In the news over the last few days has been Beau Biden, Delaware’s Attorney General, talking about the progress of his investigation into the failed housing market and the plethora of foreclosures over the last few years. His investigation is focused in on MERS, Mortgage Electronic Registry System, Inc, a company that registers about 60% of the mortgages.
Biden’s office issued a statement outlining the lawsuit:
MERS engaged and continues to engage in deceptive trade practices that sow confusion among homeowners, investors, and other stakeholders in the mortgage finance system, seriously damaging the integrity of the land records that are central to Delaware’s real property system, and leading to improper foreclosure practices.” MERS is said to have deceived borrowers by knowingly obscuring important information and acting as the owner of mortgage loans and falsely foreclosing on homes without proper authority. This is one of only a few major investigations into the financial meltdown and the banks responsibility for it since the crash in 2008.
This leads into an article I that was recently published by ProPublica that looked into what has happened to the mortgage companies, investment banks, CEOs/executives, and the rating agencies after the banking failure and what, if any, consequences they have faced. Their findings were not surprising because as we already know there have been hardly any arrests and/or convictions for the corruption and illegality these entities perpetrated.
Already known is that deregulation over the last 30 plus years had played a prominent role, however, there were 2 bills in particular that were significant in exacerbating the conditions leading to the financial crisis.
First, in 1999 Bill Clinton signed into law The Gramm-Leach-Bliley Act, which repealed all remaining parts of Glass-Steagall and allowed firms to participate in traditional banking, investment banking, and insurance at the same time.
Secondly, a year later The Commodity Futures Modernization Act was passed into law. This deregulated over-the-counterderivatives– securities like CDOs (collateralized debt obligations and CDS (credit default swaps). Propublica wrote:
They derive their value from underlying assets and are traded directly between two parties rather than through a stock exchange. Greenspan and Robert Rubin, Treasury Secretary from 1995 to 1999, had both opposed regulating derivatives. Lawrence Summers, who went on to succeed Rubin as Treasury Secretary, also testified before the Senatethat derivatives shouldn’t be regulated.
It’s worth noting the substantial lobbying efforts that accompanied the deregulation process. According to the FCIC, between 1999 and 2008 the financial industry spent $2.7 billion lobbying the federal government, and donated more than $1 billion to political campaigns. While deregulation took place mainly under Clinton’s watch, George W. Bush is faulted for not doing more to catch the out-of-control housing market.
I have listed below some of their findings (the article in its entirety can be found here). I do highly recommend reading this article in its entirety because ProPublica also delves into the credit agencies, regulators, and the banks that created CDOs involved and I have not listed those portions in this post.
Countrywide, once the nation’s largest mortgage lender, also pushed customers to sign on for complex and costly mortgages that boosted the company’s profits. Countrywide CEO Angelo Mozilo was accused of misleading investors about the company’s mortgage lending practices, a charge he denies. Merrill Lynch and Deutsche Bank both purchased subprime mortgage lending outfits in 2006 to get in on the lucrative business. Deutsche Bank has also been accused of failing to adequately check on borrowers’ financial status before issuing loans backed by government insurance. A lawsuit filed by U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them.
Where are they now
Few prosecutions have been brought against subprime mortgage lenders.
Ameriquest went out of business in 2007 and Citigroup bought its mortgage lending unit.
Washington Mutual was bought by JP Morgan in 2008. A Department of Justice investigation into alleged fraud at WaMu closed with no charges  this summer. WaMu also recently settled a class action lawsuit brought by shareholders for $208.5 million. Bank of America purchased Countrywide in January of 2008, as delinquencies on the company’s mortgages soared and investors began pulling out. Mozilo left the company after the sale. Mozilo settledan SEC lawsuit for $67.5 million with no admission of wrongdoing, though he is now banned from serving as a top executive at a public company. A criminal investigation into his activities fizzled out earlier this year. Bank of America invited several senior Countrywide executives to stay on and run its mortgage unit. Bank of America Home Loans does not make subprime mortgage loans.
Deutsche Bank is still under investigation by the Justice Department.
In the years before the crash, banks took subprime mortgages, bundled them together with prime mortgages and turned them into collateral for bonds or securities, helping to seed the bad mortgages throughout the financial system. Washington Mutual, Bank of America, Morgan Stanley and others were securitizing mortgages as well as originating them. Other companies, such as Bear Stearns, Lehman Brothers, and Goldman Sachs, bought mortgages straightfrom subprime lenders, bundled them into securities and sold them to investors including pension funds and insurance companies.
Where they are now
This spring, New York’s Attorney General launched a probe into mortgage securitization at Bank of America, JP Morgan, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing boom. Morgan Stanley settled with Nevada’s Attorney Generallast month following an investigation into problems with the securitization process.
As part of a proposed settlement with the 50 state attorneys general over foreclosure abuses, several big banks were offered immunity from charges related to improper mortgage origination and securitization. California and New York have withdrawn from those talks.