Posts filed under “Foreclosures”
A modern Pecora Commission could right Wall Street wrongs
January 28 2012
What shall we make of this surprise pronouncement in President Obama’s State of the Union address? A belated investigation has been launched into the role of fraud in the financial crisis.
This much is clear: Despite rampant illegalities, bank fraud and countless cases of perjury, the response to date — at the federal level and from most, but not all, states — has been underwhelming, cowardly even. A few principled holdouts — the attorneys general of Delaware, New York, Nevada and California — refuse to rubber-stamp a pre-investigation settlement with banks, but that’s all. Despite chances to bring crooks to justice, there has been little action.
So, here we are, four years after the great financial collapse, three years after the recovery began and in the last year of Obama’s term — and the president has finally decided to investigate the role of fraud in the great global financial crisis. Hence, this new task force — the unit of Mortgage Origination and Securitization Abuses — begins behind the curve. The statute of limitations is, in many cases, close to elapsing.
Even so, do not dismiss the investigation out of hand because of the timing: History informs us that a serious investigation can begin four years after the fact. Recall that Ferdinand Pecora was the fourth chief counsel for the Senate committee that investigated the Wall Street crash of 1929 and subsequent Depression. He was appointed in 1932 and received broad investigatory powers in 1933. His report ran thousands of pages. Thanks in large part to Pecora’s findings, Congress passed the Glass-Steagall Banking Act, which separated commercial and investment banking; the Securities Act of 1933, which established penalties for filing false information about stock offerings; and the Securities Exchange Act, which created the Securities and Exchange Commission to regulate the stock exchanges. Nearly 50 years of financial stability followed.
The personality in charge can make all the difference. In an encouraging sign, Obama appointed to the task force New York Attorney General Eric Schneiderman, one of the few attorneys general not railroaded into a premature settlement with banks of the robo-signing-foreclosure scandal.
Critics have derided the task force as little more than election maneuvering. The politics are obvious: Both Occupy Wall Street and the tea party were very unhappy with the bank bailouts; they seem even less happy with the lack of prosecution.
It’s fair to ask: Is this new task force a meaningless exercise?
It is too soon to tell, of course. Like good poker players, we can look for “tells” that signal whether this will be a farce or a serious player. We’ll find clues in the structural setup of the office as well as the areas it investigates.
In the setup of the office, four aspects are crucial:
• Does the office have subpoena power (as the New York attorney general’s office has through the Martin Act)?
• Are there going to be public hearings (preferably in the Senate)?
• Will the commission have a significant budget?
• Will it be a forum for whistleblowers and crowdsourcing?
Without such powers, the office would be a farce, helping to shield banks from the fallout of their wrongdoings.
What the office investigates will also reveal how serious this is. Both pre- and post-crisis topics should be investigated, including:
• MERS: Mortgage Electronic Registration Systems was created by banks without any authority or enabling legislation. It allowed the rapid transfer of mortgages, avoiding state and county filing fees amounting to billions of dollars. Without MERS, it’s hard to imagine that the massive volume of mortgage securitizations could have occurred. How were lenders able to circumvent mortgage filings with town and county registrars? Did they engage in illegalities? How many billions of dollars do they owe in fees for transferred notes? And what percentage of MERS assignments were fraudulent, made for entities that did not exist?
• Origination fraud: Why did lenders accept “stated income” loans? Why did they abandon traditional standards? Michael White, a Countrywide subprime unit employee, called this “origination fraud,” observing, “Eliminate the verification of income for a mortgage borrower, and you eliminate your ability to predict the likelihood of repayment or default.”
• RMBS: Wall Street’s securitized mortgage pools (residential mortgage-backed securities) contained a broad variety of flaws, some so egregious that they amounted to fraud. In plain English, we’re talking about bad paperwork and misrepresented pools of mortgages to borrowers whose debts were significantly understated and whose median incomes and credit scores were significantly overstated.
• Insurance fraud: Look at a bank tactic in which legitimate home insurance is canceled and new insurance provided at a substantially higher fee through a subsidiary or affiliate of the bank mortgage holder. This extra expense in some cases led to foreclosures.
• “Pyramid” servicing fees: An illegal practice in which current payments are applied to past late fees, generating more late fees and additional interest owed and creating a delinquency where none existed. This tactic also led to foreclosures that were probably unlawful.
• Lost mortgage notes: How is it possible that the most important part of the mortgage contract — the promissory note — was consistently lost or misplaced by banks? It is unfathomable to anyone who has ever handled documents. At best, it’s gross incompetence. At worst, it’s willful document destruction during litigation.
•Document fraud for sale: There were many examples of alleged document fraud, but the one crying out for investigation involves Lender Processing Services’ DOCX subsidiary. The firm seems to have been selling fabricated documents for a fee to lawyers and banks. Indeed, Lender Processing Services, which processes nearly half of all U.S. foreclosures, could require a separate investigation.
•False affidavits, perjury (robo-signing): We do not know who ordered the robo-signing of foreclosure documents, the false notarizations, fraudulent written statements to courts and perjury. This should be easy to investigate, like flipping a nickel-bag dealer to get to the drug kingpin. Astoundingly, this easy-to-investigate felony (via notarized perjurious statements submitted to foreclosure courts) has yet to be prosecuted.
