Rep. Cummings Asks For Hearing–Why Was Independent Foreclosure Review Abruptly Axed Just As the Harm and Misconduct Was Beginning to Emerge

Representative Elijah Cummings (D-Md ) wrote to Chair of the Committee on Oversight and Government Reform, Rep. Darrell Issa (R-Ca), asking for a hearing on the Fed’s and the OCC’s abrupt and premature conclusion of the Independent Foreclosure Review.  Full letter here.

“Now that we have obtained copies of these documents, they confirm that some mortgage servicing companies engaged in widespread and systemic foreclosure abuses, including charging improper and excessive fees, failing to process loan modifications in accordance with federal guidelines, and violating automatic stays after borrowers filed for bankruptcy,” Cummings wrote.  “It remains unclear why the regulators terminated the IFR prematurely, how regulators determined the compensation amounts servicers were required to pay under the settlement, and how regulators could claim that borrowers who were harmed by these servicers would benefit more from the settlement—including the settlement amounts paid for each error category—than by allowing the IFR to be completed.”

In his letter, Cummings requested that the Committee hold a hearing with representatives from the Federal Reserve, the Office of the Comptroller of the Currency (OCC), mortgage servicing companies, and independent consultants to address three key questions:

·        Why did the Federal Reserve and the OCC terminate the IFR prematurely before its objective had been achieved?

It is unclear why the regulators believed it was in the best interests of borrowers to end the IFR when high error rates were identified during preliminary reviews and consultants were poised to conduct more in-depth reviews to identify the full extent of harm.

·        How did the regulators arrive at the compensation amounts in the settlement?

The settlement required banks to provide cash payments and other assistance to affected borrowers, but it is unclear what criteria were used to determine these settlement amounts, and whether these amounts were in any way related to the actual or estimated harm suffered by borrowers.

·        How did the regulators determine that the amounts mortgage servicers would pay—and the amounts borrowers would receive—would be more favorable under the settlement than if the IFR had been completed?

It is unclear how regulators determined that the settlement amounts would provide a greater benefit to borrowers than if the IFR had continued until the independent consultants could report reliable data on servicer error rates.

- See more at: http://democrats.oversight.house.gov/press-releases/cummings-requests-hearing-on-mortgage-settlement/#sthash.zioM12Nv.dpuf

And the Beat Goes On

Massive New Fraud Coverup: How Banks Are Pillaging Homes—While the Government Watches

Great new article by David Dayen.  I would correct the title to say while the government “participates.”  It doesn’t just passively watch.  A failure to act when you have a duty to act–by the Justice Department, and regulators authorized to act, and by the judiciary—-also implicates you.

An excerpt:

But despite the fact that the nation’s courtrooms remain active crime scenes, with backdated, forged and fabricated documents still sloshing around them, state and federal regulators have not filed new charges of misconduct against Bank of New York, Deutsche Bank, U.S. Bank or any other mortgage industry participant, since the round of national settlements over foreclosure fraud effectively closed the issue.

Many focus on how the failure to prosecute financial crimes, by Attorney General Eric Holder and colleagues, create a lack of deterrent for the perpetrators, who will surely sin again. But there’s something else that happens when these crimes go unpunished; the root problem, the legacy of fraud, never gets fixed. In this instance, the underlying ownership on potentially millions of loans has been permanently confused, and the resulting disarray will cause chaos for decades into the future, harming homeowners, investors and the broader economy. Holder’s corrupt bargain, to let Wall Street walk, comes at the cost of permanent damage to the largest market in the world, the U.S. residential housing market.

By now we know the details: During the run-up to the housing bubble, banks bought up millions of mortgages, packaged them into securities and sold them around the world. Amid the frenzy, lenders failed to follow basic property laws, which ensure legitimate transfers of mortgages from one legal owner to another. When mass foreclosures resulted from the bubble’s collapse, banks who could not demonstrate they owned the loans got caught trying to cover up the irregularities with false documents. Federal authorities made the offenders pay fines, much of which banks paid with other people’s money. But the settlements put a Band-Aid over the misconduct. Nobody went in, loan by loan, to try to equitably confirm who owns what.

