FORECLOSURE IS NO LONGER THE PERFECT CRIME

The financial crisis has spawned hundreds of criminal prosecutions for alleged fraud. Yet so far, defendants have been mostly minor players such as real-estate agents, mortgage brokers, borrowers and a few low-level bank employees. No senior executives at large financial institutions face criminal charges. That’s in stark contrast to prosecutions during the savings and loan scandal two decades ago, when the government’s strategy targeted and snagged some of banking’s most powerful players. The approach back then succeeded in sending scores of S&L executives to prison, as well as junk-bond king Michael Milken and business tycoon Charles Keating Jr.

One explanation for the difference may be that key bank regulators – who did the detective work during the S&L crisis and sent more than 1,000 criminal referrals to prosecutors – ( CLICK FOR FULL VIDEO OF THIS PROSECUTOR) have this time left reporting fraud up to the banks themselves. This is similar to the Florida Attorney General’s Office when investigating Florida Default Group, Erin Cullaro, the investigator once worked there, and still did part-time work for the firm, WITH THE WRITTEN PERMISSION OF THE ATTORNEY GENERAL.

Besides the absence of criminal referrals, other excuses for the lack of major prosecutions may include a skittishness among prosecutors about filing cases they could have trouble winning, and a severe decline in investigative resources. The FBI dramatically shifted resources away from white-collar crime after the 2001 terrorist attacks. The strategy of leaving it to banks to ferret out all the fraud. Institutions will not make criminal referrals against the people who control the institutions. The system that tracks Suspicious Activity Reports, or SARs, detected a dramatic increase in mortgage fraud starting in 2003, when reports of mortgage fraud nearly doubled within a year from 5,400 to 9,500. By 2007, the number had exploded to 53,000. During those same years, many mortgage lenders dramatically lowered their lending standards. Banks often required no proof of income. Borrowers could even get loans without be able to repay them. The system that tracks Suspicious Activity Reports, or SARs, detected a dramatic increase in mortgage fraud starting in 2003, when reports of mortgage fraud nearly doubled within a year from 5,400 to 9,500. By 2007, the number had exploded to 53,000. During those same years, many mortgage lenders dramatically lowered their lending standards. Banks often required no proof of income. Borrowers could even get loans without be able to repay them. Lending executives may have encouraged the making of bad loans, but they generally did not personally approve the loans. They didn’t send emails telling the troops to make fraudulent loans instead they paid big commissions to loan offers who made risky loans. Then the executives were able to reap huge bonuses for making the company look so profitable. the administration may have been more focused on saving failing banks – and an entire financial system – than in prosecuting bank executives. Giving billions in bailout dollars to executives who encouraged fraudulent practices not only could complicate a case, it could prove embarrassing.

The timing was perfect, less cops around, your only accomplice was the government that bailed you out, the criminal is the investigator, and the big fish merely give up the small fish,  that in all likelihood, aren’t even in business anymore.

HENCE- THE PERFECT CRIME — BUT NOT ANYMORE

But the foreclosure crisis is not only a few million personal tragedies. It is a few million crime scenes.

What is behind these suits? Simple: Crime by mortgage servicers and their contractors. And this is more than just the crime of these foreclosures themselves — it’s the residual tail end of a housing bubble based on fraud. The reason these bank servicers must now routinely employ notaries using false documentation is because they never established a clear chain of the property title upfront.

The attitude during the go-go days of the housing bubble was “here today, gone tomorrow,” as Joe Nocera and Bethany McLean make clear in their book “All the Devils Are Here.” This was a refinement of the financial deal makers’ code, “IBG-YBG,” meaning “I’ll be gone, you’ll be gone,” described by Jonathan Knee in “The Accidental Investment Banker.”

In this environment, why bother getting your paperwork in order when the goal is to put someone into a predatory loan, reap fees and disappear tomorrow?

Now that these homes are in foreclosure, however, the lack of paperwork is a serious problem. And, since no one has yet been held accountable for the fraud perpetrated during the housing bubble, the business model of financial institutions is often still predatory.

This fraud is now coming back to haunt our courts — for example, in the falsified foreclosure paperwork required to cover up the corner-cutting of the subprime lenders and the banks that funded them.

