Saturday, December 24, 2011

Mortgage Abuse Prosecutions

From Yves Smith at naked capitalism we hear that there is a chance that mortgage cheats, at the banking end of the fiasco, may get their just desserts. It always strikes me as odd that people who took out loans at the urging of every sainted advertiser in the country, including the President, cop the blame when the falsity of those loans is made apparent. I think its about time the bankers faced their responsibilities. if the paperwork was good they would have no trouble foreclosing on delinquents. Instead we blame the delinquents without wondering why the banks can't foreclose. It seems a few people in power are now asking the awkward questions.

The development reported by the Financial Times’ Shahien Nasiripour, that the inspector general for the FHFA, the supervisor of Fannie and Freddie, and the Federal Home Loan bank, has decided to share information with New York State attorney general Eric Schneiderman, is far more significant than it appears on the surface.

It’s a well deserved slap in the face of the Department of Justice.

I’m not certain of the precise scope of powers of the FHFA inspector general. But typically, federal inspector generals have limited scope of action. They can only subpoena documents and cannot subpoena witnesses. And, of course, they are not prosecutors and cannot launch cases. The theory of IGs is that if they uncover something unsavory, they’ll hand it off to the Department of Justice. But as a former IG has pointed out, the DoJ does not take case leads from the IGs unless they are fully fleshed out, and that is well nigh impossible to do in the absence of speaking to witnesses.

The Department of Justice has AWOL on the mortgage and banking beat, no doubt to avoid ruffling powerful possible Obama donors. Inspectors general are in theory independent, and on top of that, the FHFA is an independent agency and is not running the Administration playbook (I’ve been told by people involved in bank regulation that Geithner has tried pressuring FHFA acting chief DeMarco to no avail).

So what does the FHFA inspector general do, certain that Eric Holder will ignore any misdeeds he finds? Turn to another prosecutor who can bring cases that can bring cases that are national in scope. From the Financial Times:

The collaboration between New York’s top prosecutor and the federal auditor overseeing half of the US home loan market raises the spectre of criminal probes and increased scrutiny of Wall Street’s once-lucrative role in packaging mortgages into securities.

Eric Schneiderman, New York attorney-general, has the power to file criminal charges as part of his investigation into banks’ role in packaging mortgages into securities for sale to investors, who have suffered hundreds of billions of dollars worth of losses.

Steve Linick, the inspector-general overseeing the Federal Housing Finance Agency, US mortgage financiers Fannie Mae and Freddie Mac, and the Federal Home Loan Banks, is probing allegations of fraud involving mortgage-backed securities purchased by Fannie and Freddie. He is also investigating wrongdoing by lenders that allegedly sold fraudulent home loans to Fannie and Freddie, according to testimony Mr Linick gave in Congress last week…

The partnership is bolstered by Mr Schneiderman’s ability to use the Martin Act, a 1921 state law that allows him to bring misdemeanour and felony criminal charges against alleged wrongdoers doing business in New York. The prosecutor can operate across state lines, essentially acting on behalf of investors across the US.

This is a win-win on several fronts. Not only can the FHFA inspector general have the New York attorney general use its subpoena and prosecutorial powers to advance its cases that the AG also thinks are promising, but the New York AG can presumably also take advantage of the IG’s expertise and staffing. State attorneys general are thinly staffed relative to the demands on them, so pooling resources could help the AG bring more cases (not just in combination with the IG, but by freeing up staff).

I am wondering if the tide is turning on the legal front. Catherine Masto is moving along quickly with her pursuit of mortgage abuses. As we indicated when she brought her criminal case against two mid level LPS employees, she appears to be going systematically, from the bottom of the crime racket. First she has gone after the foot soldiers. Now she has filed a wide ranging civil suit against LPS, which handles over half the foreclosures in the US via its network of foreclosure mills. Based on reports I have heard about LPS conduct from multiple, credible sources, I am quite confident that Masto has solid evidence backing the charges in her suit. LPS is likely to claim it believed it did nothing wrong (!) because it was acting as directed by its clients. Or Masto may separately be able to prove the servicers were well aware of LPS’s actions by getting her hands on internal documents or LPS’s software (impermissible practices institutionalized in the software cannot be a secret to the servicers). So expect Masto’s suits to lead to the heart of the servicing industry. She has found the thread that can unravel the entire garment and is pulling hard.

Another intriguing sign is the SEC case against former Fannie and Freddie executives over their alleged misreporting of subprime exposures in investor reports. This looks to be a cagey crowdpleaser. Obama gets to say he is going after executive bad conduct…and it happens to be at the company Republicans love to hate. Expect more Obama populist window dressing as we get closer to the election.

The mortgage industrial complex is starting to look a smidge vulnerable. That time is long overdue. I hope readers will cheer these tough minded state attorneys general on in the courageous work.

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