Bloomberg’s editorial board had a pretty good denunciation of forced-place insurance, the scam whereby servicers purchase insurance for borrowers who they deem have lapsed coverage, at enormous markups with kickbacks for themselves, which in many cases drives homeowners into foreclosure.
Here’s how it generally works: Banks and their mortgage servicers strike arrangements — often exclusive — with insurance companies in which the banks agree to buy high-priced policies on behalf of homeowners whose coverage has lapsed. The bank advances the premium to the insurer, and the insurer pays the bank a commission, which is priced into the premium. (Insurers say the commissions compensate banks for expenses like “advancing premiums, billing and collections.”) The homeowner is then billed for the premium, commissions and all.
It’s a lucrative business. Premiums on force-placed insurance exceeded $5.5 billion in 2010, according to the Center for Economic Justice, a group that advocates on behalf of low- income consumers. An investigation by Benjamin Lawsky, who heads New York State’s Department of Financial Services, has found nearly 15 percent of the premiums flow back to the banks.
This is a classic kickback scheme, which banks and insurance companies have been running against homeowners – who in some cases actually have the insurance that servicers are forcing on them – for years now. Only recently have state and federal regulators seen forced-place insurance for the scam that it is. And they have begun to crack down. The investigation by Benjamin Lawsky in New York could really lead to some changes here.
But the real problem here is that Bloomberg’s editors don’t seem to realize how standard a practice this is in the mortgage industry. They write at the top of the editorial, “One of the more confounding aspects of the U.S. housing crisis has been the reluctance of lenders to do more to assist troubled borrowers. After all, when homes go into foreclosure, banks lose money.”
But this isn’t confounding at all. Servicers have the financial incentive to start foreclosure rather than modify a loan. They get paid on a percentage of unpaid principal balance and any fees they can extract. Modifying principal would reduce the unpaid principal balance, lowering their take. But the fees they can get at 100%, so they would much rather keep a borrower delinquent. And if a home goes into foreclosure, the servicer gets first in line for payouts from the foreclosure sale, with the investors taking the loss. They could care less if the homeowner goes into foreclosure. The incentives run the wrong way, entirely.
You’d think that someone with regulatory authority would seek to fix this, five years into the foreclosure crisis. But it hasn’t happened. The same incentives remain in place. And the same fraudulent activity happens on a daily basis, with nobody going to jail for the efforts.
Regulation of financial markets or the mortgage industry remains scattershot after all these years. Only one-third of the new Dodd-Frank rules are even in place. And prosecutions remain rare. There’s a better chance of protesters and institutional investors striking a blow against the banking oligopoly than the federal regulatory apparatus.
Peter J. Boyer and Peter Schweizer investigate this lack of accountability for Wall Street, and come to some familiar conclusions.
Strikingly, federal prosecutions overall have risen sharply under Obama, increasing dramatically in such areas as civil rights and health-care fraud. But according to the Transactional Records Access Clearinghouse, a data-gathering organization at Syracuse University, financial-fraud prosecutions by the Department of Justice are at 20-year lows. They’re down 39 percent since 2003, when fraud at Enron and WorldCom led to a series of prosecutions, and are just one third of what they were during the Clinton administration. (The Justice Department says the numbers would be higher if new categories of crime were counted.)
“There hasn’t been any serious investigation of any of the large financial entities by the Justice Department, which includes the FBI,” says William Black, an associate professor of economics and law at the University of Missouri, Kansas City, who, as a government regulator in the 1980s, helped clean up the S&L mess. Black, who is a Democrat, notes that the feds dealt with the S&L crisis with harsh justice, bringing more than a thousand prosecutions, and securing a 90 percent conviction rate. The difference between the government’s response to the two crises, Black says, is a matter of will, and priorities. “You need heads on the pike,” he says. “The first President Bush’s orders were to get the most prominent, nastiest frauds, and put their heads on pikes as a demonstration that there’s a new sheriff in town.”
Obama delivered heated rhetoric, but his actions signaled different priorities. Had Obama wanted to strike real fear in the hearts of bankers, he might have appointed former special prosecutor Patrick Fitzgerald or some other fire-breather as his attorney general. Instead, he chose Eric Holder, a former Clinton Justice official who, after a career in government, joined the Washington office of Covington & Burling, a top-tier law firm with an elite white-collar defense unit. The move to Covington, and back to Justice, is an example of Washington’s revolving-door ritual, which, for Holder, has been lucrative–he pulled in $2.1 million as a Covington partner in 2008, and $2.5 million (including deferred compensation) when he left the firm in 2009.
Good for Newsweek for not sugar-coating this story, for looking at the revolving door, particularly from Holder at Covington. Boyer and Schweizer do look into campaign contributions from the finance sector and the relative silence of the RMBS working group, the task force that was finally supposed to bring a reckoning for these crimes.
I think they missed just one thing, and that’s the question of world view. You have a group of elite policymakers that literally cannot conceive of a world without Goldman Sachs and Bank of America and JPMorgan Chase, and they will do whatever it takes to preserve that. You don’t even need the subsidy at that point, the promise of lucrative positions after the policymaking career ends. There’s already enough of a simpatico to get the desired outcomes.