50 or 100 years. This is the real thing. And much of what went wrong on wall street could be traced back to something called credit default swaps. They were traded in a risky shadow market, and they were at the heart of the financial meltdown. [ticking] it has tentacles as wide as anything ive seen. I think, next to housing, this is the single most important issue in the United States and certainly the largest threat to the u. S. Economy. Meredith whitney was talking back in 2010 about a then looming financial crisis involving state and local governments across the country. It was a debt crisis which some people believe could derail the recovery and require another big bailout package that no one in washington wants to talk about. The day of reckoning has arrived. Thats it. And its gonna arrive everywhere. Time may vary a little bit depending upon which state youre in, but its coming. [ticking] welcome to 60 minutes on cnbc. Im steve kroft. In this edition, we look at three stories linked by the financial collapse of 2008. First, we examine a scam thats cost thousands of americans their homes. Then we look into wall streets shadow market of credit default swaps. Finally, a report on the perilous state of state finances. We begin with the foreclosure crisis. In the aftermath of the great recession, the huge number of foreclosed properties was a significant factor in weighing down the economy. Many were stuck on the market for an unexpected reason the banks couldnt find the ownership documents. As scott pelley first reported in april 2011, lenders wanting to evict people found that often, the legal documents behind the mortgages simply werent there. Caught in a jam of their own making, some companies appeared to have resorted to forgery to throw people down on their luck out of their homes. These folks on the street arent homeless. They slept on the sidewalk because they want to keep their homes. Facing foreclosure, they camped out to get in line to beg their bank for lower payments on their mortgage. So many in the country are desperate now that they have to meet in Convention Centers coast to coast. We understand people have been here for a day or two. Two. Two. For two days. Two and a half. This was los angeles, where 37,000 homeowners gathered. And this was miami, where the worry was visible and shared by 12,000 more. The line went down the block and doubled back twice. Dale defreitas lost her job. Now she fears her home is next. Its very emotional, because i just think about, i dont want to lose my home. I really dont. Its your american dream. It was. And it still is. [chuckles] welcome to naca, save the dream. Welcome, everybody. These Convention Center events are put on by the nonprofit Neighborhood Assistance Corporation of america, which helps people figure out what they can afford and then walks them across the hall to Bank Representatives to ask for lower payments. More than half will get their mortgages adjusted, but the rest discover that they just cant keep their home. And for many, thats when the real surprise comes in. Turns out, these banks, which demand borrowers have all of their paperwork just right, these same banks have fouled up their own paperwork to a historic degree. In my mind, this is an absolute intentional fraud. Lynn szymoniak is fighting foreclosure, and while trying to save her house, she discovered something we did not know. Back when wall street was using algorithms and computers to engineer those disastrous mortgagebacked securities, it appears they didnt want oldfashioned paperwork slowing down the profits. This was back when it was a whitehot fever pitch to move as many of these as possible. When you could make a whole lot of money through securitization and every other aspect of it could be done electronically, you know, keystrokes, this was the only piece where somebody was supposed to actually go get documents, transfer the documents from one entity to the other. And it looks very much like they just eliminated that step altogether. Szymoniaks mortgage had been bundled with thousands of others into one of those wall street securities traded from investor to investor. When the bank took szymoniak to court, it first said that it had lost her documents, including the critical assignment of mortgage, which transfers ownership. But then there was a courthouse surprise. They found all of your paperwork more than a year after they initially said that they had lost it . Yes. Did that seem suspicious to you . Yes, absolutely. You know, and what do you imagine, it fell behind the file cabinet . Where was all of this . We had it. We own it. We lost it. And then, more recently, everyone is coming in saying, hey, we found it. Isnt that wonderful . But what the bank may not have known is, Lynn Szymoniak is a lawyer and fraud investigator with a specialty in forged documents. She has trained fbi agents. Did you ask for copies of those documents . Yes. And what did you find . When i looked at