• Foreclosure mills, process servers: Law firms engaged in rampant fraud that corrupted the foreclosure process. If found guilty, those folks should be disbarred and jailed. Same for the “sewer service” process servers who threw away legally required notices to delinquent homeowners.
• Soldiers and Sailors Relief Act: Federal law protects active-duty service members from foreclosure and eviction. I find violation of this law reprehensible. If it were up to me, I would let the Special Forces — Navy Seals and Army Green Berets — handle this as they see fit.
Even with criminal statutes of limitations elapsing, we can achieve some measure of justice against the crisis wrongdoers. Lawyers can be disbarred and corporate insiders banned from serving in publicly held firms again. CEOs and CFOs can be fired. A significant investigation, with subpoena powers, a real budget and public hearings would go a long way toward restoring public confidence.
Schneiderman has an opportunity to create a legacy for himself that lasts far beyond the next election cycle. If he lacks the tools to do so, he should demand them or resign in protest.
A.G. SCHNEIDERMAN ANNOUNCES MAJOR LAWSUIT AGAINST NATION’S LARGEST BANKS FOR DECEPTIVE & FRAUDULENT USE OF ELECTRONIC MORTGAGE REGISTRY Complaint Charges Use Of MERS By Bank Of America, J.P. Morgan Chase, And Wells Fargo Resulted In Fraudulent Foreclosure Filings Servicers And MERS Filed Improper Foreclosure Actions Where Authority To Sue Was Questionable Schneiderman: MERS And Servicers…Read More
The most interesting news from the SOTU address was the very belated appointment of a mortgage investigation task force, the Office 0f Mortgage Origination and Securitization Abuses. You may recall that back in April of 2011, I presented to the National Association of Attorneys General a short keynote speech. It was titled “How Systemic Bank…Read More
Mitt Romney’s State of the Union Challenge on the Mortgage Crisis by Eliot Spitzer and Dylan Ratigan ~~~ Finally, a presidential candidate came out and honestly addressed the biggest problem in our economy, the enormous debt overhang in our mortgage market. A few days ago, Mitt Romney was at a forum in Florida talking about…Read More
Earlier this week, we discussed whether Lender Processing Services deserved the “Corporate Death Penalty“. You can see all of our prior LPS discussions are here. I bring this up because there is a fascinating post over at Reality Check, which declares Florida’s new AG Pam Bondi “the BFF of foreclosure fraudsters” such as LPS. (I…Read More
Governor Sarah Bloom Raskin
At the Association of American Law Schools Annual Meeting, Washington, D.C.
January 7, 2012
Thank you and happy New Year. It is a pleasure to be with you today as you meet to discuss so many pressing and important issues. I know there has been much discussion at this conference about the public function of law schools and I commend you for tackling this essential challenge. In my speech today, I hope to add to the conversation a little bit by presenting a simple argument, that laws and regulations must be enforced, and enforcement must be part of what we teach lawyers and future lawmakers to study. What we think of as the rule of law encompasses not merely theories of the process by which public laws and regulations are created through particular legislative and administrative procedures, and not merely theories of how laws and regulations are interpreted by courts. The rule of law includes enforcement itself. The rule of law compels us to consider whether a rule has been crafted in such a way that it is capable of being complied with and capable of being enforced effectively by state actors. The rule of law also involves decisions about whether there has been compliance, and if not, what should be done about it.
The failure of timely enforcement leads to the entrenchment of bad practices and an increase in the costs of correction. For example, turning to what will be the focus of my comments today–the role of mortgage servicers in the foreclosure crisis–the longer it takes for mortgage servicers to make the operational adjustments necessary to fix their sloppy and deceptive practices, the costlier and more difficult it becomes for them to sort them out and correct them.
More fundamentally, a failure by regulators to enforce the laws and regulations as strong antidotes to financial misconduct and unsafe and unsound practices by the institutions they regulate establishes de facto acquiescence to the dominant norms of the financial marketplace. At that point, our laws become the resting place for unfair practices and broad disrespect for the law generally. This is a phenomenon that Shakespeare’s Angelo observed in “Measure for Measure” when he said:
We must not make a scarecrow of the law,
Setting it up to fear the birds of prey,
And let it keep one shape, till custom make it
Their perch and not their terror.
For sure, different regulatory regimes could have different answers regarding the best way to enforce laws and regulations. As law professors teaching both the substance of law and the practice of law, I imagine you find ways within your courses and scholarship to discuss theories of enforcement–for example, the use of private rights of action versus enforcement by regulatory agencies; different enforcement tools such as memoranda of understanding, consent orders, and cease and desist agreements; how these different enforcement tools are sequenced; and whether and when violations of law should be publicized.
In answering all of these questions, there is consensus that public enforcement should be used in addressing pervasive regulatory problems. Today I want to talk about how home mortgage foreclosures hurt the pace of an economic recovery, and how important it is that the severe misconduct that has been uncovered in the mortgage servicing sector be addressed through intensified public enforcement of the law as part of the overarching effort to rebuild our damaged communities and neighborhoods.
