In last week's post, we discussed the recent securities fraud lawsuits brought against Bank of America by the U.S. Securities and Exchange Commission and the Justice Department. This week, we examine a related concern facing mortgage-backed securities: legal title.
According to recently unsealed documents from the whistle-blower litigation brought against several banks -- including Bank of America, Wells Fargo & Co., Citigroup Inc. and J.P. Morgan Chase & Co. -- securities issuers may never have legally owned the mortgages securing the mortgage-backed securities. One way this type of securities fraud might happen is if the security issuers never received the actual promissory note and mortgage documents.
Even more troubling is the revelation that employees at these banks may have falsified documents to cover up the lack of the flaws. This illegal practice is called robo-signing.
The practice of robo-signing apparently began because banks seeking to initiate foreclosure on defaulting homeowners needed the title documents to begin the process. The amount of the whistle-blower settlement -- $95 million -- is one indication of how widespread the illegal practice was. Yet according to one white-collar fraud expert, over $1.4 trillion worth of mortgage-backed securities might still be supported by nothing more than falsified title documents.
For investors considering a mortgage-backed security product, special caution might be in order. In fact, a stockbroker or financial adviser also might be expected to provide more context for the potential risks surrounding this type of investment.
Source: rawstory.com, "White-collar fraud expert proves 'mortgage-backed securities' neither mortgage-backed nor secure," Scott Kaufman, Aug. 12, 2013