Will banks finally begin to pay for their mortgage sins?
On Oct. 24, 2012 — five years after the housing market made like butter in a hot skillet — federal prosecutors brought a civil suit against Bank of America.
They charge that Bank of America's Countrywide Financial subsidiary was essentially a printing press for mortgages, issued whether the borrowers had the ability to pay back the loan or not. Then they sold those loans to the government, which held the bag when the loans went sour.
The suit seeks to collect at least $1 billion in penalties for the company's actions, which forced taxpayers to guarantee bad loans. Because the suit is being brought under the False Claims Act, damages could triple to more than $3 billion.
The case is one result of a mortgage task force that President Obama formed this year to investigate wrongdoing, as the legal deadline for filing crisis-related cases approaches.
They took particular aim at a Countrywide program known as "the hustle," which Bank of America inherited when it bought Countrywide in 2008 and kept going through 2009.
According to the lawsuit, the "HSSL" program — the acronym stood for "high-speed swim lane" — got started in 2007.
Eager to issue loans quickly, Countrywide bagged internal controls that were designed to weed out risky borrowers.
The company even replaced trained underwriters with less-seasoned workers, who then manipulated loan forms by writing down higher incomes than borrowers had, prosecutors say, so the loans would meet the standards of Fannie Mae and Freddie Mac.
Fannie and Freddie, the two government-backed companies that back a majority of home loans, bought and guaranteed the loans. When those loans proved worthless, taxpayers footed the bill.
According to Bank of America spokesman Lawrence Grayson, quoted in The New York Times, “At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.”
The economic downturn, Mr. Grayson? You built that.
Not you personally, I'm guessing, but people in your bank and in many other banks like it.
Yes, investors bought blocks of mortgages without asking too many questions about their quality, and home buyers purchased homes worth much more than they could afford. The housing crisis featured plenty of greed to go around.
At the end of the day, however, the people who knowingly wrote fraudulent mortgages — loan paperwork that claimed that applicants made a fictional $500,000 a year instead of a factual $50,000 — are the people who brought the economy down.
Not Obama. Not Romney. Not even George W. Bush and his sidekick Dick Cheney, though Lord knows I think the pair of them would take Halloween candy from an elementary-school student.
What exactly has the government done about that?
Angelo R. Mozilo, Countrywide's former CEO, agreed in 2010 to settle a civil fraud case brought by the SEC for $67.5 million.
Prosecutors have sued 17 big banks over Freddie and Fannie's losses; the list includes JPMorgan Chase and Wells Fargo. Forty-nine states have settled with big banks in civil actions, and Fannie and Freddie continue to ask large banks to buy back the bad loans they originated.
With the exception of a single failed 2009 case involving Bear Stearns, not one bank executive has faced criminal charges. We'd be quicker to find and punish the culprits in a bus crash.
What's more, the penalties they've paid thus far aren't terribly significant, particularly in light of the pain they've caused, the bailouts they accepted and the prosperity they currently enjoy.
There are plenty of ethical people in the financial industry. Overall, however, the financial industry is (surprise!) about making money, and it sees nondevastating financial penalties as the price of doing business.
If we wanted to prevent the next grand-scale mortgage fraud, it would have been a great idea to start investigating wrongdoing a long time ago — like in 2008.
Starting from now, we need to either hit fraudulent mortgage issuers with penalties that are big enough to hurt, or we need to present executives at those mortgage issuers with the real possibility of going to jail. Or both.
That's the motivation that works.