Tuesday, 27 July 2010 19:29

A New Spin on Bank Fraud: Banks Defrauding Their Investors, Auditors and Regulators, Which Also Helps Delinquent Mortgagees

Last week, I made clear to my readers and subscribers that the bank malaise is not over, despite what may appear to be encouraging moves by the executive staff. Housing prices are still on their way down, save temporary blips from government bubble blowing and the outright concealment of non-performing assets by banks, see Anecdotal Evidence That Banks Are Hiding Depressed High End Real Estate. Now, many may see this as consipiracty theory, which is why I always included hard analysis behind my posts. After a Careful Review of JP Morgan’s Earnings Release, I Must Ask – “What the Hell Are Those Boys Over at JP Morgan Thinking????”

The boys over there at the "Morgan' appear to be partying like it was 1999, releasing all types of reserves and provisions (which coincidentally padded a very weak earnings quarter) as if I didn't make it "Very Clear In March, US Housing Has a Way to Fall":

Well, here is some additional evidence which shows how banks are producing those positive sloping credit metrics... They are fudging the delinquency reporting. Reference this note from a fellow BoomBustBlogger:

Hello Reggie,

I'm a big fan of your blog and greatly appreciate your diligent efforts in effectively educating your readers while exposing the the biggest heist ever perpetrated on the American Public by Wall Street.  I know you are the most up to date person out there when it comes to the scams the banks are running but I wasn't sure if you knew of a specific scam that they have been running on the mortgage side of their business. I'm hoping you can be the voice that warns people of a new type of fraud which the banks are perpetrating in broad day light.

I have been a Mortgage Banker for the last 18 years. I also follow the markets and particularly the banking sector with great interest.  While reviewing the Banks most recent quarterly earnings, the common theme evident in all of their disclosures was that their delinquency rates had dropped dramatically and hence they were lowering their loan loss reserves.

Meanwhile, I have repeatedly come across delinquent and even defaulted loans which are not being properly reported by the loan servicers to the credit bureaus.

As an example, I recently came across a new mortgage client who was referred to me and I thought I'd share it with you for a potential story. These particular clients had a house which they were way upside down on, so last year they went ahead and purchased another house under an FHA loan with 3.5% down and immediately let the old, upside down house go into foreclosure thereafter.

These particular clients called me to see if they could refinance their new home's FHA loan to a lower rate. I told them that it would be near impossible because of the damage done to their credit by the foreclosure on the previous house. They were adamant that their scores were still in the high 670's and so I ran both of their credit reports. Sure enough, his middle score was a 674 and her score was a 678. When I looked at the previous mortgage, it showed as "FORECLOSED- NO DELINQUENCIES"!!! When I asked them they stated that they hadn't made a payment to the bank for more than a year prior to the foreclosure on their house.

Same is true for many loan modification cases that I have come across. While the banks are dragging out the process with the borrowers, who are living in the homes 100% mortgage free, their statements reflect the borrowers as being current every month.

Is that not just absolutely ridiculous!?!? This is blatant fraud!

While Bank CEO/CFOs are going on their quarterly calls and lying to investors about how they are reducing their loan loss reserves due to their delinquency rates being substantially lower, they are deliberately falsifying their credit ratings while foreclosing on homeowners.

What happens when these banks end up losing billions of dollars on all of these foreclosures after depleting their loan loss reserves? More of 2008 is what I imagine. Except their won't be any more bailouts.

I implore you to please feel free to contact me or any other sources you may have at your disposal to investigate this newest fraud being perpetrated against investors.  Should you be interested, I can forward you the above credit report for your review.

Investors should know what the heck is going on before they listen to analysts telling them that "this is a buying opportunity of a lifetime" while the banks are fudging their numbers. This is exactly how we got into this mess. Investment Banks pulling Repo 105 scams, not marking their books correctly, and so on.

Shame on them for defrauding investors and the Public the first time and causing the global credit crisis. Shame on us for sitting by and letting it happen again two years later while they wipe out millions more of investors retirement accounts and cause the next Great Depression.

Attached please find the first two pages of the credit report that I told you about. I [also have access to] mortgage statements from Bank of America, in which the borrower has not made a payment in over 18 months and is currently in the loan mod process, yet their statements reflect a current status each and every month. The borrowers had a foreclosure back in 04/2010 with no mortgage lates reported on their credit report.  Please refer to the first trade line on page 2 of the credit report under Derogatory Tradelines.