the assignment of mortgage, and this is the assignment, a copy from my case, i looked at even the date they put in, which was 10 17 2008, was several months after they sued me for foreclosure. So what they were saying to the court was, we sued her in july of 2008, and we acquired this mortgage in october of 2008. It made absolutely no sense. Curious, she used her Legal Training to go online and researched 10,000 mortgages. Then i began to find the strange signatures. One of the strangest signatures belonged to the Bank Vice President whod signed szymoniaks newly discovered mortgage documents. The name is linda green, but on thousands of other mortgages, the style of greens signature changed a lot, and even more remarkable, szymoniak found that linda green was Vice President of 20 banks all at the same time. All within the same week. I mean, this is a very, very active person. Where did all those documents come from . We went searching for the linda green, and we found her in rural georgia. She told us shes never been a Bank Vice President. In 2003, she was a shipping clerk for auto parts when her grandson told her about a job at a Company Called docx, docx. Docx, once housed here in alpharetta, georgia, was a sweatshop for forged mortgage documents. They were sitting in a room signing their name as fast as they possibly could to any kind of nonsense document that was put in front of them. [ticking] coming up, more linda greens. So youre linda green . Yes. Cant you tell . [laughs] its easy being green, when 60 minutes on cnbc returns. 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Part of a whole new line of tablets from dell. Its changing the conversation. In the aftermath of the 2008 housing collapse, the number of properties going into foreclosure soared across america. But in a shocking number of cases, many of the mortgage documents needed for the banks to foreclose on delinquent homeowners were missing. As scott pelley reported in april of 2011, this led some companies to set up forgery mills to recreate the missing paperwork. Docx and Companies Like it were recreating missing mortgage assignments for the banks and providing the legally required signatures of Bank Vice President s and notaries. Linda green says she was named a Bank Vice President by docx because her name was short and easy to spell. As demand exploded, docx needed more linda greens. So youre linda green . Yes. Cant you tell . [laughs] Chris Pendley worked at docx at the same time and signed as linda green. When you came in to docx on your first day, what did they tell you your job was gonna be . That i was gonna be signing documents using someone elses name. Did you think there was something strange about that in the beginning . Yeah, it seemed a little strange, but they told us and they repeatedly told us that everything was aboveboard and it was legal. And your previous experience in banking . None. In legal documents . None. There really were no requirements for the job. Correct. You had to be able to hold a pen. Hold a pen. But you were signing these documents as if you were an officer of the bank. Correct. How many banks were you Vice President of in a given day . I would guess somewhere around five to six. What were you getting paid for this . [chuckles] im embarrassed to say. 10 an hour. 10 an hour, thats not much for a guy whos Vice President of five banks. Yeah, i was very underpaid for my status in the companies. Pendley showed us how he signed mortgage documents as linda green. He told us that docx employees had to sign at least 350 an hour. Pendley estimates that he alone did 4,000 a day. [laughs] this is also linda green. Shawanna crite worked at docx and says that she both signed and notarized the mortgage documents. What was the role of the notary . We were to make sure that everyone on the document was who they said they were and notarize the documents. But the people who were signing the documents werent who they said they were. Right. So if Chris Pendley was signing for linda green, youd notarize that document . Yes. And you were told that was okay . Yes. The real linda green didnt want to be interviewed, but she said that some of the Bank Vice President s at docx were high school kids. Their signatures were entered into evidence in untold thousands of foreclose suits that sent families packing. So it was a common practice in the last few years to flood the courts with these documents. And look at some of the junk the courts were flooded with. Sometimes, the document mill didnt even bother to fill in the name of the supposed owners. To them, it seemed like a joke. Instead of the name of the bank here that was acquiring the loan, this one says, bogus assignee for intervening assignments. Thats who acquired this loan. This was an actual document that was in litigation . Yes. And what corporation assigned this loan . A corporate identified as a bad bene. Excuse me . When i saw that, i was just absolutely amazed. What does that