EDITOR’S ANALYSIS: Seems boring, doesn’t it. All those numbers and columns. But here is actually where the rubber meets the road because the difference between what the banks SAID they were doing and what ACTUALLY happened with the money is the like night and day. And the auditors should have caught it. But they didn’t because like the ratings firms they were paid not to see what was right in front of them.
Like the ratings firms, if they had REALLY done their job there would have been no money from investors, there would have been no crazy guaranteed to fail loans to hapless homeowners who didn’t understand the traditional loan papers, much less ones designed for use in securitization. The absence of loans receivable would have been one clue that the banks were not taking losses on defaulted loans. It would have also alerted the auditors that a pile of liability was mounting because the the profits and fees for “selling” (“trading”) on investor money were outsized by any standards compared to prior deals. They would have questioned whether those were indeed profits and fees, or just money owed to the investors.
I could give a long list. The point is that the actual financial health of the Banks was misrepresented to shareholders, to the public, to people trading in the stocks of these Banks, to investors buying the bogus mortgage bonds and other ‘bonds” “securing” other types of consumer debt. It also is the final nail in the coffin as to disclosures that should have been made to borrowers as to who they were doing business with and whether the firm was acceptable to them.
For one thing, borrowers, in a transparent world, would have been told, pursuant to the requirements of the Federal Truth in Lending Act, something like “we have no interest in whether or not you pay on this obligation. In fact, we are being paid a fee and making profits based upon your signature and we are using your identity to sell securities to investors all over the world. The amount we are making on your particular loan is 300% of the actual loan amount. Your loan is $ 200,000.
“The fees, commissions and trading profits that are assured upon your signature are $ 600,000 and if you do not make payments, we will get even more from insurance, credit default swaps, over-collateralization, cross collateralization, and other credit enhancements.
“No underwriting committee and thus no underwriting procedures exist for granting loans. The sole basis for granting and funding a loan is whether the initial payment conforms with standards set by Goldman Sachs. The value of your property has not been determined. The appraiser has been given instructions as to the contract amount and is further instructed to certify a value $ 20,000 higher than the amount needed to close the transaction.
“No confirmation of property values, income or viability of the loan has been undertaken by anyone. The party to whom you have promised to pay this obligation did not loan you the money, and is not empowered to issue a satisfaction of mortgage since the obligation is actually owned by a third party, whose name is Goldman Sachs. The investors who advanced funds from which your loan was funded have already taken a substantial loss because Goldman Sachs has diverted money that was intended to fund loans and instead re-categorized them as trading profits. Please sign below to acknowledge that you have received full disclosure, and you may have your loan.”
Ok, we all know THAT didn’t happen. So what does that mean for borrowers? Besides the obvious question mark it puts after the words “amount due” it also raises the issue of whether the auditing firms, in addition to facing liability to investors and shareholders, might have liability to borrowers who were mislead by the financial practices of the investment banks and therefore about the viability of their loan, and the accounting for payments made on account of the obligation owed to the creditors (investors).
Proper accounting would have required that payments received and passed around like a whiskey bottle should have been credited to the borrowers’ obligations and correspondingly reduced those obligations as well as reducing the obligation owed to the investors because — they received PAYMENT.
The Banks take the position that since they stole the money fair and square from the investors that the investors obligation should not be reduced by the amount the banks received for the investors but not distributed to them. I disagree. And if the auditors had done their job, the borrowers would have learned the true balance due, if any, under the obligation that arose when their obligation began (and possibly ended) at their closing.
With hindsight, we now know that auditors in 2007 should have been looking carefully at bank books.
They should have drilled into allowances for loan losses, and they should have been especially alert for signs that the banks were playing games when they sold loans. Auditors should have carefully reviewed how the banks were valuing their mortgage-backed securities and loans that they planned to sell.
It won’t surprise you to learn that in at least one case, the auditor seems to have done a pretty poor job.
Those comments were made after the board’s inspectors reviewed Deloitte’s audit of a bank’s 2006 results, as part of the annual inspection of the firm. The inspection of 61 Deloitte audits concluded in November 2007.
Had the auditor taken the criticism to heart, it might have gone back in and checked more thoroughly.
But it did not.
The bank was not named in the report, even in the previously confidential part released this week.
I thought it might have been Washington Mutual, a Deloitte client that collapsed in September 2008, but Deloitte says that was not the case.
Deloitte, in its response to the board, stated that at the bank, “the audit procedures performed, the conclusions reached and the related documentation were appropriate in the circumstances.”
In other words, Deloitte concluded the board simply did not understand what it was talking about.
All that became public in early 2008, when the censored version of the board’s report became public. But it was little remarked on at the time. Now we have seen the rest of the report, and it is even more critical.
The report said its inspections indicated “a firm culture that allows, or tolerates, audit approaches that do not consistently emphasize the need for an appropriate level of critical analysis and collection of objective evidence, and that rely largely on management representations.”
