The mortgage investigations drag on

By Felix Salmon
January 25, 2012
settlement with the banks over mortgage fraud has never been clearer. But neither has the fact that it's not going to happen any time soon.

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The shape of a possible settlement with the banks over mortgage fraud has never been clearer. But neither has the fact that it’s not going to happen any time soon. And without a deal in hand, Barack Obama ended up making a different announcement in his State of the Union address:

Tonight, I’m asking my Attorney General to create a special unit of federal prosecutors and leading state attorney general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.

Sam Stein has the details — but suffice to say that this is a new investigation, with no fewer than five co-chairs, which will run in parallel to the existing DoJ investigation:

The unit will not supersede the efforts already underway by the Department of Justice. Instead, it will operate as part of the president’s Financial Fraud Enforcement Task Force. In addition to Schneiderman, the unit will be co-chaired by Lanny Breuer, assistant attorney general at the Criminal Division of the Department of Justice, Robert Khuzami, director of enforcement at the SEC; John Walsh, a U.S. attorney in Colorado, and Tony West, assistant attorney general in the Civil Division at DOJ.

To recap: we were meant to have a settlement by now. And instead of a settlement, we’ve got yet another investigation, where the aggressive New York attorney general looks as though he’s in the minority with respect to punishing the banks for their misdeeds.

The settlement as it looks right now has a reasonably large headline figure attached — $25 billion — but most of that is principal reductions which would make a lot of sense for the banks even if there were no settlement at all. In fact, there’s a case to be made that the settlement talks have delayed much-needed principal reductions. If you’re a bank in settlement talks and you want to do across-the-board principal reductions while removing yourself from legal jeopardy, of course you try to connect the former to the latter. After all, principal reductions plus immunity from prosecution looks much more attractive than principal reductions on their own. And the government can’t announce a big settlement figure if the banks have already reduced the principal on a lot of mortgages anyway.

But frankly any settlement now looks just as far away as ever. After all, there’s no point in setting up a new investigation to hold banks accountable, if we’re about to see a settlement which prevents any law-enforcement body from doing that.

So expect the status quo to continue, probably through 2012: banks with huge contingent legal liabilities hanging over their heads and their stock prices, and the government holding back on prosecutions as it attempts to cobble together a global settlement. It’s a recipe for uncertainty and gridlock and banks hoarding their money rather than lending it out. New investigations are all well and good, but I can’t help but think that it’s a bit late to be launching them in 2012. This should clearly have been done in 2008, or 2009 at the latest.


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Schniderman is a problem for the Obama administration. Sometimes the best way to watch and control an enemy is to bring him into the fold. The Obama economic team is very pro-big bank and looking to cut a deal for them, so they are biding their time, studying their enemies and figuring out a way to make it happen. If the President were serious about reforming mortgage practices it would’ve happened already.

Posted by Sechel | Report as abusive

I am confused by the distinction between civil and criminal investigations. The joint ~50 AG talks are purely civil and they do not offer any criminal immunity. Is this new task force going to pursue criminal, civil or both types of investigations? There were many hundreds in jail after the S&L meltdown.

Posted by ScottFree | Report as abusive

Khuzami taking part should foretell where all this is going. He is a pillar of accountability and responsibility? Well at least he is a remarkable prestidigitator of sham settlements. How long are we going to have to put up with this charlatan?

Posted by Woltmann | Report as abusive

I totally don’t buy the idea that refusal to settle very cheaply with the banks is somehow delaying principal reductions. Housing prices started to fall in June 2005, and by January 2009 had fallen, on average, by about 25%. In some markets – Las Vegas, Miami, San Diego – by a lot more than that. The robosigning investigations didn’t start for another year, yet banks/mortgage servicers have been completely unwilling to write down principal with the singular exception of mortgages that were acquired through an acquisition during 2008 (and even B of A has not been writing down Countrywide mortages, despite the potential opportunity through transaction accounting). I completely agree that such write downs are in the ultimate interest of bank shareholders and (most) holders of MBS, but its not the investigations of fraudulent practices that are holding things up.

Posted by richclayton | Report as abusive

If we really want to investigate people for fraud, where are the investigations of the mortgage brokers and borrowers who misrepresented income or intent to live in a house? Maybe there are grounds for civil or even criminal misrepresentation charges against some of the large banks or their employees, but we absolutely know that a lot of borrowers committed fraud, abetted in many cases by mortgage brokers. The focus is obviously political. Nice and convenient for all the non-New York politicians how much of the finance industry is concentrated in someone else’s state.

Posted by realist50 | Report as abusive

Felix, so you believe massive and systematic fraud are acceptable business practices? That banks are above the law? That the fifty promissory pledges signed previously by banks don’t indicate knowledge and intent to break our laws? That setting up business processes and organizations to break the law isn’t evidence of a systematic approach to criminality? That recidivism should not be prosecuted? That criminals behind a corporate veil should not be prosecuted? That criminal enterprises should not be prosecuted under racketeering law? That the following, known bank crimes should not be prosecuted?

- stock fraud
- securities fraud
- mortgage fraud
- consumer fraud
- accounting control fraud
- wire fraud
- tax fraud
- bank fraud
- perjury
- illegal foreclosure
- insider trading
- bribery
- usury
- corruption
- bid rigging
- market manipulation
- foreclosure on active-duty servicemen
- trade with terrorists and enemy states
- money laundering
- racketeering
- contempt of court
- obstruction of justice
- Violations of Sarbanes-Oxley
- lying to Congress

Posted by anonymous16 | Report as abusive

anonymous16, I think people are suggesting that there needs to be some actual evidence the claims you made are even vaguely true.

Can we also assume you are all for aggressively prosecuting every homeowner who misrepresented their ability or willingness to pay? Or all the buysides who broke their fiduciary responsibility to their investors?

Posted by Danny_Black | Report as abusive

Possibly you have certainly not planned to do so, although I believe you’ve got managed to convey your state of mind that many everyone is with. Your feeling regarding needing to guide, but not knowing how as well as where, is usually some thing many of us intend as a result of.