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.
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.