Deloitte responded by denying almost everything. It did not like the “second guessing” shown by the regulators. It said “we strongly take exception” to the observation about its culture, which it said was simply wrong.
In any case, the firm concluded, “there were only a limited number of instances,” not nearly enough to justify questioning Deloitte’s quality controls.
The board inspectors found problems in 27 of the 61 Deloitte audits.
The Sarbanes-Oxley law that established the board included provisions to protect the public images of audit firms. If a board inspection found problems with the quality control systems, that was to be kept confidential unless the firm did not move to fix the problems over the following year. Then the release could be delayed while the firm tried to persuade the board to keep the information private. If that effort failed, the firm could appeal to the Securities and Exchange Commission.
Only then could the report be made public. So in this case, it took 41 months from the issuance of the report — more than three years — for Deloitte’s clients to learn of the problem.
The board also has the authority to file enforcement actions against auditors, but those, too, are private until the S.E.C. rules on an appeal. It is as if charges of robbery had to be kept confidential until all appeals had been completed. There is no way to know if the accounting board has taken action against anyone. An auditor that the board deems to be in violation of rules may keep working for years while secret proceedings continue.
Firms have every incentive to stall, and then to say that whatever is being criticized happened years ago.
Deloitte’s current chief executive, Joe Echevarria, tried to sound cooperative in his response this week, and was careful to point out he was new on the job. A Deloitte spokesman said that Barry Salzberg, the chief executive when Deloitte sent the response letter in 2008, was traveling in Asia and unavailable for comment.
Mr. Echevarria emphasized in an interview that the firm was investing in training, and spoke of a desire to be the leader in audit quality.
Until 2002, audit firms were basically unregulated. The board was established in response to the WorldCom and Enron scandals, but all the secrecy has made it hard for outside observers to know how well it is doing. The fact that its inspectors zeroed in on mortgage issues when they did is impressive.
In theory, the board can put a firm out of business, but since the demise of Arthur Andersen reduced the Big Five to what some call the Final Four, there is general agreement that going to three would be unacceptable. So while the board can credibly threaten to close down a small firm that does a dozen or two audits each year, no such threat would be credible for Deloitte or one of the other three major accounting firms.
Contempt for regulators is nothing new in the auditing world. Back in 1999 and 2000, Arthur Levitt, then the chairman of the S.E.C., tried to impose some limited rules to increase the independence of the auditors from the companies whose books they audit. The firms fought back, arguing the S.E.C. had no such authority, and in the end Mr. Levitt got only part of what he was seeking.
In private conversations I had then, chief executives of some firms were resentful of any effort to regulate them. How dare some government bureaucrats question their judgment?
By protesting that it was unfair to criticize Deloitte’s culture, the firm may have spoken volumes about that culture.
In a culture that investors might prefer, a Deloitte partner whose audit failed to pass muster with the board might find that his career prospects had worsened, as others who did better audits were promoted. Imagine if the partner responsible for the audit of that bank had seen his career suffer, or even end.
But the letter makes it appear that Deloitte’s culture was one that pulled together and provided backing for a partner criticized by a picky regulator. Would the culture provide similar backing for a partner who angered a client’s management by forcing changes in financial statements that the company did not like?The secrecy mandated by Congress preserved Deloitte’s reputation for years. Now it may be unfairly raising doubts about other firms. Did others have audit failure rates approaching Deloitte’s 44 percent? Is Deloitte the only one of the Big Four to have failed to fix problems? We don’t know. The accounting oversight board last week said it might require that audit firms disclose the names of partners in charge of each audit. The firms hate the idea, warning it could unfairly damage the reputation of individual auditors who would suffer “guilt by association” if their clients got into trouble. Secrecy about who does the work seems to be a way of life at the Big Four. Deloitte’s letters to the board dismissing its concerns were not signed by anyone other than the firm as a whole. I’d love to know which executives signed off on assuring the board there was no need to look again at that bank’s books, and to ask them if they still held that opinion.Only Congress could change the law to require that full inspection reports be released and to make enforcement actions public when formal charges are filed. But the board could at least require that letters responding to board inspections be signed by real people, and that they carry statements saying the firm’s chief executive had approved the response.
How to stop mortgage arrears and house repossession orders
Article by Marge Dubois
How to stop mortgage arrears and house repossession orders
House repossessions caused through mortgage arrears have hit an 8 year high according to the Council of Mortgage Lenders UK. Around 14,000 homes have been repossessed in the last 6 months in England, Scotland, Wales and Northern Ireland – up 30% on this time last year.
Borrowers most affected, are people who fall under the ‘sub-prime’ market (adverse credit files due to various conditions in their past, including CCJ’s -county court judgments, IVA’s and other bad credit conditions).
Other possible repossession candidates are the 1.8 million people coming to the end of their fixed rate terms in a market where we have seen 5 increases in the base rate over the past 12 months.
Many borrowers have other loans to repay, cars to run and families to bring up so costs can soon mount, leaving them completely over extended so ‘baton down the hatches’ is an understatement with the probability of yet another interest increase within the next couple of months.