mean, a bad bene . It could possibly mean a bad beneficiary. I have no idea what they meant. So heres the same woman, linda green, and this time, instead of being a Vice President of American HomeMortgage Servicing, shes Vice President of a bad bene. Szymoniak says that the banks whose paperwork was handled by the docx forgery mill included wells fargo, hsbc, deutsche bank, citibank, u. S. Bank, and bank of america. We contacted all of them, and each said that it farmed out its Mortgage Servicing work to other companies, and it was those Mortgage Servicing firms that hired docx. Docx was owned by a Company Called lps, a 2 billion firm that calls itself the nations leading provider of mortgage processing services. Lps told us that when it found out about the phony signatures in 2009, it shut docx down. Its astonishing to me that this became as pervasive as a problem that it is. It got sloppy. It got very sloppy. Until july 2011, sheila bair was one of the governments top banking regulators as chairman of the federal deposit insurance corporation. You just described it as pervasive. Yeah. It is pervasive. It absolutely is pervasive. And it was just a matter of cutting corners, not spending enough money, not have any quality controls. Although banks say the courts have been accepting their paperwork, thats changing as desperate homeowners countersue the banks over the document fiasco. This leaves houses unsold indefinitely, undermining the recovery. Im very worried about, if this starts getting out of hand, the kind of impact it will have. These are lawsuits by homeowners. Yes. Who are being foreclosed upon saying or are in the process or have already been foreclosed on. Saying, prove it. Yes, exactly. Prove that you own this. Exactly. Chairman bair thinks rotten mortgage documents are so threatening to the economy that the government should force banks to pay into a massive fund. But you think there needs to be a cleanup fund. I do. A cleanup funds a good word for it. Just like you would have for a natural disaster. Yes, somewhat like that. Yes, this is one of human making, but yes. [chuckles] you dont want to give an exact dollar amount for this cleanup fund, but what are we talking about . Is it billions . It would be. Yes, i would assume it would be billions, yes. Billions of dollars. Yes, absolutely. Chairman bairs proposed cleanup fund would pay homeowners to accept a banks ownership claim without a lawsuit. She says that this could be cheaper for the banks than trying to recreate the missing documents legitimately and not through the document mills. I think eventually, the bank could prove who owned it, but it would take a lot of time and expense. You know, none of the major banks were willing to sit down with us and talk to us about this, not even the american bankers association. Oh, im sorry to hear that. Why do you think that is . Theyre feeling very defensive now, and so, like, i can only assume that that is the reason why they declined. The banks are defensive because all 50 state attorneys general want to punish them. The states are seeking about 20 billion in damages for what they say is the irresponsible, perhaps criminal way that some Mortgage Companies handled what is, for most folks, the most important investment of their lives. In march 2012, the us government, 49 state attorneys general, and the nations five largest mortgage lenders announced a 25 billion agreement over alleged foreclosure abuses and asked a federal judge to approve the plan. As part of that settlement, Lynn Szymoniak, who filed a whistleblower lawsuit on behalf of the federal government, will receive 18 million. [ticking] coming up, the complex financial instrument that helped down the u. S. Economy. The idea that you could lend money to someone who couldnt pay it back is not an inherently attractive idea to the layman, right . However, it seemed to fly with people who were making 10 million a year. Wall streets shadow market when 60 minutes on cnbc returns. Restore revive rejuvenate rebuild rebuild rebuild so uh this is my friend frank and his, uh, Retirement Plan. One golden crown. Come on frank how long have we known each other . Go to etrade. They got killer tools man. Theyll help you nail a Retirement Plan thats fierce. 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The numbers were staggering, but they didnt begin to explain the greed and the incompetence that created the mess. As we first reported that same week, it all began with a terrible bet, one that was magnified by reckless borrowing, complex securities, and a vast unregulated shadow market worth nearly 60 trillion that had hid the risks until it was too late to do anything about them. It started out as a mortgage crisis. Then it slowly evolved into a credit crisis. Now its something entirely different and much more serious. What kind of a crisis is it today . This is a fullblown financial storm and one that comes around perhaps one every 50 or 100 years. This