Elizabeth Warren, Champion of the Middle Class

Elizabeth Warren, the Fighter CBS News, full video interview at the link.

Warren was appointed chair of the Congressional Oversight Panel, the fund’s watchdog. Her clashes with Treasury Secretary Tim Geithner, the fund’s administrator, became an unlikely YouTube hit.

WARREN: “I am sorry. I just want to make sure I am following. You are saying that there have been changes in management at financial institutions –”
GEITHNER: “Where the Government acted, absolutely.”
WARREN: “– that have received TARP funds?”
GEITHNER: “Well, as I said, in the context of the interventions taken in Fannie and Freddie and AIG, just to cite three examples –”
WARREN: “I am asking about the financial institutions.”
GEITHNER: “Well, those are financial institutions.”
WARREN” “I am asking about the banks.”

“It’s no secret that Secretary Geithner and I saw the world very differently,” Warren said. “I believed his focus was far too much on the big financial institutions and not on families — to say in effect, ‘Here, take the money, please,’ rather than saying, ‘We will save our financial institutions, but believe me, there have got to be strings.’

“But none of that was on the table. It was all about how to rebuild the largest financial institutions and to get them back to profitability as soon as possible. And I just thought that was wrong.”

“You’re willing to push people; how would you describe your style?”

“Intense?” she laughed. “Well, look, the things we’re talking about are important. So I care a lot about it. And I get worked up.”

Warren’s background?

Warren dropped out of college to get married at 19, moved to Texas, and eventually graduated from the University of Houston. By 1978, she was 29 and divorced with two kids. She also had a law degree from Rutgers . . . and a gift for teaching, which eventually landed her a job at Harvard.

Her specialty was bankruptcy law and its impact on struggling families.

Strassmann asked, “You’re the daughter of a janitor, you went to a commuter college, a public law school. You became a Harvard Law School professor and a United States Senator, most of that in the last 20-25 years. How is that then not proof that the American Dream still does work for people?”

“Oh, but look at the foundations of this journey,” Warren said. “I went to public school back in the ’50s and the ’60s, graduated from college and law school in the ’70s. That’s when you could go to a commuter college and pay $50 a semester and get a really fine education.

“Today, a kid who wants to go to a public university will pay 300 percent more than her mom or dad.”

Matt Taibbi Writes About America’s Two-Tiered Justice System

Matt Taibbi has a new book called The Divide: American Injustice in the Age of the Wealth Gap.  This ties right in with Joseph Stiglitz’s comments in the Price of Inequality,

But a basic principle of the rule of law and property rights is that you shouldn’t throw someone out of his home when you can’t prove he owes you money. But so assiduously did the banks pursue their foreclosures that some people were thrown out of their homes who did not owe any money.  To some lenders this is just collateral damage as the banks tell millions of Americans they must give up their homes—some eight million since the crisis began, and an estimated three to four million still to go. The pace of foreclosures would have been even higher had it not been for government intervention to stop the robo-signing.

The banks’ defense—that most of the people thrown out of their homes did owe money—was evidence that America had strayed from the rule of law and from a basic understanding of it. One is supposed to be innocent until proven guilty. But in the banks’ logic, the homeowner had to prove he was not guilty, that he didn’t owe money. In our system of justice it is unconscionable to convict an innocent person, and it should be equally unconscionable to evict anyone who doesn’t owe money on her home. We are supposed to have a system that protects the innocent.  The U.S. justice system requires a burden of proof and establishes procedural safeguards to help meet that requirement.  But the banks short-circuited these safeguards. 

Here is a summary of Taibbi’s book, “The Divide”  from Amazon.com:

A scathing portrait of an urgent new American crisis
 
Over the last two decades, America has been falling deeper and deeper into a statistical mystery:
 
Poverty goes up. Crime goes down. The prison population doubles.
Fraud by the rich wipes out 40 percent of the world’s wealth. The rich get massively richer. No one goes to jail.
 
