Not a single fraudster
has been sent to jail,
but DOJ ‘on the job’
Angelo Mozilo, once president of Countrywide Financial, was given a financial slap on the wrist for his role in the collapse of America’s biggest mortgage lender. Click image to enlarge.
IN AN ECHO OF THE housing market crash of 2006-08, President Obama is trapped between a rock and a hard place when it comes to the government-owned mortgage giants Fannie Mae and Freddie Mac.
This affects not only homeowners and prospective-homeowners who may want a mortgage, but everyone who needs a roof over their heads, too – because, yes, apartment owners also borrow and tap the mortgage markets.
The federal government was forced to take over the two mortgage banking giants in September 2008 because they were on the brink of collapse.
Now, Obama wants public investors to get back into the market, but no one knows how to entice them to put their money up because of what they know about what has gone on before – and how little they know about what will happen in the future.
What we all do know is that no one has been sent to jail.
SYMPTOMATIC OF THE FRAUD and abuse that accompanied the housing market crash, is the lawsuit the Department of Justice filed Aug. 6 against Bank of America.
According to the announcement released that day, Attorney General Eric Holder has filed a civil lawsuit against Bank of America Corporation and certain of its affiliates (collectively “Bank of America”).
The Department of Justice announcement of its latest lawsuit – this one against Bank of America. Click image to enlarge.
The complaint alleges that Bank of America lied to investors about the relative riskiness of the mortgage loans backing the residential mortgage-backed securities (RMBS), made false statements after intentionally not performing proper due diligence and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers.
“Today’s filing marks the latest step forward in the Justice Department’s ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct,” said Attorney General Eric Holder.
He was backed up by the U.S. Attorney for the Western District of North Carolina, Anne M. Tompkins, who joined Holder in the announcement.
“Bank of America’s reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors,” said Tompkins.
So the top officials at Justice allege “reckeless and fraudulent” behavior (don’t forget Bank of America inherited the giant mess when it bought Countrywide Financial, the biggest fraudster of all; its former president Angelo Mozilo got off with a financial slap on the wrist.)
And yet not a single banker has gone to jail because of this blatant disregard for the rules and regulations that are meant to protect borrowers (and lenders) alike.
THE ISSUE OF WHAT TO DO to entice investors back into the public mortgage market – and the reasons for their skittishness – was examined in detail by one of the finest business reporters in the country on Sunday.
In The Housing Market Is Still Missing a Backbone Gretchen Morgenson of The New York Times brings it all together.
“Playing to taxpayers who are angered by the government’s takeover of Fannie Mae and Freddie Mac in 2008, Mr. Obama said he wanted to wind these companies down. That’s an important goal,” Morgenson wrote.
Problem is, the private sector won’t play ball.
“… [T]here are many reasons for the reluctance of banks and private investors to fund residential mortgages without government backing,” Morgenson wrote.
Among them is lack of confidence.
The Bank of America case is just the most recent of a long string of similar civil actions against perhaps dozens of institutions that committed fraud and worse during the mortgage market frenzy of 2005-06, and the collapse that followed.
Millions of homeowners suffered.
Bond holders also took a beating.
Interest rates on government bonds, as of yesterday. Source: Department of the Treasury. Click image to enlarge.
Now, according to Morgenson (and many others) investors are holding back because interest rates are clearly on the rise. As rates rise, bond prices drop; their relationship is inverse.
The Federal Reserve Bank has already indicated that it will gradually begin withdrawing its $85-billion-per month support for the bond market, beginning (most observers expect) some time around the end of this year.
If rates are most assuredly heading skyward, why would any investor want to take on the risk by purchasing mortgage bonds right now?
But this is worsened by the fact that not much has been done to correct the excesses of the housing boom and bust.
“Perhaps the largest problem for investors who might otherwise be willing to return to the mortgage market is the lack of transparency in privately issued securities,” Morgenson writes.
And she is correct.
Until such time as the playing field between issuers and investors is leveled out, mainly through transparency, disclosure and trust, the government will continue to be forced to play a huge role, buying 90 percent of all mortgages issued by the banks and others.
It’s regrettable in the extreme.
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