Well. Isn’t this a welcome development?

Last week, we heard the announcements by New York Attorney General Eric Schneiderman that his office is investigating fraud in mortgage securitization — originally focused on Goldman Sachs, Bank of America, and Morgan Stanley, this morning expanded to include JPMorgan, UBS, and Deutsche Bank.

Previously, the Florida AG had published a brutal analysis on Florida foreclosure fraud.

We now learn that California is stepping up to the plate: California Attorney General Kamala Harris is creating a 25-person task force to target mortgage fraud of any size.  It includes a team of 17 lawyers and eight special agents from the state Department of Justice. The focus will be on three key areas:

Corporate fraud: including instances in which bundled mortgages were sold as securities to the state or its pension funds under false pretenses, using California’s False Claims Act, which makes false claims submitted to the state a felony;

Scams: including instances in which consultants, lawyers and others took fees from people in foreclosure, saying they would help the homeowners get loan modifications or other remedies, but delivered nothing.

Origination Fraud: Fraudulent lending practices, including deceptive marketing, failure to fully disclose loan terms. This includes qualifying people for loans who couldn’t afford the terms.

Note that this initiative is distinct from the multistate investigation because “it would go after all aspects of the mortgage-lending business.”

That statement makes the third item above quite fascinating: It means that the California AG is looking into something that no one else has been willing to touch: Origination Fraud. Any finance firm that lent money to people they knew could not possibly pay is back could be prosecuted under these terms.

Even more significant is the possibility of “Systemic Origination Fraud” — the no doc loans where lenders voluntarily kept themselves ignorant about the borrowers ability to repay loans.

Understand what the New York and California Attorneys General just did: They raised the bar for what it is going to take to stay in office as an elected AG. I expect we should soon hear from the Attorneys General offices Arizona and Nevada undertaking similar prosecutions.

If not, angry citizens in these foreclosure heavy, fraud ridden states will become very frustrated. Voters will be asking: “If NY and California and Florida can do this, why aren’t we?

I imagine that any AG that refuses to hold corporate interests accountable should best prepare to return to the private sector.

Previously:
Follow the Money: How Systemic Bank Fraud Contributed to the Financial Crisis (April 12, 2011)

Florida Attorney General Report on Fraudclosure (January 5, 2011)

Dodo Bird Bankers (May 9, 2011)

Sources:
California creating mortgage fraud task force
Alejandro Lazo
Los Angeles Times, May 23, 2011
http://www.latimes.com/business/la-fi-mortgage-fraud-20110523,0,1196882.story

New York Investigates Banks’ Role in Financial Crisis
GRETCHEN MORGENSON
NYT, May 16, 2011 
http://www.nytimes.com/2011/05/17/business/17bank.html

Category: Bailouts, Credit, Legal, Real Estate

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23 Responses to “NY & California AGs Are Prosecuting Bank Fraud”

  1. Moss says:

    It is certainly about time.
    It will be very difficult for the banksters and their lobbyists, or the Feds with their complacent, complicit and captured regulatory and legislative co-conspirators to influence the AG’s.

  2. BusSchDean says:

    Maybe, just maybe we can draw a clearer line between what is “business” and what is “fraud.” Business builds value through market transactions that have integrity and underlying value. With business we have winners and losers as losers bet on the wrong side of underlying value. Fraud simply transfers wealth through markets that lack integrity.

  3. Petey Wheatstraw says:

    With all of the robosigning, it would seem that document examiners would be all that are needed to start the ball rolling in the right direction. Shake the tree, get a couple of strong convictions, and wait for the big fruit to fall.

  4. Lariat1 says:

    It may sound silly but I believe that something has to happen, it all can’t get swept under the rug. There has to be some accountability. It’s fraud and our young adults see it as fraud and see the bankers getting away with it. Do the crime and you don’t do the time. What lesson is that for them to see as they start their lives on their own. What morals? Who needs morals?

  5. BusSchDean says:

    Lariat1: Nothing silly about that at all. I talk about this almost weekly to one faculty member or another. Even with convictions we desperately need business leaders to speak out. To his credit, BR speaks out like few others. Where are the CEOs who truly believe in markets that have integrity?

  6. Irwin Fletcher says:

    Funny thing. No mention of going after the most common element of mortgage fraud.
    Why would you say you were tackling mortgage fraud and exclude the largest perpetrators?

  7. number2son says:

    I’m actually surprised by all this optimism from this blog’s usual cast of cynics. Justice finally and at long last? Maybe so.

  8. Petey Wheatstraw says:

    Irwin Fletcher:

    If you’re talking about the home buyer, you’re talking about the lesser of the criminally culpable (if culpable, at all). Other than flippers, most mortgage applicants, during the “boom,” were guided by professionals. Any resistance at settlement was met by reassurances that any shady dealing was SOP. In the case of new construction, buyers were faced with the loss of their substantial deposits if they didn’t go through with the deal (our courts treat home builders very specially when it comes to reneging on a pre-construction deal). If anything, the average non-flipper was sucked into the deal. Every scam needs a sucker. If you want to find the real criminals, follow the money.

  9. FS says:

    Petey,

    “the lesser of the criminally culpable” is certainly not the person who has no money and is buying a home. That is fraud. Your portrayal of these poor souls as being dragged to the bank and being forced to sign paperwork they know is fraudulent is absurd. The lack of personal responsibility, at BOTH the corporate and individual level must be addressed.

