HW's publisher Paul Jackson penned a viewpoint piece that ran Wednesday, and the message in it was one that we think will become much clearer in the next 12 months -- that fraud is a HUGE problem that has yet to be recognized in the current mortgage mess. Of course, that means much of the media outside of HW hasn't yet picked up on this. And it certainly means that none of the consumer lobby has any idea what it's talking about, because it isn't looking at remittance reports and loan tapes. But troubled bond insurers are. And it appears that Ambac, of all institutions, is starting to figure it out. Dow Jones reported yesterday that Ambac's got the due diligence hounds and their associated attorneys picking through the rubble of RMBS that was once deemed an insurable risk -- and what they're finding has everyone very, very concerned:
Some of the factors the company will examine include loan-level document review and a review of legal documents "focusing on representations and warranties," Wallis said. "Hypotheses are being built which involve fraudulent activity in various guises."
The Calculated Risk blog posted details from a call transcript that are even more troubling. Some relevant excerpts:
David Wallis, Chief Risk Officer: ... it is very striking how concentrated, how very concentrated, some of the poor performers are, and that gives rise to all sorts of obvious questions. I mentioned that we have diagnostic and forensic people working on some of these deals ... That is a very difficult long process, but you look in the files. You look at the transcripts of servicing records, and you see what you see. And all I will say is that there is some pretty amazing stuff to see. ... To give you a sense of how odd the data is, the remits are actually beginning to come in somewhat late because sometimes people don't believe the data that is being presented, and they send it back and say, well, that cannot be right. But, in fact, unfortunately some of it is right, and the numbers are huge. ... You know, how bad can it get? 81 people in 100 walking away sounds pretty bad to me.
At 100 percent loss severity -- which is the case for the HEL deals that Ambac's now losing its shorts on -- you can bet that's bad. One word, dear readers: fraud. Lots of it. And it's something that will eventually come out, because in the end defaults expose all flaws. Borrower initiated. Lender initiated. Title problems. Even servicers that have attempted to "manage" reported defaults to massage a given deal. When we're talking about bad loans, all things become clearer in hindsight. Just remember this when the press begins the mortgage fraud meme -- and remember that fraud comes in all forms.