● Will it be a forum for whistleblowers and crowdsourcing?
Without such powers, the office would be a farce, helping to shield banks from the fallout of their wrongdoings.
What the office investigates will also reveal how serious this is. Both pre- and post-crisis topics should be investigated, including:
●MERS: Mortgage Electronic Registration Systems was created by banks without any authority or enabling legislation. It allowed the rapid transfer of mortgages, avoiding state and county filing fees amounting to billions of dollars. Without MERS, it’s hard to imagine that the massive volume of mortgage securitizations could have occurred. How were lenders able to circumvent mortgage filings with town and county registrars? Did they engage in illegalities? How many billions of dollars do they owe in fees for transferred notes? And what percentage of MERS assignments were fraudulent, made for entities that did not exist?
●Origination fraud: Why did lenders accept “stated income” loans? Why did they abandon traditional standards? Michael White, a Countrywide subprime unit employee, called this “origination fraud,” observing, “Eliminate the verification of income for a mortgage borrower, and you eliminate your ability to predict the likelihood of repayment or default.”
●RMBS: Wall Street’s securitized mortgage pools (residential mortgage-backed securities) contained a broad variety of flaws, some so egregious that they amounted to fraud. In plain English, we’re talking about bad paperwork and misrepresented pools of mortgages to borrowers whose debts were significantly understated and whose median incomes and credit scores were significantly overstated.
● Insurance fraud: Look at a bank tactic in which legitimate home insurance is canceled and new insurance provided at a substantially higher fee through a subsidiary or affiliate of the bank mortgage holder. This extra expense in some cases led to foreclosures.
●“Pyramid” servicing fees: An illegal practice in which current payments are applied to past late fees, generating more late fees and additional interest owed and creating a delinquency where none existed. This tactic also led to foreclosures that were probably unlawful.
●Lost mortgage notes: How is it possible that the most important part of the mortgage contract — the promissory note — was consistently lost or misplaced by banks? It is unfathomable to anyone who has ever handled documents. At best, it’s gross incompetence. At worst, it’s willful document destruction during litigation.
●Document fraud for sale: There were many examples of alleged document fraud, but the one crying out for investigation involves Lender Processing Services’ DOCX subsidiary. The firm seems to have been selling fabricated documents for a fee to lawyers and banks. Indeed, Lender Processing Services, which processes nearly half of all U.S. foreclosures, could require a separate investigation.
●False affidavits, perjury (robo-signing): We do not know who ordered the robo-signing of foreclosure documents, the false notarizations, fraudulent written statements to courts and perjury. This should be easy to investigate, like flipping a nickel-bag dealer to get to the drug kingpin. Astoundingly, this easy-to-investigate felony (via notarized perjurious statements submitted to foreclosure courts) has yet to be prosecuted.
●Foreclosure mills, process servers: Law firms engaged in rampant fraud that corrupted the foreclosure process. If found guilty, those folks should be disbarred and jailed. Same for the “sewer service” process servers who threw away legally required notices to delinquent homeowners.
●Soldiers and Sailors Relief Act: Federal law protects active-duty service members from foreclosure and eviction. I find violation of this law reprehensible. If it were up to me, I would let the Special Forces — Navy Seals and Army Green Berets — handle this as they see fit.
Even with criminal statutes of limitations elapsing, we can achieve some measure of justice against the crisis wrongdoers. Lawyers can be disbarred and corporate insiders banned from serving in publicly held firms again. CEOs and CFOs can be fired. A significant investigation, with subpoena powers, a real budget and public hearings would go a long way toward restoring public confidence.
Schneiderman has an opportunity to create a legacy for himself that lasts far beyond the next election cycle. If he lacks the tools to do so, he should demand them or resign in protest.
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture.
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