  10. b_thunder says:

    Finally someone in Law Enforcement “food chain” decided to start from the beginning- and the beginning is the origination fraud.
    I’m just skeptical that the process will be allowed to complete – this will certainly undermine the 3-yar old “extend and pretend” efforts of 2 administrations and the Fed. I bet there will be call made from the Treasury to US AG and from the US AG to the states’ AGs

  11. Raleighwood says:

    I find taking advantage of people who lack the intellect and/or experience to know when they are being taken advantage of or set-up to fail criminally culpable.

    Not all of the folks in foreclosure fall into that category but enough for me to find them far less criminal than the agents that sucked them in and betrayed their trust.

  12. Petey Wheatstraw says:

    I sat in numerous settlements during the crimefest and was in a position to witness the process from pre-construction marketing through to settlement.

    I’m not saying that anyone was dragged anywhere. I’m saying that the consumer (buyer), in many cases, was taken into a high pressure financial/legal proceeding (in fact, I would say that the pressure was ramped up beyond that normally found at a RE settlement), designed to close the deal at any cost. The buyer was both pivotal to the scam and the least knowledgeable in the room. In most cases, the buyer was the only non-professional present. The other persons consisted of the RE agent(s) who work for the seller (and in some cases, but not many, for a RE broker working for the buyer), the loan agents and officers, the builder’s settlement team. The entire process was designed to push settlement through, no matter the legality, and it all hinged on the buyer.

    There was virtually no one who did not qualify for a mortgage during this time.

    In cases where there were questions regarding the legality of the transaction, or when the buyer would question their ability to repay their loan, should interest rates change (and even more rarely mentioned, if housing prices dropped), pressure was applied. Assurances were given BY THE PROFESSIONALS that everything was on the up and up. If push came to shove, and settlement was going to fall through, the buyer was faced with the loss of their earnest money deposit and be subject to legal proceedings where legal fees and builder losses would be awarded to the builder. I’m talking outright threats.

    I count flippers as professionals, and do believe their motive was different than that of a traditional home buyer. The former entered into numerous deals — aware of the process and fully prepared to commit fraud upon fraud, the latter went to live in their overpriced houses and tried to pay their highly creative mortgages.

    There’s also the folks who took equity out during the boom. Again, I’m sure that the vast majority of these loans were blessed by TPTB (otherwise, from the viewpoint of the borrower, if this was not a valid process approved and backed by the industry making the loan and based on accurately valued assets, why would they be lending the money so freely?).

    Again — if you want to find the guilty, follow the money.

  13. Transor Z says:

    I imagine that any AG that refuses to hold corporate interests accountable should best prepare to return to the private sector.

    Oh, I suspect they’re way ahead of you there, Barry.

  14. Petey Wheatstraw says:

    TZ:

    Funny!

  15. JimmyDean says:

    Finally….let’s just hope they can make something stick

  16. realgm says:

    Late is better than never. It’s a good 1st step to bring justice to those criminals. I hope to see a lot of banksters in jail.

  17. trail says:

    This is progress, but they’re not really prosecuting bank fraud yet, they’re just investigating it. Once they file some charges, they will be prosecuting bank fraud. Many a slip ‘twixt the cup and the lip.

  18. shaka says:

    The AGs are forgetting the most lethal weapon in their arsenal: The RICO Act.

  19. willid3 says:

    it would be good to get the fraud gone. especially if we want let the private sector finance homes as opposed to having F&F do it. as it is, investors have no reason to trust the lenders, or the rating agencies either as both have been shown to be either incompetent, or frauds. and considering how little power the borrower has in the closing (other than agreeing to the deal) and how little most know about it (after all if it were simple to to, then why would there e a need for lawyers and other professionals to be involved in it? and why would there be so many fees?). and from every thing that we do know, it appears that lenders and their partners are the biggest source of . irregularities. nobody forced them to do NINJA loans. they invented those. nobody forced them to create MERS, or the originate to sell business model. those were all private sector creations (or market based ones. every ones doing it. so we must too!)

  20. Irwin Fletcher says:

    Petey,

    Lying about your income = fraud.
    Asking your employer to inflate your verification of income = fraud
    Claiming you will be living in the house when you never intend to occupy it = fraud
    Claiming you have a down payment when you just pulled cash from a credit card = fraud
    Asking your employer to lie and say you have been on your job for two years = fraud
    Collusion with the seller of the house regarding price = fraud

    These are just a few that were and still are VERY common. I agree. Follow the money.
    Following the money means watching the lenders give the money to the borrowers who don’t pay it back.
    In all of the instances above, the money flows to the fraudulent borrower who keeps the money and the lender loses the money.

    I am just saying that this is real and it is common. Much more common than people realize. Taking nothing away from going after all the other fraud too. Let’s just be consistent if we are really serious about going after fraud. That’s all.

  21. Thor says:

    Irwin – Unless you can provide sources for your claims I would not make the claim at this venue. You are making a rather huge sweeping generalization about fraudulent home buyers and I have not seen any data that would prove your point that fraudulent home buyers are anything more than a small percentage of this mess.

  22. Ed618 says:

    With all due respect, I believe the proclamation that the bar has been raised for AGs to win election/reelection, is premature, at best.

    Only a small percentage of voters have more than a cursory understanding of the issue, and the belief that the borrowers have significant culpability is widespread. And to the extent that public opinion moves in the direction you suggest, a long, technical legal battle will allow ample time for that opinion to evaporate.

  23. louis says:

    “Lying about your income = fraud.
    Asking your employer to inflate your verification of income = fraud
    Claiming you will be living in the house when you never intend to occupy it = fraud
    Claiming you have a down payment when you just pulled cash from a credit card = fraud
    Asking your employer to lie and say you have been on your job for two years = fraud
    Collusion with the seller of the house regarding price = fraud”

    Why would a lender give money to these people? Shocking.