I agree with the Federal Reserve Bank of New York’s research that the foreclosure crisis has shifted from a subprime origination problem to a broader problem related to the collapse of the housing bubble and elevated unemployment. Policymakers may assume that this is an easier problem to solve, because economic growth and reducing unemployment plays a larger role in healing the market. It partially gets the government off the hook for designing housing programs; fix the economy, and we’re on our way.
But this neglects the rampant and ongoing criminality in the housing market, which the government just blessed with a slap-on-the-wrist settlement. For instance, the NY Fed makes no effort to understand the phenomenon of servicer-driven foreclosures, whether through illegal fee pyramiding or denial of modifications or whatever other instance of crime. Diane Thompson at the National Consumer Law Center famously estimated that a large majority of the cases she saw on a regular basis were servicer-driven foreclosures, and an improving economy won’t touch that at all.
Due to the settlement, and the investigations that led up to it, we actually know quite a lot about the nature of servicer abuse, almost all of which constitutes criminal conduct. In another close reading of the settlement documents, Abigail Field details this criminal abuse:
A close read of the complaint and the related language that precedes the releases (see Exhibits F and G) reveals:
1) broad origination fraud occurred but is weirdly not detailed in the complaint, probably for ugly, policy damaging political reasons;
2) HUD’s Office of Inspector General (and perhaps others) did a real investigation exposing apparently criminal and civil false claims and statements;
3) The United States Trustees did a real investigation documenting systemic stealing from debtors in bankruptcy and lying to the courts; and
4) the banks criminally abused our soldiers.
In all, at least three types of criminal conduct–False Claims Act violations, Servicemember Civil Relief Act violations, and False Statements violations–appear to have been substantiated.
So where are the indictments?
Do read Abigail’s entire post for the particulars. The government stipulated in these settlement documents that banks “engaged in a pattern of unfair and deceptive practices” on originating loans, and then knowingly defrauded the government by seeking federal insurance for these poorly-underwritten loans. In addition, their servicer arms, and this is documented in the complaint, failed to properly credit payments, added illegal fees and insurance, wrongfully denied modifications for the people they first ripped off, and then engaged in “preparing, executing, notarizing or presenting false and misleading documents, filing false and misleading documents with courts and government agencies, or otherwise using false or misleading documents as part of the foreclosure process (including, but not limited to, affidavits, declarations, certifications, substitutions of trustees, and assignments).” That includes lies to both state courts and federal bankruptcy courts, including seeking payments in bankruptcy that they had no right to collect, and initiating collections on those illegal payments, some of which had already been paid by the debtor.
If all of this is ongoing conduct – and we have reason to believe it is – it doesn’t matter whether foreclosures are occurring through subprime originations or mass unemployment. They’re going to keep occurring, since the banks are running illegal swindles designed to take away people’s homes. Why would they stop when it’s so profitable, or at least when it would be less profitable, or even negative, to deal honestly? And the major thing that matters to stopping that is an effective deterrent. A chinsy settlement without prosecutions on documented criminal conduct won’t do. Neither will similarly trivial Federal Reserve fines – I think their grade inflation in the stress tests more than cancels out whatever fines they may impose.
In short, federal policymakers are asking the wrong questions, on both sides of the aisle, about the foreclosure crisis. It’s not about whether or not homeowners are responsible for foreclosure fraud for simply being too delinquent, or whether Fannie Mae or Freddie Mac will honor principal reductions as a way out of the mess. The real question, given the facts, is whether or not anyone at the state or federal level is willing to shut down what amounts to a racketeering outfit known as mortgage servicers.