Long before the banks started evicting delinquent homeowners, Wall Street, it appears, used robo-signers to ink mortgage deals that would eventually cost investors tens of billions of dollars and in part led to the financial crisis.
According to lawsuits filed last week by the U.S.’s Federal Housing Financing Agency, one individual was used by three different banks to sign off on 36 different mortgage bond deals in 2006 alone. Many of the deals contained as many as 4,000 home loans. Yet, according to the lawsuits, the individual Evelyn Echevarria signed documents attesting to the fact that all the loans – well over 100,o00 in 2006 alone – met the underwriting guidelines set out in each of the deals’ offering statements for potential investors. In fact, according to the FHFA lawsuits, many of the loans in the deals were of much lower quality than the offering documents suggested. “Signing these documents should have been a meaningful function,” says Joel Laitman, a lawyer who suing Echevarria and Credit Suisse in a separate class action suit on behalf of investors. “But it is hard to see that one person could have fulfilled their legal obligation to vet all of these prospectuses if they were doing so many deals at the same time.”
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Last week, the FHFA sued 17 banks on behalf of Fannie Mae and Freddie Mac for creating nearly $200 billion worth of ill-fated mortgage bonds that were purchased by the giant now-government-controlled mortgage guarantors. The government, through the FHFA suits, claims the banks mislead Fannie and Freddie into believing the loans that backed the bond deals it was buying into were safer than they turned out to be. When many of the borrowers failed to pay back their loans, the bonds plunged in value, and Fannie and Freddie lost tens of billions of dollars on the deals. The government’s suits are bringing back fears that some of the nation’s largest banks – most notably Bank of America – might not have enough capital to meet their obligations. Paul Miller, an analyst at FBR Capital Markets, estimates that the banks might have to pay out as much as $121 billion to settle the FHFA and other similar lawsuits.
But the suits are also shedding light on the outside firms and individuals that Wall Street used to set up and supposedly vet mortgage deals. Here’s why:
A number of the FHFA lawsuits name individual defendants who signed off on the mortgage deals but appear to have had little or no day-to-day role at the banks. At times, the investment banks touted the involvement of these outside individuals as extra protection for investors, making sure the loans were of proper quality. But according to the FHFA, many of the deals that Fannie and Freddie bought into included home loans – some with little or no downpayment to borrowers with low credit scores – that were riskier than banks selling the deals let on.
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Echevarria is named in three different lawsuits involving Citigroup, Credit Suisse and Deutsche Bank. In all, according to the suits, Echevarria’s name appeared on documents pertaining to 62 deals starting in 2005 and ending in 2007 in which Fannie or Freddie invested in. During that time, according to the lawsuits, Echevarria, sometimes simultaneously, held positions as a director of subsidiaries of all three banks.
Reached by phone by TIME on Tuesday, Echevarria said she knew about the FHFA lawsuits, but didn’t know she was personally named in any of the suits. She said she didn’t know why she would be listed as a defendant. Echevarria said she has never been employed at Citigroup, Credit Suisse or Deutsche Bank, or any large Wall Street bank for that matter.
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Where Echevarria does work is at a small firm in Charlotte, North Carolina called Amacar Group, which according to the firm’s website ”delivers consultative structure finance expertise.” The company’s CEO Douglas Johnson is also named as a defendant in one of the FHFA lawsuits, against Deutsche.
Spokespersons for Citigroup and Credit Suisse declined to comment on the FHFA lawsuits. A spokesperson for Deutsche says that the firm that Echevarria is listed as working for, ACE Securities, in the FHFA lawsuit against the German bank is a separate firm, and was never owned or operated by Deutsche. He said he believes ACE acted as trustee for some of Deutsche’s mortgage deals, and that’s its role was limited to such clerical duties as collecting and storing paperwork.
But according to Amacar’s website, the firm’s role in securitizations - the process that packages numerous mortgages or other loans into bonds that can be sold to investors - is different “from the specific services provided by law firms, accounting firms, trustees or administrative service providers.” Johnson, before founding the firm in 1995, had been the head of asset backed securitization at First Union. Amacar’s website says its function is to bring independence to securitization deals. Its website says it does so by setting up separate legal entities for bond underwriters and finding managers and directors to run these entities for the banks.
One of the independent directors Johnson’s firm found for banks was Johnson’s wife. According to the FHFA lawsuits, Juliana Johnson served as a director at mortgage subsidiaries of Bank of America, Credit Suisse and Deutsche. She signed off on numerous deals for all three banks. She is named as a defendant in three of the government’s lawsuits. Juliana Johnson is listed as a founder of Amacar, along with her husband. Before joining the firm, Juliana Johnson, according to her bio on Amacar’s website, spent 12 years at AT&T, “including extensive sales and marketing experience.” It is unclear if she has any experience with mortgage bonds or securitizations in general outside of her time at Amacar. And it’s not clear how good a job she did at vetting the deals she ended up signing off on. In one such deal for Deutsche, called ACE 2006-ASAP4, the offering statement said that in nearly 80% of the loans in deal, borrowers owned at least 20% of the equity of their home. In reality, according to the FHFA lawsuit against Deutsche, borrowers had no equity at all in nearly 13% of the loans included in the deal. The percentage with 20% or more was just less than 45%.
Lawyer Joel Laitman says all individuals who signed off on these deals should be held liable for the losses because they gave the appearance that they were making sure the investment banks were following the rules. “It’s not just supposed to be the investment bankers who are attesting to the fact that these deals are what they claim to be in their prospectuses,” says Laitman. “It should be anyone that signs the document.”
Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.
