Even if the mega-banks were correct that the foreclosure fraud scandal merely concerns document errors, and that the replacement documents will fix everything, they cannot rewind history. First of all, judges may not accept the new documents, and may make the banks file entirely new cases. Second, the banks did supply those fake documents, backdated documents, forged documents, false affidavits. All that will be the subject of both the Ohio lawsuit against GMAC and the 50 state AG investigation. In addition, the banks clearly violated criminal statutes by breaking into occupied homes, changing locks, and engaging in other forms of intimidation. That, along with the document fraud, should draw criminal charges, and there’s an indication today that it will, from federal law enforcement:
Federal law enforcement officials are investigating possible criminal violations in connection with the national foreclosure crisis, examining whether financial firms broke federal laws when they filed fraudulent court documents to seize people’s homes, according to people familiar with the matter.
The Obama administration’s Financial Fraud Enforcement Task Force is in the early stages of an investigation into whether banks and other companies that submitted flawed paperwork in state foreclosure proceedings may also have misled federal housing agencies, which now own or insure a majority of home loans, according to these sources.
The task force, which includes investigators from the Justice Department, Department of Housing and Urban Development and other agencies, is also looking into whether the submission of flawed paperwork during the foreclosure process violated mail or wire fraud laws. Financial fraud cases often involve these statutes.
Robert Gibbs basically backed up this investigation today with his statement that the Financial Fraud task force would investigate foreclosure fraud, and “hold accountable any bank that has violated the law.” The government could also force the banks to repurchase fraudulent loans that they own and insure.
This brings into focus the “morality” issue that defenders of the banks always throw around. We’re supposed to look down upon the “deadbeat” borrowers, and see their inability to pay their loan as the original sin here, certainly more vital than those technical document errors. But this ignores the need for the banks to follow the law and the contract they signed, in the same way as the homeowner:
But, what if the borrower was defrauded in either a legal sense or a moral sense at the inception of the contract? That may not make the contract unenforceable, but does it make the enforcement inequitable? Does it erode this moral high ground that lenders are claiming? [...]
It used to be said that a business person needed a good banker, a good accountant, and a good lawyer. (Now it might be said that a banker needs a good lawyer.) Implied in this is that there is a professional relationship and that the customer depends on the advice of these professionals. Bankers have until recently seen themselves as professionals. In the less heady days of local banking, the President and senior officers of the bank made the loan decisions. One of them generally had a relationship with the borrower. They knew the borrower and had their interest in mind along with the interest of the bank. There was a certain implied fairness at work. The judgment of the banker often accrued to the benefit of the borrower. If the banker thought something was a bad deal, they said so. If they thought the borrower was making a bad investment either in general or in relation to their specific circumstances (knowledge, skills, income, liquidity, time horizons…) they would tell them that [...]
If banks knew in the executive suite or the research department that the fundamentals were turning ugly, and still kept making loans and shoving them into government guarantee programs or selling them to investors, then there is no moral high ground. The information asymmetry was used to make more money. In a moral sensibility, the contract should be looked at what it was, a gamble by both parties. If at this point in time the stupidity of the lender has allowed the contract to become unenforceable, then that is the lender’s problem. Too bad, so sad.
If the banks really wanted to step down from this, they could modify the loans (which the investors clearly would allow them to do) instead of committing fraud in a rush to foreclosure. But they should face the consequences for their actions too.