In search of a solution, journalist Matt Taibbi discovered the Divide, the seam in American life where our two most troubling trends—growing wealth inequality and mass incarceration—come together, driven by a dramatic shift in American citizenship: Our basic rights are now determined by our wealth or poverty. The Divide is what allows massively destructive fraud by the hyperwealthy to go unpunished, while turning poverty itself into a crime—but it’s impossible to see until you look at these two alarming trends side by side.
 
In The Divide, Matt Taibbi takes readers on a galvanizing journey through both sides of our new system of justice—the fun-house-mirror worlds of the untouchably wealthy and the criminalized poor. He uncovers the startling looting that preceded the financial collapse; a wild conspiracy of billionaire hedge fund managers to destroy a company through dirty tricks; and the story of a whistleblower who gets in the way of the largest banks in America, only to find herself in the crosshairs. On the other side of the Divide, Taibbi takes us to the front lines of the immigrant dragnet; into the newly punitive welfare system which treats its beneficiaries as thieves; and deep inside the stop-and-frisk world, where standing in front of your own home has become an arrestable offense. As he narrates these incredible stories, he draws out and analyzes their common source: a perverse new standard of justice, based on a radical, disturbing new vision of civil rights.
 
Through astonishing—and enraging—accounts of the high-stakes capers of the wealthy and nightmare stories of regular people caught in the Divide’s punishing logic, Taibbi lays bare one of the greatest challenges we face in contemporary American life: surviving a system that devours the lives of the poor, turns a blind eye to the destructive crimes of the wealthy, and implicates us all.

Praise for The Divide
 
“These are the stories that will keep you up at night. . . . The Divide is not just a report from the new America; it is advocacy journalism at its finest.”Los Angeles Times

“Ambitious . . . deeply reported, highly compelling . . . impossible to put down.”The New York Times Book Review
 
“Brilliant and enraging.”The Awl

California Appellate Court in Peng v. Chase: The Dissent

The Dissent in this decision by the California Court of Appeals is a thing of beauty.  CA Peng v Chase

The only party prejudiced by an illegitimate creditor-beneficiary’s enforcement of the homeowner’s debt, courts have reasoned, is the bona fide creditor-beneficiary, not the homeowner.

Such reasoning troubles me. I wonder whether the law would apply the same reasoning if we were dealing with debtors other than homeowners. I wonder how most of

us would react if, for example, a third-party purporting to act for one’s credit card company knocked on one’s door, demanding we pay our credit card’s monthly statement

to the third party. Could we insist that the third party prove it owned our credit card debt? By the reasoning of Fontenot and similar cases, we could not because, after all, we

owe the debt to someone, and the only truly aggrieved party if we paid the wrong party would, according to those cases, be our credit card company. I doubt anyone would stand

for such a thing. I think cases such as Fontenot – and their solicitude for self-proclaimed creditor beneficiaries who ask us to take on their say-so authority to foreclose on someone’s home

– are, or should be, a legacy from a bygone era. There was a time when the orderliness and regulatory oversight of the mortgage industry perhaps justified a presumption that

creditor-beneficiaries acted lawfully when they enforced a homeowner’s debt. In those days, courts excused mortgage lenders from proving their authority because we trusted

they acted properly, and we presumed that a homeowner’s challenge was typically a delaying tactic to avoid a valid foreclosure. (See e.g. Siliga v. Mortgage Electronic Registration Systems, Inc. (2013) 219 Cal.App.4th 75, 82 [“California courts have refused to allow [homeowners] to delay the nonjudicial foreclosure process by pursuing preemptive judicial actions challenging the authority of a foreclosing ‘beneficiary’ or beneficiary’s ‘agent.’ ”]; Jenkins v. JPMorgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 511-512 [same].)

I think the old presumption no longer withstands the press of current events.

