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Feb 07 2012

Foreclosure Settlement: Banks Want A Free Pass On All Litigations

As the the multistate foreclosure settlement inches to some conclusion, the Big Banks have dropped the other shoe. They won’t sign on to the agreement unless Schneiderman drops his law suit against them and MERS. The proposed settlement would also require the attorneys general from Nevada, Massachusetts and Arizona to drop their litigation should they decide to sign onto the agreement:

Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. made a last-minute demand that New York drop claims filed against them Feb. 3 as a condition of the settlement, a person familiar with the matter said. [..]

New York sued Bank of America, JPMorgan and Wells Fargo in state court in Brooklyn, saying their use of a mortgage database known as MERS led to improper foreclosures. Schneiderman said the banks’ use of the Mortgage Electronic Registration Systems database misled homeowners, undermined foreclosure proceedings and created uncertainty about ownership interests in properties.

The banks have asked that many of the claims in the complaint be thrown out, said the person. The other two banks involved in the nationwide settlement proposal, Ally Financial Inc. and Citigroup Inc., weren’t named in the complaint. [..]

The proposed settlement already requires Massachusetts, Nevada and Arizona, which have sued banks involved in the talks, to settle their claims, a person familiar with them said.

Nevada and Arizona each sued Bank of America over mortgage- servicing practices, accusing it of misleading consumers, while Massachusetts sued all five banks.

It appears that the agreement would give the banks immunity from prosecution and civil suits from mortgage origination fraud. The settlement does not prevent an investigation into mortgage securitization (secondary mortgage fraud), it would give the banks a free pass on all the fraudulent foreclosures and mortgages that are the primary cause of the housing market crash.

So where does this leave the new unit the President Obama created to investigate mortgage fraud? Professor of law and economics at the University of Missouri-Kansas City, Bill Black, spoke with Theresa Riley on Bill Moyers & Compnany:

Riley: If the deal goes through as reported, what could this mean for future criminal investigations and reforms?

Black:  The leaks about the proposed deal occurred in conjunction with President Obama’s State of the Union Address and a series of press releases and conferences by Attorney General Holder about a newly created “working group.” That working group is intended to investigate secondary market fraud. There is no comprehensive investigation of the over $1 trillion in mortgage origination fraud. There are no prosecutions of any of the elite bank officers who led, and became wealthy from, the epidemic of mortgage origination fraud. The State AGs do not have the resources to investigate even two of the largest fraudulent lenders.

The major development this past week is that New York Attorney General Schneiderman filed suit, alleging that the Mortgage Electronic Registration System (MERS) is aiding foreclosure fraud and ruining America’s public recordation system for real estate, which conservative economists praised as one of the key reasons America became so prosperous. MERS is enormous and it is fundamentally flawed and dangerous, so this could be a tremendously useful action.

Riley: Speaking of Schneiderman, what’s your view of President Obama’s SOTU announcement of a new Financial Crimes Unit (the Residential Mortgage-Backed Securities (RMBS) Working Group) co-chaired by him?

Black:  If Schneiderman had been named Attorney General of the United States, we would know that the administration really intended to hold accountable the frauds that drove the crisis. Instead, the top two Justice Department officials that are supposed to be prosecuting the elite frauds have consistently failed to even investigate the frauds, have denied the existence of material fraud, and came from the same law firm that represented many of the big, fraudulent banks and was critical to the creation of the notorious Mortgage Electronic Registration System (MERS) that contributed to the foreclosure fraud.

AG Schneiderman was appointed to the working group because he has broad credibility as a real prosecutor. His refusal to support the earlier drafts of the robo-signing deal (which was so bad that I described it as the formal surrender of the U.S. to crony capitalism) led the State AGs to kick him out of the settlement discussions.

Schneiderman is only one of the co-chairs of the new working group. The others are federal prosecutors or officials who were the strongest proponents of the cynical deal that would have de facto immunized the elite criminals from civil and even criminal sanctions. The working group is set up so that Schneiderman can give the group credibility while being marginalized. He can be outvoted in any matter in which he proposes vigorous prosecutions.

Riley: It sounds like you don’t think this new working group is going to get the job done. Last week, Schneiderman said that he thinks he has the resources (particularly the IRS and the Consumer Protection Unit) and the political will to pursue the investigation in a meaningful way. Why do you disagree?

