If the President wants to show the country that he now wants to give Americans a fair shake and break up the “invisible government” that exists in parallel with Wall Street, he could give a statement on last night’s 60 Minutes story on two whistleblowers at mortgage originators who stand ready to work with the Justice Department in prosecuting systemic fraud.
First, I want to give the credit where it’s due. This is Michael W. Hudson’s story that 60 Minutes appropriated. He found Eileen Foster, the senior executive and fraud monitor at Countrywide Financial, and detailed her story way back in September, including how the company treated her allegations at the time (Foster got fired for her trouble, and Countrywide started concealing the results from their fraud monitoring from the monitors themselves). Hudson has been in front of the mortgage fraud story since his book The Monster detailed the fraud at Ameriquest.
The truth, as most of us know, was that the culture of these originators was to book loans through all means necessary. If it meant copy and pasting a borrower’s name onto a more favorable financial documentation, so be it. If it meant cheating the borrower by leading them to believe they would receive one loan and then handing them another, so be it. If it meant using white-out and exacto knives as the tools of the trade, so be it. The originators were fueled by the Wall Street money bubble, as the big banks pushed the Countrywides and Ameriquest to book more and more loans to feed the insatiable thirst for the securities that used them as the building blocks. There’s one degree of separation between the big banks and the originators on this fraud, but it was all driven from Wall Street. The bubble grew larger and larger as the originators booked more and more loans and put people into refinancing to avoid having the bottom drop out. But that only lasted so long.
Why was nothing done to stop this? Because the banks didn’t want anyone stopping it. The most celebrated example of Wall Street intervening to stop any brake from being put on the go-go origination machine was in Georgia back in 2003. Josh Rosner and Gretchen Morgensen tell the story in their book Reckless Endangerment:
Standard & Poor’s was the most aggressive of the three agencies, however. And on January 16, 2003, four days after the Georgia General Assembly convened, it dropped a bombshell. Because of the state’s new Fair Lending Act, S&P said that it would no longer allow mortgage loans originated in Georgia to be placed in mortgage securities that it rated. Moody’s and Fitch soon followed with similar warnings.
It was a critical blow. S&P’s move meant Georgia lenders would have no access to the securitization money machine; they would either have to keep the loans they made on their own books, or sell them one by one to other institutions. In turn, they made it clear to the public that there would be fewer mortgages funded, dashing “the dream” of homeownership.
It was an untenable situation for the lenders who had grown addicted to the securitization money spigot. With S&P shutting it off to abusive lenders, it was only a matter of time before the Fair Lending Act was dead.
To Brennan and other consumer advocates, it was a shocking and devastating moment in the battle against predatory lending. “We were stunned when we saw the press release,” Brennan said. “We thought, where does this come from?”
Standard & Poor’s said it was taking action because the new law created liability for any institution that participated in a securitization containing a loan that might be considered predatory. If a Wall Street firm purchased loans that ran afoul of the law and placed them in a mortgage pool, the firm could be liable under the law. Ditto for investors who bought into the pools.
“Transaction parties in securitizations, including depositors, issuers and servicers, might all be subject to penalties for violations under the Georgia Fair Lending Act,” S&P’s press release explained.
It ended with a warning: “Standard & Poor’s will continue to monitor this and other pending predatory lending legislation.” In other words, any states that might have been considering strengthening their predatory lending laws as Georgia did should beware.
Georgia did in fact back down, and no state dared come into S&P’s crosshairs. Similarly, federal regulators did nothing to stop this ongoing fraud. And they still decline.
Though it’s based on someone else’s journalism, the 60 Minutes story is quite good, and it allows these issues to again get placed into the spotlight. The President can keep talking a good game on all of this, or he can use the new attention to spur action. I have a pretty clear belief about what he’ll do.
…the part of the piece about how the Justice Department never used a powerful tool to prosecute bank executives for violating Sarbanes-Oxley guidelines is worth paying attention to as well.