Servicers Have Duty of Care to Borrower in Modifying Loans When Nymark Factors Are Met (California)

In federal district court in California, a magistrate judge has issued two decisions refusing loan servicers’ bid to dismiss a homeowner’s negligence claims, as related to loan modification efforts.  The magistrate judge parses the divergent legal authority and sides with the finding of a duty on behalf of the servicer when certain factors are met.
The facts alleged in this case are nearly as egregious as those alleged in Garcia, and the court finds that Plaintiffs have sufficiently alleged this claim. The loan modification was intended to affect them (e.g., the loan modification would have reduced their monthly mortgage payments), the harm from mishandling their application was foreseeable (e.g., Plaintiffs applied for a loan modification (or at least tried to apply for one) to avoid foreclosure), their injury was certain to occur (e.g., Plaintiffs’ application allegedly was never even submitted by the so-called “single point of contact,” and obviously this means that it would not be granted), the connection between Wells Fargo’s conduct and Plaintiffs’ loss of their home is close (e.g., Plaintiffs relied on Wells Fargo’s representation that the foreclosure would not occur while their application was pending, so their failure to appear at the trustee’s sale was not surprising), Wells Fargo’s alleged role in this debacle would subject them to moral blame (e.g., Plaintiffs allege that Wells Fargo tricked them into defaulting on the Second Loan so that Wells Fargo could string them along with respect to the loan modification on the First Loan so it could foreclose under the Second Loan), and the same public policy considerations cited in Garcia apply here as well. While a lender may not have a duty to modify the loan of any borrower who applies for a loan modification, a lender surely has a duty to submit a borrower’s loan modification application once the lender has told the borrower that it will submit it, as well as a duty to not foreclose upon a borrower’s home while the borrower’s loan modification is being considered once the lender has told the borrower that it won’t foreclose during this time and to ignore all foreclosure-related notices. In short, taking Plaintiffs’ allegations as true at this stage, the court fails to see, even in a cynical world, how Wells Fargo’s role could possibly be described as a “conventional” one that relates to the “mere” lending of money. Its role went beyond that. The court rejects Wells Fargo’s argument that it had no duty to Plaintiffs in this situation.
Rijhwani v. Wells Fargo Home Mortgage, Inc., C 13-05881 LB, 2014 WL 890016 (N.D. Cal. Mar. 3, 2014)
Defendants next move to dismiss Plaintiffs’ fourth claim for negligence. See Motion, ECF No. 5 at 6; Complaint, ECF No. 1, ¶¶ 69–77. The elements of a negligence cause of action are (1) the existence of a duty to exercise due care, (2) breach of that duty, (3) causation, and (4) damages. See Merrill v. Navegar, Inc., 26 Cal.4th 465, 500 (2001). Under California law, as Defendants point out, lenders generally do not owe borrowers a duty of care unless their involvement in the loan transaction exceeds the scope of their “conventional role as a mere lender of money.” See Nymark v. Heart Fed. Savings & Loan Ass’n, 231 Cal.App.3d 1089, 1095–96 (1991) (citations omitted). To determine “whether a financial institution owes a duty of care to a borrower-client,” courts must balance the following non-exhaustive factors:
[1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant’s conduct and the injury suffered, [5] the moral blame attached to the defendant’s conduct, and [6] the policy of preventing future harm.
Id. at 1098 (quotation marks and citations omitted).4
Defendants argue that Chase was under no duty to provide a loan modification because it did not exceed the scope of its conventional role as a mere lender of money. Motion at 6–7. Defendants counter that numerous California federal and state courts have applied the six-factor test articulated in Nymark “to find mortgage servicers have a duty, including this Court.” Opp’n at 14–15 (citing Chancellor v. OneWest Bank, No. C 12–01068 LB, 2012 WL 1868750, at *13 (N.D.Cal. May 22, 2012)). Indeed, as the state and federal district court cases cited by the parties demonstrate, courts are divided on the question of when lenders owe a duty of care to borrowers in the context of the submission of and negotiations related to loan modification applications and foreclosure proceedings.5 Compare Motion, ECF No. 5 at 6–7 and Reply, ECF No. 13 at 3–4 (citing Diunugala v. JP Morgan Chase Bank, N.A., No. 12cv2106–WQH–NLS, 2013 WL 5568737, at *4 (S.D.Cal. Oct. 3, 2013) (finding Jolley (cited by the Rowlands) inapposite in the context of “a residential home loan and related loan servicing issues” and granting motion to dismiss negligence claim against lender and servicer that used wrong underwriting standards when reviewing loan modification application); Rockridge Trust v. Wells Fargo, N.A., No. C–13–01457 JCS, 2013 WL 5428722, at *35–36 (N.D. Cal. Sept. 25, 2013) (noting divergent opinions, collecting cases, and holding that loan modification is a traditional money lending activity that does not give rise to a duty of care); Sanguinetti v. CitiMortgage, Inc., No. C 12–5424 SC, 2013 WL 4838765, at *4–5 (N.D.Cal. Sept. 11, 2013) (dismissing negligence claim based on lender’s duty of care to follow proper loan modification procedures where alleged duty arose from consent judgment between lender and California and federal governments regarding mortgage practices); Hosseini v. Wells Fargo Bank, N.A., No. C–13–02066 DMR, 2013 WL 4279632, at *7 (N.D.Cal. Aug. 9, 2013) (dismissing negligence claim for failure to establish duty of care based on lender’s “undertaking the loan modificiation process and requesting and accepting documentation” from plaintiffs); Armstrong v. Chevy Chase Bank, FSB, No. 5:11–cv–05664 EJD, 2012 WL 4747165, at *4 (N.D.Cal. Oct. 3, 2012) (loan modification is a traditional money lending activity); Nymark, 231 