Black: First, the “investigation” will not investigate what was by far the largest and most destructive fraud – control frauds – the origination of millions of fraudulent loans. Second, the working group’s resources to investigate secondary market fraud are ludicrously inadequate.

Let me provide specifics on scale.

The total staffing of the working group (once completed in several months) is 55. At peak, there were roughly 1000 investigators (and hundreds of prosecutors) assigned to the S&L prosecutions 20 years ago. The current crisis caused losses far exceeding the S&L debacle and involves frauds that are massively greater than the frauds that drove the S&L debacle.

But the issue of resources is not where the discussion needs to begin. The keys are information, expertise, understanding of control fraud, and prioritization of investigations and prosecutions. Absent criminal referrals from the financial regulators and whistleblowers, absent dozens of banking regulators being “detailed” to serve with the FBI as their internal experts, absent training of the investigators and prosecutors on how to detect and prosecute control frauds (the Justice Department uses the mortgage lending industry’s “definition” of mortgage fraud – and, surprise, it defines the lenders and their CEOs who made millions of fraudulent liar’s loans as the good guys/victims of mortgage fraud rather than the perpetrators), and absent the immediate reversal of the current system of making smaller mortgage frauds our top criminal justice priority – absent all of these things there can be episodic prosecutorial successes, but continued systemic failure is certain.

We will know that there is a real commitment to prosecuting the elite frauds when the Justice Department takes these essential, foundational steps – and the Department quadruples the number of FBI agents assigned to investigate mortgage fraud.

Riley: What would you like to see happen?

Black:  We have descended too fully into the cesspool of crony capitalism when our most elite banks can commit what SEC investigations find to be fraud and still claim in filings to the SEC that they have “a strong record of compliance with securities laws” – and the SEC buys such a preposterous claim hook, line, sinker, rod, reel, and the canoe they paddled into the swamp.

Where are the “soft on crime” conservatives when you need them? This is the perfect story for Republicans to use in attacking President Obama’s policies. Why are they so silent?

I want the elite criminals who ran the control frauds to be prosecuted and imprisoned if found guilty. Under President Bush, the Justice Department’s prosecution of financial frauds was pathetic. Even though financial fraud reached unprecedented levels, the Bush administration prosecuted fewer than one-half as many financial frauds as during the S&L debacle. The bad news is that the Obama administration has proven even more disgraceful failures in holding elite criminals accountable than did the Bush administration. The Obama administration has convicted a few bankers from non-elite banks and it may eventually convict a token elite banker, but it will continue to fail systemically to hold elite bankers accountable for their frauds.

(all emphasis mine)

The special new unit is a charade. There will be no prosecutions of any elite criminals. Obama has made sure of that.

Meanwhile the agreement is inching towards a conclusion with Iowa Attorney General announcing that 40 states have agreed to sign:

“The sign-on deadline for the proposed joint state-federal mortgage servicing settlement passed Monday with more than 40 states signing on,” Miller said “This enables us to move forward into the very final stages of remaining work.Federal and state officials, as well as representatives from the banks, continue to address matters that they must complete before finalizing any settlement.”

Delaware Attorney General Beau Biden, who spoke with MSNBC’s Dylan Ratigan, indicated he will sign on only if he can continue to pursue MERS and not be precluded from adding the banks from the suit.

Apparently Missouri’s Attorney General didn’t get the word about not filing suits. He not only filed a criminal lawsuit against DocX, one of the largest companies that provided home foreclosure services to lenders across the nation, for forgery in the preparation of documents used to evict financially strained borrowers from their homes but arrested Lorraine O. Brown, the company’s founder and former president.

Chris Koster, the Missouri attorney general, will prosecute the case. “The grand jury indictment alleges that mass-produced fraudulent signatures on notarized real estate documents constitutes forgery,” Mr. Koster said in a statement. “Today’s indictment reflects our firm conviction that when you sign your name to a legal document, it matters.”

Mr. Koster said his office’s investigation was continuing. This suggests he may hope to persuade Ms. Brown to cooperate in his investigation of the parent company. If convicted, Ms. Brown could face up to seven years in prison for each forgery count. DocX could be fined up to $10,000 for each forgery conviction.

Hey, Mr. President, this is what needs to be done on a federal level.

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