The Mortgage Insider

I’m sure you’ve heard the old saying, “It’s good to be king!” Well, it must be true. I just wasn’t aware we lived in a monarchy, or should I say “financial oligarchy.” Unfortunately after I finished this story, it was the only logical conclusion I could draw. To be honest, I can’t take credit for breaking this story either. I received an e-mail from another friend of mine in the business. After I saw the attached video, I was so dumbfounded that I initially thought it had to be a hoax. So I started to search for back-up from other news sites and sources. Sure enough, it appears that this is absolutely true. See what you think …

The initial video report I received was from a mortgage industry pundit named ThinkBigWorkSmall.com[1]. Their exposure of this story had become so viral on the Internet that it provoked an actual response from the FDIC on their site[2] just last week. The scary thing is, the FDIC release is purposely worded to discredit the source, deny the story entirely, and not directly address any of the relevant facts. Of course, that merely further convinced me of the story’s accuracy. You’ll see why in a minute. But let’s start at the beginning.

IndyMac Bank was one of the largest sub-prime lenders, and the seventh largest mortgage originator in the country overall just before its collapse. When it went out of business in July 2008, it was the fourth largest bank failure in U.S. history. For those of you who didn’t know, IndyMac was founded in 1985 by another well-known crook named Angelo Mozilo, “… as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae.[3]” In 1997, Angelo spun IndyMac off from Countrywide for a huge profit, as you would expect. And IndyMac proceeded for the next decade to make and securitize loans with little or no verification of income or assets, to consumers with questionable credit. But the story of IndyMac’s failure wouldn’t be complete without mentioning a couple of relevant facts. First, the securitization of these loans could not have been accomplished without being aided and abetted by the AAA rating the bond rating companies sold them for a large fee. And more importantly, IndyMac likely would have been shut down much earlier had it not been for one Darrel Dochow of the OTS (Office of Thrift Supervision—who by definition should have been “supervising” IndyMac all along). You may remember that name from the S&L crisis of the 1980s. Back then, he overrode federal bank examiner’s recommendations to seize Lincoln Savings and Loan, before that bank’s spectacular collapse. Yep you guessed it, being an utter failure as a regulator in the 1980s actually earned him a series of promotions.
 

Unfortunately for us, Mr. Dochow’s ineptitude was apparently only exceeded by his utter disregard for the law. I say that because of a little “back dating” scandal involving IndyMac. It turns out he allowed them to back date an $18 million contribution two months after the fact, so they would appear to meet capital requirements in the March 2008 quarter.[4] Well, it turns out that, based upon a subsequent audit, there never was any documentation for this $18 million either. In fact, he allowed four other banks to do the same thing, all of which subsequently failed. In June of 2008 and a month before IndyMac’s collapse, Senator Charles Schumer (D-NY and member of the Senate Banking Committee) blew the whistle in a series of open letters to regulators, including the OTS. He expressed his concern for IndyMac’s dire financial condition. While that caused a huge run on the bank and hastened IndyMac’s failure, it turned out he was merely beating an already dead carcass. However, that didn’t stop the director of the OTS and Mr. Dochow’s then boss, John Reich, from responding to Senator Schumer’s concerns. Mr. Reich’s response was, of course, to discredit the source, deny the story entirely, all the while failing to address the relevant facts directly. So now maybe you understand my problem with the FDIC’s current response?

Anyway, Mr. Reich was forced to finally demote Mr. Dochow when this back dating scandal broke in the news. You read that right, he wasn’t fired for this infraction and he retired with a full pension in February of 2009. Thankfully, Mr. Reich likewise resigned in disgrace in February of 2009, amidst a Treasury Department investigation into “OTS failures and misconduct.”

Now fast forward a month to March of last year. The FDIC sold IndyMac’s $20.7 billion in loans and other assets to OneWest Bank for $16 billion.[5] That’s not a bad deal—especially when you consider the FDIC financed $9 billion of that on very favorable terms. But you’re going to love the punch line. Guess who runs OneWest Bank? That would be none other than Steven Mnuchin, former executive VP at Goldman Sachs. In fact, OneWest was only formed one month before the sale and was funded in large part by George Soros. Soros is, of course, the billionaire hedge fund manager convicted of insider trading, and one of the largest individual contributors to President Obama’s 2008 campaign. I know what you’re thinking, “Doesn’t being convicted of insider trading disqualify you from running a hedge fund? Shouldn’t he be in prison or something?” The answer is, “Not if you have friends like these!” The FDIC’s rebuttal indicates that the sale of IndyMac was “competitively bid.” But if OneWest was only formed a month before the sale, wouldn’t it have been nice if they listed at least a couple of these “other” bidders?

So what kind of sweetheart deal did OneWest get? Well OneWest (Soros and Mnuchin) paid no more than 70 cents on the dollar for the mortgage loans it “owns and services.” The fact is, it only “owns” 7 percent of all the loans it services. The other 93 percent of those loans are owned by outside investors. That turns out to be lucky for us because the deal the FDIC gave OneWest was a little something my people call a loss-share agreement. Under the terms of that agreement, the FDIC will reimburse OneWest 80 to 95 percent of the losses on those loans, but only after those losses reach $2.5 billion.

That doesn’t sound like much of a sweetheart deal? Well, the 80 to 95 percent reimbursements are based upon the “original loan balance” and not what OneWest paid for the loans. So in essence, it guarantees OneWest a 10 to 25 percent profit on any loans it forecloses. The $2.5 billion benchmark is, for all practical purposes, just an incentive to foreclose those loans as fast as possible. I mean if you were offered a profit of somewhere between $250 to $625 million from the government once you foreclosed $2.5 billion in loans, what would you do?

Interestingly enough, the FDIC thinks it is important for you to know that this deal only applies to the 7 percent of the loans owned by Soros and Mnuchin. And you should also be aware it hasn’t paid a dime out on this loss-share agreement … yet. Gee, I know I’m feeling relieved. Finally the FDIC wants to assure you that it monitors OneWest’s compliance of the Home Affordable Modification Program. Mmm … they must mean the same way they monitored IndyMac all those years leading up to the collapse. All I know is that they don’t offer evidence of a single loan modified by OneWest anywhere on their site. And after I Googled “OneWest loan modifications” … well, let’s just say evidence is hard to come by.

The Fed has started to tighten interest rates, and the hen house is obviously full of foxes. Do any kind of financing you need to get done now. Sooner or later those hens will have to come home to roost!

[2] http://www.fdic.gov/news/news/press/2010/onewest_lossshare.html

[3] http://en.wikipedia.org/wiki/OneWest_Bank

[4] http://articles.latimes.com/2009/feb/21/business/fi-dochow21

[5] http://articles.latimes.com/2009/mar/20/business/fi-indymac20