If you are facing repossession and you want to know what happens next take the following steps:
1. Talk to your Bank or Building Society as early as possible to explore your options. Delaying this and allowing mortgage arrears to mount up makes it difficult for the lenders to offer a counselling ear and take a lenient stance. An eviction could leave you homeless so act now!
2. Reduce your outgoings, by economising when shopping and cutting all luxury subscriptions. Be aware of what you are spending.
3. Increase your income. This may be possible by working extra hours, taking on lodgers or applying for extra benefits.
4. If there is no way of paying the arrears and the continuous monthly payments then the other option is to start thinking: “I need to sell my house fast”.Remember that getting mortgages after a repossession will be very difficult so if the clock is ticking then registering with an estate agent is not a viable option as this will take time. Selling through an auction is fast but isn’t guaranteed so the quickest way to sell your house is go to a private investor or property company who will buy your home within weeks. If you want to stay in your home you should make sure they offer you a rent back option allowing you to rent your home from them after the sale has completed. If you think your circumstances may change in the future you should go to a specialist company who can also offer you a buy back option allowing you to buy back your home when in a better financial position. A good specialist company offering advice and services on all of the above is http://www.housesforcashuk.co.uk
This hike in repossessions has a nightmare affect on homeowners who lose their properties and is generally the result of people innocently trying to get a foot on the property ladder without realising the consequences of future interest rate increases or changes in circumstances.
If you have mortgage arrears, are facing repossession or have a court hearing don’t waste time and act now, before it is too late.
Resource Box:
Marge Dubois runs you through the ins and outs of stopping your mortgage arrears and preventing your house from being repossessed. For further info click here – http://www.housesforcashuk.co.uk
Marge Dubois is a published writer on a wide range of subjects. A linguist by training, her interests are as diverse as waste management, wine, car leasing, spirituality, loans and many more.
Mortgage Rescue Companies cannot Charge Advance Fees to Prevent Foreclosures
Most people who are in danger of foreclosures and have failed to benefit from the government program for loan modification may be drawn to take the aid of mortgage rescue companies.
Such companies try to exploit the fact that you are in a desperate condition and so will not mind paying hefty fees. Very often, you end up being cheated as these companies take the money and disappear. Because of this sad situation, the federal government has moved in to protect the rights of borrowers.
From January 1st, 2011, companies that are responsible for foreclosure relief will be banned from collecting payment before providing services. They cannot charge for their services unless they present a written acceptance letter from the lender. This ensures that the foreclosure relief company makes significant efforts on its part to help you before they charge you a fee. However, non-profit agencies are exempt from this rule.
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A few states have already banned collection of fees in advance. Pennsylvania has a rule that prohibits advance fees unless a broker who is licensed gets a penal bond for getting advance fees. But very few brokers follow this procedure. In spite of the protection provided in Pennsylvania, many borrowers have lost money by paying so called mortgage rescue companies and were not provided services.
According to the Federal Trade Commission, they are prohibiting advance fees because many affected by the crisis of foreclosures are exposed to the wiles of fraudulent agencies. Because there seems no end in the foreclosures crisis, many fraudulent agencies have found the time ripe for exploiting homeowners and have spent a lot of advertisement in the media to highlight their services.
Some experts called these relief companies as the worst manipulators in the crisis of foreclosures. They said that some homeowners who fall victim to such fraudulent companies often miss the opportunity to benefit from authentic foreclosure relief programs provided by government agencies like the HUD (Department of Housing and Urban Development) and other non-profits.
However, one of the reasons why homeowners fall prey to frauds is because the federal programs like HAMP (Home Affordable Modification Program) have not benefited many people as targeted. Lenders were expected to ease mortgage payments to help homeowners retain their homes and fight foreclosures.
According to the Obama administration, the program was intended to help around 4 million property owners by end of 2010. However, till October 2010, permanent modifications have been granted only to 483,342 applicants, and the trial modifications number was four times the number of active trials that have escaped foreclosures.
The foreclosure crisis has had a huge effect on individual homebuyers, financial institutions, the economy — and bankruptcy courts. In response, some courts have initiated programs to give debtors and lenders an opportunity to work through their differences — these programs serve the needs of both groups but don’t necessarily lead to foreclosure on the debtor’s home. This broadcast looks at these programs, how they work, and what affect they have had on debtors, creditors, and the bankruptcy courts that use them. Judges Arthur Votolato (Bankr. DRI) and Robert Drain (Bankr. SDNY) talk about the programs in their courts with Judge Elizabeth Stong (Bankr. EDNY), who will moderate the discussion. Bankruptcy practitioner Patricia Antonelli (Partridge Snow & Hahn, LLP) talks about working within the programs from the attorney’s perspective. John Rao (National Consumer Law Center) and Victor Milione (Nixon Peabody, LLP) discuss the programs from the debtors’ and creditors’ perspectives. Debra Miller, Chapter 13 US Trustee (ND Ind.), talks about the role and the view of the Trustee’s office. (April 2011)