Cal.App.3d at 1096–97 (court found that a lender owed the plaintiff no duty because the lender performed an appraisal of the plaintiff’s property “in the usual course and scope of its loan processing procedures to protect [the lender's] interest by satisfying [itself] that the property provided adequate security for the loan”); and Wagner v. Benson, 101 Cal.App.3d 27, 35 (Cal.Ct.App.1980) (court rejected the plaintiffs’ negligence claim that was based on their allegation that the lender was negligent “in loaning money to them, as inexperienced investors, for a risky venture over which the [lender] exercised influence and control”)); with Opp’n, ECF No. 11 at 14–15 (citing McGarvey v. JP Morgan Chase Bank, N.A., No. 2:13–cv–01099–KJMEFB, 2013 WL 5597148, at *6 (E.D Cal. October 11, 2013) (denying motion to dismiss because, once it offered a loan modification and processed her application, servicer could have duty of care to deceased borrower’s daughter to exercise ordinary care in processing loan modification request); Jolley v. Chase Home Finance, LLC, 213 Cal.App. 4th 872 (2013) (holding that there was a triable issue of material fact as to whether Chase owed Jolley a duty of care in servicing a construction loan, which was disbursed in installments depending on progress towards completion); Trant v. Wells Fargo Bank, N.A., No. 12–cv–164–JM–WMC, 2012 WL 2871642, at *6–7 (S.D.Cal. July 12, 2012) (finding duty of care because lender acted outside the scope of the typical lender-borrower relationship where employees ensured plaintiffs they would receive at least a temporary modification); Kennedy v. Wells Fargo Bank, N.A., No. No. CV 11–4635 DSF (PLAx), 2011 WL 4526085, at *4 (C.D.Cal. Sept. 28, 2011) (applying the six-factor test and finding that the totality of the circumstances favored finding a duty of care at the motion to dismiss stage); Ansanelli v. JP Morgan Chase Bank, N.A., No. C 10–03892 WHA, 2011 WL 1134451, at *7 (N.D.Cal. Mar. 28, 2011) (finding sufficient active participation by the servicer to create a duty where the defendant offered “an opportunity to plaintiffs for loan modification and to engage with them concerning the trial period plan,” which was “precisely ‘beyond the domain of a usual money lender’ ”); Garcia v. Ocwen Loan Servicing, LLC, No. C 10–0290 PVT, 2010 WL 1881098 (N.D.Cal. May 10, 2010) (finding that a servicer had a duty of care to a borrower under the Nymark factors).
*9 In light of the divergent case law, the undersigned recently issued an opinion weighing the lines of authority. See Rijhwani v. Wells Fargo Home Mortgage, Inc., No. C 13–05881 LB, 2014 WL 8900016, at *14–17 (N.D.Cal. Mar. 3, 2014). The court found (and reaffirms here) that Garcia is persuasive and instructive. As the court explained, in Garcia :
the defendant had [at least twice] cancelled the trustee’s sale to allow time for processing the plaintiff’s application. The defendant asked the plaintiff to submit various documents in connection with the loan modification request. The plaintiff did so, but upon receiving the documents, the defendant routed them to the wrong department. Later, the plaintiff’s agent received a recorded message indicating documents were missing, but the message did not identify which ones were missing. For the next several weeks, the plaintiff’s agent repeatedly tried to contact the defendant to determine which documents were missing, but he was unable to speak with any of the defendant’s employees. The plaintiff’s agent was finally able to actually speak with one of the defendant’s employees, but it was too late. The employee informed the plaintiff’s agent that the home had been sold at a trustee’s sale the day before.
The court concluded that at least five of the six factors cited above weighed in favor of finding that the defendant owed the plaintiff a duty of care in processing the plaintiff’s loan modification application. Id. at *3–4.
Id. at *16–17. Similarly, in Rijhwani, the court found that the Nymark factors supported finding a duty of care and denied the motion to dismiss the plaintiff’s negligence claim. Id. at *17.
The court reaches the same conclusion on the factors here.6 First, the loan modification was intended to affect the Rowlands because it would have reduced their mortgage payments. The Rowlands’ allegations are stronger than those in many of the cases finding a duty of care because (at least as alleged) Chase did not just mishandle a loan modification application. Instead, it mishandled an approved loan modification agreement that Chase representatives repeatedly stated was “complete” and “in place.” See, e.g., Complaint ¶¶ 15–18, 23. Second, the harm in mishandling a loan modification agreement is foreseeable from the outset (and Chase’s alleged breaches continued even while Ms. Rowland reported the ongoing emotional distress from Chase’s delays and collection efforts). Third, the injury was certain to occur in that the principal balance would not be reduced, penalties would accrue, and Ms. Rowland reported the ongoing emotional distress. Fourth, the connection between Chase’s alleged conduct and the injury is obviously direct and immediate. Fifth, Chase’s conduct would subject it to moral blame. Finally, as the Garcia court explained, recent statutory enactments demonstrate “[t]he existence of a public policy in favor of preventing future harm to home loan borrowers.” Garcia, 2010 WL 1881098, at *3 (citing Cal. Civ.Code § 2923.6). In Rijhwani, this court held that a lender has a “surely has a duty to submit a borrower’s loan modification application once the lender has told the borrower that it will submit it.” Rijhwani at *17. Here, where Chase offered the Rowlands a loan modification, admitted its repeated errors, and transferred the servicing rights shortly thereafter, public policy supports the existence of a duty. See Complaint ¶ 40. As in Rijhwani, and at the pleadings stage, Chase’s role is not merely “a ‘conventional’ one that relates to the ‘mere’ lending of money.” Plaintiffs state a claim.
Rowland v. JPMorgan Chase Bank, N.A., C 14-00036 LB, 2014 WL 992005 (N.D. Cal. Mar. 12, 2014)

