The foreclosure fraud case is one of the BIG stories I’ve been trying my best to follow lately. We learned today that all 50 state Attorneys General have opened an investigation into mortgage industry practices:
The state attorneys general are looking at allegations some banks did not properly review files or submitted false statements to evict delinquent borrowers from their homes during a foreclosure crisis that is one of the most visible wounds of the 2007-2009 recession.
"We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry," Minnesota Attorney General Lori Swanson said in a statement.
"The latest allegations of corner-cutting and slipshod paperwork are troubling, but perhaps not surprising."
--
The states are investigating the use of "robo-signers" -- people who sign hundreds of affidavits a day -- by banks and companies that collect monthly mortgage payments. It is alleged they did not properly review the documents they were signing.
"What we have seen are not mere technicalities, as some suggest," Ohio Attorney General Richard Cordray said.
So if there was systematic fraud perpetrated throughout the mortgage lending industry, one would hope we’d finally see some of these scoundrels locked up for awhile.
Incidentally, one of the last times that all 50 state Attorneys General agreed to pursue a coordinated investigation, guess what the alleged crime was? Predatory lending. And guess who took the lead in making the public case for the investigation – then-Governor of New York Eliot Spitzer. Spitzer came out swinging against the mortgage lending industry and the banks at large in a February 14, 2008 Washington Post piece that is worth excerpting from at length (but well worth a read in its entirety):
Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.
Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.
--
Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.
In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. (emphasis mine)
The Bush Administration intervened to stop the states from investigating and enforcing their own predatory lending laws, which I think just might qualify as an egregious breach of the sacredness of “states’ rights” in GOP doctrine, eh?
But as we all now know, hubris brought Spitzer’s gubernatorial reign down (but he’s not out, have you seen him on CNN recently?) with the high-priced call girl scandal he was ensnared in just a few weeks after he wrote his Valentine’s Day article. Let me make a quick aside at this point and say in no uncertain terms that I am not arguing that what Spitzer did was by any means acceptable. Now, that being said, could there be any coincidence between his article broadcasting the Bush Administration’s outrageous actions on behalf of predatory lenders and his being outed as a john? Let’s look a bit further:
Spitzer's fall was all the more stunning because he had been elected in November 2006 with 69 percent of the vote, the most ever in a New York gubernatorial race, and some Democrats even said he could possibly become the country's first Jewish president.
But his life and career began unraveling last week, when federal agents, acting on wiretaps, busted a high-class New Jersey-based prostitution ring, called Emperors Club VIP, and arrested four people. The criminal complaint listed an anonymous "Client 9," who was heard calling the escort service to arrange for a call girl named "Kristen" to meet him for a Feb. 13 tryst at Washington's Mayflower Hotel.
The client allegedly paid for the woman's train fare from New York to Washington and $4,300 for a two-hour session. Law enforcement sources confirmed this week that Client 9 was Spitzer.
--
There are also questions about the identities of the other wealthy clients of the Emperors Club VIP. The criminal complaint unsealed last week made reference to 10 clients without naming them; only Spitzer has been identified as Client 9. (all emphases mine)
Interesting that Spitzer was the only client whose name was leaked identified to the press, especially because he was later cleared of all charges:
The details of Mr. Spitzer’s financial transactions — how he took money from his personal accounts and sent it to the prostitution ring’s front company, QAT International — were always the crucial questions in the case. Prosecutors, from the start, were trying to determine whether there was ample evidence to charge Mr. Spitzer with a crime called structuring, which makes it illegal to conduct financial transactions in a way intended to conceal their source and purpose.
Michael Horowitz, another former chief of the public corruption unit in Manhattan, said that it was rare for prosecutors to pursue a structuring charge without a substantive underlying crime like money laundering or drug trafficking. He suggested that a prostitution case, which the government was unlikely to prosecute anyway, was not enough to undergird a structuring charge. (emphasis mine)
So the government knew that Spitzer’s crimes were not going to lead him to prison, and yet it is uncommon for sitting politicians involved in sex scandals to be forced out of office, look at South Carolina Governor Mark Sanford, US Senator from Nevada John Ensign, and US Senator from Louisiana David Vitter (who was also caught in a prostitution scandal – the DC Madam case). None of them were forced out of their jobs; do the rules bend when Republicans are involved, or was Spitzer more the exception to the rule in being forced out? And why does it appear that some people in high places decided to drop the axe on Spitzer to muzzle him just after he publicly charged that the Bush Administration aided and abetted predatory lenders?
That line of questioning leads us back to the now-unfolding foreclosure fraud situation, explained in great detail here by Mike Konczal of the Roosevelt Institute. The banks, as we all are well aware, benefited from a massive infusion of taxpayer largess in the form of the bailout (TARP) of October 2008 (remember it was Bush’s bailout folks, no matter what the Tea Party may wrongly claim) and that the bailouts served to rehabilitate a good chunk of the banks’ balance sheets. But the banks still were forced to contend with the problem of widespread despair in the housing markets, and with the fact that many of the houses that they owned were, in fact, overvalued assets due to the nationwide plunge in home values.
