Opinion

Alison Frankel

Expectations for the new mortgage-backed securities task force

By Alison Frankel
January 30, 2012

I follow mortgage-backed securities litigation closely enough to be disgusted at the greed that fueled the securitization of insufficiently underwritten mortgages issued to homeowners who had no hope of paying them off. Sure, MBS investors and the bond insurers that backed MBS trusts were sophisticated and, to some extent, forewarned about the timebombs lurking in those mortgage pools. But you can’t read the voluminous MBS filings by monolines and investors — including the federal agency that oversees Fannie Mae and Freddie Mac — without wishing that someone be held accountable for sending the housing market on a slide, and dragging down the rest of the economy with it.

To date, accountability has been an elusive goal. I’m not talking about private suits or breach-of-contract put-back claims, in which MBS issuers are beginning to acknowledge billions of dollars of exposure to investors and insurers. But state and federal regulators and prosecutors have lagged behind the private plaintiffs bar (and the Federal Housing Finance Agency). As best I can tell, there have been no criminal prosecutions of people or institutions involved in mortgage-backed securitizations. On the civil side, the U.S. Attorney for the Southern District of New York, Preet Bharara, brought an MBS-based suit against Deutsche Bank last May. This summer, the New York Attorney General, Eric Schneiderman, filed Martin Act claims against Bank of New York Mellon for its conduct as Countrywide MBS securitization trustee. In October, the Delaware AG, Joseph Biden III, filed a civil suit against the Mortgage Electronic Registry System that accuses the banks that established MERS of using it as a vehicle to bundle mortgages they didn’t actually own. And last week, the Illinois AG, Lisa Madigan, sued Standard & Poor‘s for giving undeserved AAA ratings to overly risky mortgage-backed notes.

Those, however, are the only major government cases stemming from mortgage-backed securitizations that I’m aware of. For well over a year, the MBS industry has been under intense scrutiny by government investigators, from (among others) Congress, the Justice Department, the Securities and Exchange Commission, and the N.Y., Delaware, and Massachusetts AGs’ offices. So far, we haven’t seen a lot of tangible results from those investigations.

That’s why I’m skeptical that the new MBS fraud task force, introduced Friday at a press conference headlined by U.S. Attorney General Eric Holder, SEC Enforcement Director Robert Khuzami, and N.Y. AG Eric Schneiderman, is going to wreak vengeance on MBS wrongdoers.

Both Khuzami and Holder, in fact, emphasized what their lawyers have already done in probing financial fraud. “To be clear, investigations into RMBS offerings have been ongoing at the SEC. Along with experts across the agency, we have a specialized unit dedicated to the effort,” Khuzami’s press release said. “We already have issued scores of subpoenas, analyzed more than approximately 25 million pages of documents, dozens and dozens of witnesses, and worked with our industry experts to analyze the terms of these deals and the accuracy of the disclosures made to investors.” (Under Khuzami, the SEC has brought several actions against companies and banks that allegedly under-reported their exposure to subprime mortgages; and several more against banks and individuals that allegedly deceived investors in MBS derivatives.) Holder’s press release pointed to the securities, bank, and investment fraud cases the Justice Department has recently prosecuted, along with DOJ’s Fair Lending settlement with Countrywide parent Bank of America.

The benefits of creating an umbrella task force to oversee investigations already underway by state and federal regulators aren’t clear to me from the task force’s announcements. There will apparently be additional resources dedicated to MBS fraud. Holder said that there are now 15 DOJ lawyers, investigators, and analysts working on MBS matters. They will be supplemented right away with 10 FBI agents, and another 30 DOJ staffers will join the team “in the coming weeks.” Khuzami and the DOJ also said the task force will enhance coordination and streamline processes. “It will ensure that we pool the different capabilities, resources, legal theories and remedies that each of us bring to the effort,” Khuzami’s press release said.

Okay, streamlining is good. So is the apparent expansion of the state AGs’ mandate. “We have jurisdiction to go after every aspect of the mortgage bubble and the crash of the financial market,” Schneiderman said at the press conference, according to Housing Wire. (Here’s the AG’s press release.) “We have jurisdiction over every MBS issued over the last decade with Delaware and New York joining the group.” As if to underline that point, the task force announced that in recent days it has subpoenaed 11 financial institutions.

But the AGs, according to a DOJ spokesperson, won’t have any greater prosecutorial reach via the task force than they already have in their own states. “Membership in the RMBS Working Group will not empower state Attorneys General to enforce any statute that they could not otherwise enforce,” the DOJ told me in an email. “The Working Group and its federal and state co-chairs will coordinate investigations and make decisions about which office or offices should conduct various pieces of these investigations and which should be done jointly depending on the facts, the law and the jurisdiction.”

So when you put aside the press releases, what the MBS task force really adds to existing investigations is some additional DOJ manpower and better coordination among the various state and federal agencies.

There are clearly political benefits that come with the announcement of the new task force. It’s a gesture to critics who want to see MBS securitizers and trustees answer for their actions. Reuters has also obliquely suggested that membership in the MBS task force may persuade Schneiderman and other AGs who have voiced opposition to the Obama Administration-backed mortgage abuse settlement with top banks to support the proposed $25 billion deal.

I hope that’s not why the President called for an MBS task force. I hope the task force will, in some manner, tell the country whether it’s true that MBS issuers abandoned even their own lax underwriting standards, ignored warnings from inside and outside mortgage loan reviewers, and packaged deficient loans into doomed securities. I hope that even if regulators and prosecutors don’t bring cases, they tell us who got rich in the securitization business. I want everyone who lost money through their mutual fund or pension fund’s investment in MBS — and all the people whose mortgage lenders told them they could afford a loan they really couldn’t — to know those names.

That’s what I want. But I’m not holding my breath.

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Comments
One comment so far | RSS Comments RSS

Don’t expect much from Holder and Breuer at the DOJ. They spent a large part of their careers as Covington and Burl partners. Covington and Burl’s client list includes most of the most powerful corporations on Wall Street.

Judging from the DOJ’s dismal lack of progress over the past 3 years, it appears that Holder and Breuer have maintained some unholy alliances with their former clients from Wall Street, the very same people they should be prosecuting right now.

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