Thank you for your time and consideration.

Feel free to click the icons below to get an idea of what this mortgage professional was referring to...

[gallery link="file"]

Now that we know an improving economy and upward sloping credit metrics are being manufactured, let's revisit JP Morgan's most recent quarterly results and the miracle known as "Green Shoots"!!!

Charge-offs came down but the reduction in provisions has been quite disproportionate bringing down the allowance for loan losses. In 2Q10, the gross charge- offs declined 26.6% (q-o-q) to $6.2 billion (annualized charge off rate – 3.55%) from $8.4 billion in 1Q10 (annualized charge off rate – 4.74%). But the provisions for loan losses were slashed down 51.7% (q-o-q) to $3.4 billion (annualized rate – 1.9%) against $7.0 billion (annualized rate – 3.9%) in 1Q10. Consequently, the allowance for loan losses declined 6.2% (q-o-q) from $35.8 billion from $38.2 billion in 1Q10. Non performing loans and NPAs declined 5.1% (q-o-q) and 4.5% (q-o-q) respectively. Thus, the NPLs and NPAs as % of allowance for loan losses expanded to 45.1% and 50.7%, respectively from 44.6% and 49.8% in 1Q10. Delinquency rates, although moderated a bit, are still at high levels. Credit card – 30+ day delinquency rate was 4.96% and the real estate – 30+ day delinquency rate was 6.88%. The 30+ days delinquency rate for WaMu’s credit impaired portfolio was 27.91%.

While the lower provisioning was able to beef up the bottom line in this quarter, the same is not sustainable in the future as JPM cannot afford to reduce its allowance for loan losses substantially. This is a one shot, blow your wad and go to sleep deal!  There is no margin for error in the future, and one can only assume that the reason this was done was to pad accounting earnings and to take advantage of the extremely short term, and obviously naïve, memory of the financial media and retail/institutional investor. Given the high charge-off rates and delinquency levels, the provisioning will probably need to be bolstered again in the not too distant future.

Listen, even US Economic Cheerleader and Propaganda-in-Chief Ben Bernanke said it will be several years before growth and employment resumes. Sooooo…. What the hell are the boys (and girls) at JP Morgan doing????

The reduced provisioning can help improve bottom line, but it cannot conceal the weakness in core operations as reflected in the sagging revenues especially in the investment banking segment. Total net revenues declined 9.3% (q-o-q) and 2.0% (y-o-y) with non interest revenues declining 11.1% (q-o-q) and 4.2% (y-o-y) and net interest income declining 7.5% (q-o-q) and remaining flat on y-o-y basis. Trading revenues which witnessed a huge surge and underpinned the revenue growth in 1Q0 was seen moderating in 2Q10 in lieu of the high volatility recorded in the capital markets recently. Revenues from principal transactions declined 54.0% (q-o-q) and 32.5% (y-o-y) to $2.0 billion. Investment banking fees were down 2.7% (q-o-q)  and 32.5%(y-o-y) to $1.4 billion with most of the weakness coming from Europe (If you are wondering why, reference our Pan-European Sovereign Debt Crisis series). Lending & deposit-related fees declined 3.6% (q-o-q) and 10.2% (y-o-y) largely driven by declining deposit fees. Only non interest income that was seen growing was mortgage and credit card fees due to improved volumes and activity in these segments and even this revenue stream may come under attach under new legislation.

The rest of this Q2 review can be downloaded by subscribers (click here to subscribe) here: File Icon JPM 2Q10 review

Subscribers should also review our forensic valuation reports, which have (thus far) proven to be right on the money in terms of JP Morgan:

The JP Morgan Professional Level Forensic Report (subscription only)

The JP Morgan Retail Level Forensic Report (subscription only)

Those that don’t subscribe still have a lot of BoomBustBlog JPM opinion and analysis to chew on, including a free, condensed (but still about 15 pages) version of the forensic analysis above. You can find it below this pretty graphic from “An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses Than the Maintream Media Presents“…

An Independent Look into JP Morgan (subscription content free preview!)

If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 – JP Morgan

Is JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase? Doubtful!

Anecdotal observations from the JP Morgan Q2-09 conference call

Reggie Middleton on JP Morgan’s Q309 results

Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results

Last modified on Wednesday, 28 July 2010 22:03