The banks themselves have confessed to breaking the law. The Veterans Affairs Committee held a hearing early this year when JPMorgan was found to be illegally foreclosing on 18 U.S. military families — a violation of the Servicemember Civil Relief Act.

This law bans foreclosing on active duty troops. Knowingly violating the ban carries up to one year in prison for each count. JPMorgan apologized for its violations, because for banks, being sorry when caught is what really counts. The families were compensated by JPMorgan financially, but no one at the bank got jail time or had to plead guilty.

Bank regulators have now found that up to 5,000 military families may have been foreclosed on illegally, as The Financial Times reported last month. Yet the Justice Department settled with Bank of America for alleged violations of the service member act. BofA, like JPMorgan, doesn’t have to admit to wrongdoing — but it says it is very sorry anyway.

“The SCRA is not some obscure legal technicality,” said Rep. Brad Miller (D-N.C.), who wrote the law, “that might just have escaped the attention of mortgage servicers. Those servicers are all affiliates of the biggest banks. … Servicing mortgages is all they do, and they really don’t have that many laws to keep up with. They have got to have known what the law required and consciously decided that they could just ignore it, the same way they apparently decided it was OK to file false affidavits in legal proceedings.”

President Barack Obama has argued, as recently as last Sunday on “60 Minutes,” that what happened on Wall Street wasn’t criminal. “Some of the most damaging behavior on Wall Street,” the president told Steve Kroft, “in some cases, some of the least ethical behavior on Wall Street, wasn’t illegal. That’s exactly why we had to change the laws.”

Obama is wrong. Fraud was illegal before the crisis; it’s illegal now. The Servicemember Civil Relief Act was signed in 2003. So it was already on the books. During the savings and loan crisis, the George H.W. Bush administration sent about 3,000 white-collar criminals to jail. This administration has yet to send one.

And it is for lack of trying. Attorney General Eric Holder and his network of U.S. attorneys haven’t brought one criminal suit on illegal military foreclosures or foreclosure fraud. There have been enough books and investigations revealing rampant criminality in the housing bubble and now in foreclosure crisis. Yet Holder’s DOJ is still settling with banks to let them off the hook for illegal foreclosures on active duty troops.

The administration is now attempting to quash state-level officials by fiercely lobbying for a 50-state settlement to paper over the foreclosure fraud scandal. Obama may talk about his fealty to the “99 percent,” but his administration is engaged in an aggressive coverup of bank crimes.

The administration’s response to Coakley’s suit is perhaps the most revealing, for the Massachusetts case against the banks was particularly sweeping.

The banks’ press release response has largely been “we’re disappointed” boilerplate, and only the taxpayer-owned lender Ally Financial (formerly GMAC) pushed back hard. The company declared that it plans to cease all mortgage lending in Massachusetts.

Coakley’s response was simply that this is proof that Ally is not interested in following the laws regarding rules of evidence. In other words: good riddance.

After this dispute, Rep. Barney Frank (D-Mass.) and Coakley called for congressional hearings into Ally’s behavior.

Ally’s action is an attempt at what is known as a capital strike — a threat by financial interests that they will cease financing critical social activities unless their legal demands are met.

Gretchen Morgensen and Josh Rosner detail a similar case in “Reckless Endangerment,” their history of the housing bubble. In 2003, before the bubble, Georgia lawmakers noticed that mortgage lending was riddled with fraud and predation. So the Legislature passed a law clamping down on fraud with a state consumer protection law.

The response was devastating — Standard & Poor’s declared it would no longer rate mortgage-backed securities with loans originated in Georgia. The agency made enormous profits by rating subprime mortgages, so a predatory lending law may well have proved a threat to this profit stream. The state quickly reversed the law for fear that there would be no more housing finance in the state.

Other states and localities took notice — and we saw what happened next.

The housing bubble, in other words, was not just due to tragic herding behavior. It also involved the financial sector’s aggressive responses to democratic attempts to rein in creditor abuses. Now Ally, a bank 74 percent owned by taxpayers and controlled by the administration, is continuing this abusive trend.

Turning our markets into playpens for predatory behavior didn’t happen overnight, and it will not be fixed overnight. But until we have public servants strongly focused on justice for all, we can expect the crime spree to go on. After all, what we’re all learning is that, at least for large banks, crime pays

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