When talk of a joint investigation by state Attorneys General began, the thinking was that 40 states would be involved in the probe. Now, we’ve learned that every state but Alabama will be involved in the investigation, and even they’re sending a financial regulatory to participate in it, along with regulators from 38 other states. Democrats and Republicans alike from every state in the nation will take a look at systemic failures in the mortgage lending industry.
The officials are investigating accusations that some banks used shoddy paperwork to kick evict borrowers out of their homes during a foreclosure crisis that is one of the most visible wounds of the economic downturn.
“We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry,” the Minnesota attorney general Lori Swanson said in a statement. “The latest allegations of corner cutting and slipshod paperwork are troubling, but perhaps not surprising.”
The attorneys general will be looking at the practice by banks and companies that collect monthly mortgage payments of using “robo-signers” — people who sign hundreds of affidavits a day.
The use of robo-signers “may constitute a deceptive act and/or an unfair practice or otherwise violate state laws,” the attorneys general said, because the signers did not properly review the documents.
Even if this were solely a matter of paperwork and false documentation (and it’s not), that would represent, as Ohio Attorney General Richard Cordray told me, “a systematic fraud upon the courts.” As a result, people have been evicted from their homes illegally, in violation of existing state and local statutes. We know about the more egregious crimes – foreclosing on properties where the homeowner paid in cash and doesn’t have a mortgage, two servicers trying to foreclose on the same property, etc. These show a complete breakdown in private property laws in the US, and show the dire need for this investigation to uncover criminal fraud.
The fact that this fraud merely covers up the larger fraud over title ownership just urges these investigations to dig deeper. In their joint statement, the state AGs said that “the facts uncovered in our review will dictate the scope of our inquiry.”
If they find systemic abuse — which many experts say is a given in the current market due to the lack of investment by servicers and their desire to service mortgages on the cheap — that inquiry may broaden to include an examination of even loan-level documents. Such a time-consuming investigation will likely lead to significant costs being borne by the nation’s largest servicers, which also happen to be the nation’s largest banks […]
“This announcement illustrates states’ ability to coordinate our efforts to protect consumers,” said John Ryan, executive vice president at CSBS. “The foreclosure process in the various states is designed to ensure a basic level of due diligence and accountability occurs before taking an action that has dramatic implications for homeowners and communities.
“Our priority is to ascertain if violations of state law occurred, to re-establish confidence in the integrity of the foreclosure process, and take appropriate action to protect the rights of consumers and homeowners affected.”
This isn’t the only investigation underway, incidentally. Special Inspector General for TARP Neil Barofsky will investigate GMAC, a bailout recipient, on its foreclosure practices. There is also the lawsuit by Ohio against GMAC, and a large list of other investigations by AGs across the country.
But this joint investigation will have the most resources and potentially the most wide-ranging scope. And because the mortgage servicing industry has no actual federal regulator – an incredible occurrence that will hopefully be remedied by the Consumer Financial Protection Bureau – this investigation represents the closest to a federal probe that we’re likely to get for the moment.
Now they need to seat the grand jury…
UPDATE: Annie Lowrey gets word that Alabama has signed on to the probe. So now it’s every state Attorney General.