Because the banks have gotten “too-big-to-fail” (which is what necessitated the bailouts in the first place) as I’ve discussed in a previous posting at length, the government has continued to help prop the banks up, lest the entire financial apparatus collapse entirely. Programs such as the Home Affordable Modification Program (HAMP) that are ostensibly designed to incentivize banks to help homeowners renegotiate their mortgages on more favorable terms, have been shown to serve the banks’ interests entirely. From a report by Steve Waldman on a meeting Geithner and other top Treasury officials had with financial bloggers over the summer:
The conversation next turned to housing and HAMP. On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least. There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”. Treasury officials are not cruel people. I’m sure they would have preferred if the program had worked out better for homeowners as well. But they have larger concerns, and from their perspective, HAMP has helped to address those. (all emphases mine)
There you go, policymakers playing kabuki with taxpayers in order to help keep the banks who got us into this mess alive…what a grotesque situation!
And yet, after all of this has happened, some are saying, like former financial executive RJ Eskow, that the foreclosure fraud scandal may just show that the emperor (the banks in this case) has no clothes:
The foreclosure fraud scandal is a big deal (or a big "effin'" deal, as Joe Biden might say). But its real significance is an even bigger deal. Foreclosure fraud is one domino, and if it falls others will follow. The result could be an end to the "invisible bailout" -- the one you never hear about, the one that forces millions of people to subsidize bad lending practices in order to prop up Wall Street.
The invisible bailout is the reason why the government isn't pushing to freeze foreclosures. If the foreclosure process is halted and lending practices are thoroughly investigated, it might eventually force bankers to own up to their own lawlessness -- and write down billions of dollars in artificially inflated assets. How are they going to pay themselves record bonuses if that happens?
This is where it gets really ugly – our somewhat/perhaps/maybe/kinda recovering economy could well be plunged into another, perhaps deeper financial downturn if widespread fraud is in fact found among the banks’ mortgages. If nobody knows who rightfully holds the title to a home, how could they possibly know its market value? The entire financial system has been rebuilt (if one could even call it that) after the 2008 financial crisis on a foundation of nearly worthless and potentially fraudulent mortgages, and “irresponsible homeowners” have been to blame for not only their own troubles, but those of the entire financial system. Eskow continues:
Nobel prizewinner Joseph Stiglitz, who also bears the distinction of having been correct about the housing bubble, thinks it's time for the banks to write down the excess value of these loans. As Stiglitz observes, that will be painful for the banks in the short term, although it would be "nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy."
But the administration's reluctant to do that. That's why we heard such tepid remarks from the White House about the foreclosure fraud scandal over the weekend. If the foreclosure fraud issue is pursued too aggressively, it throws 41% of all expected housing sales into question. It raises even more questions about the ownership of millions of loans in good standing, potentially giving homeowners leverage to renegotiate based on the actual market value of their homes. And it reopens the issue of "writedowns."
Illegal submission of foreclosure documents was part of a larger cover-up. People need to be arrested for it -- but that, of course, would open up a larger can of worms. The legal process could very well reveal the extent of the title problem, as well as other potentially widespread criminal practices.
So there you have it folks, the states are now going after the big Wall Street fish again, perhaps following up on the forestalled investigations they were set to launch back in 2003 when all of this mortgage madness could have been nipped in the bud. In case you are in any doubt about just what was produced by the collusion between government and Wall Street, Ezra Klein interviewed financial analyst Janet Tavakoli last week, and here’s her response when being asked what this all means for the banks (after calling this crisis “the biggest fraud in the history of the capital markets”):
When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one. (emphases mine)
As Eskow said above, the bankers just want to make it seem that they’ve actually produced some semblance of profits for their shareholders so they can continue to collect their exorbitant bonuses. That greed leads the bankers to convince regulators to help them avoid realizing the losses they should rightfully incur for such terrible investments. That dynamic then leads to continued uncertainty in the market, which causes the banks not to lend to businesses, individuals, or even to each other. Greed has never run so rampant in the streets, and it is now manifestly clear that it is the greed of the privileged few that is genuinely handcuffing any sort of economic recovery for the rest of us. Government regulators have bought into this system for years – when Eliot Spitzer began to make a stink, he was publicly disgraced and muzzled quickly, lest his accusations about the rotting core of the financial system lead people to look too closely so that the house of cards fell.
Government has been complicit in this scheme since day one, which is the real reason none of the fraudsters have been put in prison yet – the circle would likely extend too widely and might ensnare some of those who are supposed to be on the “good” team. We can’t have change in this country until we have an honest accounting of the mistakes of the past, and I surely hope that the state Attorneys General are allowed to run their investigations as they see fit, with no White House interference. The President’s actions in confronting this crisis, including the actions of his deputies, will show just how committed to change he really is.