Mortgage Servicing and the Economy
The economic downturn that began in late 2007 and worsened considerably in the autumn of that year resulted in the worst recession in many decades. Although recovery from the recession officially began in the third quarter of 2009, the pace of recovery has been modest, resulting in an unemployment rate that has remained at or above 8.5 percent since mid-2009. This sustained high unemployment rate–with all the attendant social consequences, including lost income and family strains–has contributed to an unprecedented number of mortgage foreclosures throughout the nation.
This wave of foreclosures is one of the factors hindering a rapid recovery in the economy. Traditionally, the housing sector, buoyed by low interest rates and pent-up demand, has played an important role in propelling economic recoveries. The increase in housing sales and construction often is accompanied by purchases of complementary goods, like furniture and appliances, which magnify the effect of the housing recovery.
However, six years after house prices first began to fall, the pace of the economic recovery remains slow. Nationally, house prices have fallen by nearly one-third since their peak in the first quarter of 2006, and total homeowners’ equity in the United States has shrunk by more than one-half–a loss of more than $7 trillion. The drop in house prices has had far-reaching effects on families, neighborhoods, small businesses, and the economy, in part because so many American families–more than 65 percent–own their homes. The fall in house prices has caused families to cut back on their spending and has prevented them from using their home equity to fund education expenses or start small businesses. The decline in house prices has also impeded families from benefiting from the historically low level of interest rates, as perhaps only half of homeowners who could profitably refinance have the equity and creditworthiness needed to qualify for traditional refinancing.1
Before we begin our Sermon this Sunday, a bit of history:
Think back to the giant fraud that was Enron. It was enabled — indeed, it was only possible — by the criminal behavior of their “Big Five” accounting firm, Arthur Andersen. This massive fraud perpetrated on the investing public was only possible due to the cooperation and active participation of their accountant, who were found guilty of “obstructing justice when it destroyed Enron Corp. documents while on notice of a federal investigation” charges. For this sin relating to their handling of Enron’s audits, Arthur Anderson was forced to “decertify,” voluntarily surrendering their license to be Certified Public Accountants in the United States. By voluntary, we mean they had no other choice.
Hence, for their complicity in the Enron scandal, Arthur Anderson was taken out back like Old Yeller and put down. Their senior officers and accountants scattered to the other major firms with their clients in tow. Even their consulting firm, Accenture, luckily lost the name Arthur Andersen Consulting in 2000, removed all visible signs of affiliation.
Once Andersen was de-certified from Accountancy, AA was no more.
Today, we have what appears to be a parallel fraud: The processing of foreclosure documents by legal services giant Lender Processing Services. Thanks to the diligent worh of Attorneys General in states such as Nevada, New York, Delaware, California (but not Florida), we are starting to learn the extent of what took place under the auspices of LPS:
• former L.P.S. employee who worked in “attorney management,” overseeing firms that performed legal work for foreclosures, told Nevada investigators that L.P.S. required him to resolve issues raised by the firms at a rate of 30 foreclosure files every hour (2 minutes per)
• Former workers described their work as “surrogate signers.” Their job was to forge signatures on documents.
• Other employees were hired through temp agencies, paid $11 an hour and told that her job was “to sign somebody else’s signature on documents,” the lawsuit said. Investigators were informed she signed roughly 2,000 documents a day for months — well over 100,000 foreclosure docs.
• Notarization was similarly dishonest, with workers notarizing documents (as a Notary) that they had fraudulently signed as a surrogate.
• Borrowers were confronted with documents containing “false assertions about which entity was authorized to foreclose, and false assertions about whether the consumer was delinquent on a loan payment.”
I have a question for Bank of America and Citi: Why haven’t you thrown these LPS weasels under the bus? What dirt they have on you preventing a simple j’accuse! ? What the hurry to settle before an investigation?
The end game for this is fairly obvious: Find the fuckers who authorized this, prosecute and convict them, and throw their sorry asses in jail. If the orders came from high enough up the food chain, why not pursue a similar Arthur Anderson penalty. Wat this broad corporate policy, or the work of a rogue banker? There is the answer to the death penalty question. After all, if a legal services firm is committing fraud, what bank or law firm can ever work with them? Depending upon the outcome of these AG investigations, a corporate death penalty could very well be the appropriate remedy.
This is going to get very interesting this year . . .
From East and West, Foreclosure Horror Stories
NYT, January 7, 2012
“What’s happened is that, almost overnight, we’ve switched from democracy in real-property recording to oligarchy in real-property recording. There was no court case behind this, no statute from Congress or the state legislatures. It was accomplished in a private corporate decision. The banks just did it.” -Christopher Peterson, a law professor at the University of…Read More
Regular readers of TBP know that I spend some time rooting around in the excellent American Presidency Project, a remarkable resource. Sometimes I’m looking for something specific, other times I’m just getting a feel, a flavor, for the message coming from our leadership, specifically the president. The latter was the case when I undertook a…Read More