Mortgage Fraud is So Much More Than Lies on a Mortgage Application

Mortgage fraud, especially the mortgage fraud that has wiped out the wealth of countless American families and stripped them of their homes and security, is so much more than the FBI would credit it to be.  We have pondered Professor Bill Black’s questions of why in the hell the FBI would join forces with the Mortgage Bankers ASsociation in defining fraud.  And here we have a report from the Department of Justice, also utilizing this myopic and anemic definition of fraud, a definition which purposefully exempts broad swaths of fraud for which Wall Street, and the financial industry would be (and have been and continue to be) culpable:

David Dayen wrote a piece on Yves Smith’s financial blog, Naked Capitalism today, in response to the “interesting” and wildly unimpressive report put out by the Inspector General on Mortgage Fraud recently.  This piece is a must-read in its entirety but he says,

“Mortgage fraud” is a limiting term: There’s a yawning gap between “mortgage fraud,” in the context of how the IG presents it in this report, and the full breadth of fraud and deception at the heart of the crisis. Mortgage fraud, per the definition used by the FBI and the IG, is very specifically mortgage origination fraud, the misrepresentation used to get people into loans. That includes misrepresentation by borrowers, such as lying on a loan application, but also the actions of lenders falsely documenting income or wildly inflating appraisals. In later years, mortgage fraud came to include “foreclosure rescue” schemes, where illicit actors claim to be able to get loan modifications for borrowers for a fee, and then abscond with the money and do nothing for the borrowers.

