A Long Time Coming

The New York Times is reporting that the Federal Housing Finance Agency, which oversees the government sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FHLMC), will file suit nextweek against Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank among others for misrepresentation and failure to perform due diligence, leading the enterprises to lose billions:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

There are fears, probably well-founded fears, that the suit could put the banks, particularly Bank of America, at risk. In my view the error was in bailing them out in the first place. We can’t fix what’s wrong with our financial system by indemnifying the banks against risk and encouraging them to continue the practices which have put them at risk. But that’s, apparently, what we’ve been doing. According to an article in American Banker fraudulent practices in foreclosures on the part of banks continue:

Some of the largest mortgage servicers are still fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners.

The practice continues nearly a year after the companies were caught cutting corners in the robo-signing scandal and about six months after the industry began negotiating a settlement with state attorneys general investigating loan-servicing abuses.

Several dozen documents reviewed by American Banker show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose.

Some of documents reviewed by American Banker included signatures by current bank employees claiming to represent lenders that no longer exist.

Many banks are missing the original papers from when they securitized the mortgages, in some cases as long ago as 2005 and 2006, according to plaintiffs’ lawyers. They and some industry members say the related mortgage assignments, showing transfers from one lender to another, should have been completed and filed with document custodians at the time of transfer.

My reactions to these issues aren’t based on vindictiveness but, rather, on the simple observation that when you subsidize something you get more of it. We’ve been subsidizing these practices for decades and doing it on steroids since 2007.

Turn, turn any corner.
Hear, you must hear what the people say,
You know there’s something that’s goin’ on here,
That surely, surely, surely won’t stand the light of day.

Update

Yves Smith remarks:

The American Banker article, disappointingly, fails to discuss what these continued abuses mean. As we have stressed in repeated past posts, the failure to get the notes to the securitization trusts by the cutoff date is not fixable by any legitimate means. Do you think banks and law firms would continue to fabricate documents, particularly in the wake of so much harsh media and Congressional scrutiny, if they had any other way out?

The failure to get the notes to the securitization trust correctly does NOT mean that no one has the right to foreclose. It does mean that the party that can foreclose is someone earlier in the securitization chain who was paid for the note but in effect, no one bothered to collect it from him. No one wants that party to foreclose because, first, it would prove that the securitization did not have the note and investors were misled, and second, there is no way to get the proceeds into the trust for the benefit of the investors.

Yves’s first paragraph reminds me of one of my favorite movie lines from the old western The Comancheros:

Circuit Court Judge Thaddeus Jackson Breen: Major here has told me what your troubles are. I’ve been thinking it over and in light of my forty years experience in legal jurisprudence, I have come to the positive conclusion that there ain’t no way to do this legal and honest… but being good sensible Texans, we’ll do it illegal and dishonest! Now all the boys here in the room have agreed to sign a paper I have prepared. They all are going to commit perjury. That’s legal language for just a plain, dumb blasted lie.

which I think shows rare insight ino the legal process.