You can clearly see that this focuses on a small corner of the much more widespread fraud that has gone on for over a decade now. And it inherently, by definition, leaves the biggest Wall Street actors out of the equation. When the DoJ, FBI, or this IG report talks about mortgage fraud, they’re not talking about:

•Securitization fraud, the knowing packaging of worthless loans into bonds to unsuspecting investors;
•Securitization fail, the improper conveyance of mortgages into trusts, breaking the chain of title on the loans;
•False Claims Act fraud, where servicers collect on FHA insurance or other government benefits with faulty loans;
•Tax fraud, through setting up REMICs and then not following the guidelines with mortgages and notes, yet still benefiting from the tax status;
•Servicer-driven fraud, like the mass misplacement of loan modification documents in order to push people into default, the bonuses given for foreclosures, dual tracking, improper fee pyramiding, imposition of fees not included in the mortgage documents, lost payments, people getting foreclosed on because they underpaid by ten cents, etc.;
•Forced-place insurance fraud, the kickback scheme to saddle borrowers with lapsed insurance with junk policies that cost several orders of magnitude more;
•Foreclosure fraud, the mass production of false documents to prove ownership over loans with a questionable paper trail;
•Robo-signing, the notarization of thousands of court statements a day by line workers who know nothing about the underlying loan information;
•Breaking and entering by “property preservation” specialists who illegally break into occupied homes and occasionally ransack them in the name of “keeping watch” over properties thought to be abandoned.

I could go on. Even housing discrimination, whereby minority borrowers were charged higher interest rates and non-prime loans (even when they qualified for prime), is not incorporated into this definition of “mortgage fraud” (DoJ has actually prosecuted a fair bit of this discrimination through the Civil Rights division, but nobody’s gone to jail for it IIRC). The litany above implicates mega-banks who sold the securities, servicers (until recently, typically the arms of mega-banks) who serviced the loans, trustee mega-banks who managed the deals, and so forth. Mortgage fraud under the DoJ definition implicates fast-money, fly-by-night lenders that imploded when the whole scheme went kablooey. More recently it involves foreclosure rescue scams, which the interview subjects say flat-out in the IG report don’t involve enough money for them to consider prosecution.

That’s not true of the various types of bank-driven frauds. And without corrupt securitization feeding the need for lots of loans, there would have been far less corrupt lenders, if any. But as Gretchen Morgenson pointed out, the IG report specifically excludes securities fraud from this overview. This is on page 2 of the report:

Some observers use the term “mortgage fraud” to include mortgage-backed securities fraud, which involves wrongdoing related to the packaging, selling, and valuing of residential and commercial mortgage-backed securities. However, the FBI considers this type of misconduct to be a form of securities fraud and not mortgage fraud; therefore, we did not include as part of the scope of this audit.

That’s an absurd justification. This was all part of the same overall scheme. Even if the DoJ did a “good” job on mortgage fraud as defined by this report, it wouldn’t have touched Wall Street, because the definition mostly comprises lying on loan applications. In a way, the FBI’s compartmentalizing here shows how the law enforcement apparatus was never going to get to the bottom of the scandal. They placed a false frame on it, one that inherently goes after the little guy and not the bigger players.

Of course, as we see, DoJ couldn’t even be bothered to get the small spade work done (which could have led them to the top). And if they wouldn’t prosecute small-time fraud, they weren’t going to prosecute anything.

He goes on to explain how the DoJ doesn’t even collect proper metrics on its investigation of “mortgage fraud” and then discusses how DoJ explicitly deprioritized the prosecution of mortgage fraud, how it lied to Congress about its prosecutions, and how it took credit for Neil Barofsky’s (former Special Inspector General of the TARP and author of book reviewed here, Bailout) collar of Taylor Bean’s CEO, Lee Farkas, just about the only noteworthy prosecution of a bank executive in the wake of the mortgage tsunami.