Attorneys General Schneiderman and Biden Target Mortgage Mess
Op-Ed Published in Politico
By Eric Schneiderman & Beau Biden
America’s free markets work only when there is one set of rules for everyone — and everyone plays by those rules.
It is now clear, however, that many in the mortgage finance industry ignored the rules over the past decade. This led to a breakdown in our housing market and in the market for mortgage-backed securities.
These two markets are inextricably linked. Any real effort to repair the damage caused by the collapse of the housing bubble must address the injury in both sectors. Tens of millions of homeowners and millions of investors — including retirees with money in pension and mutual funds — were devastated by this manmade catastrophe.
We recognized early this year that, though many public officials — including state attorneys general, members of Congress and the Obama administration — have delved into aspects of the bubble and crash, we needed a more comprehensive investigation before the financial institutions at the heart of the crisis are granted broad releases from liability.
We undertook such an inquiry, building on the work of many others. And we know time is of the essence. Homeowners and investors are suffering every day, and patterns of abuse and misconduct are continuing. We’re working hard to complete the first — and most critical — phase of our investigation before the end of 2011.
The key to our strategy to root out the conduct that triggered the biggest financial crisis since the Great Depression is recognizing that a comprehensive effort requires an attack from both sides — looking at harm both to borrowers and to investors. So we are investigating four distinct, but interdependent, areas of abuse. Only one of those areas is being discussed in the negotiations now under way among the banks, the administration and some of our colleagues.
First, we are investigating misconduct by loan originators: banks and the other lenders engaged in patterns of deceptive conduct when they made mortgage loans across the country.
Second, we are delving into the aggregation, or pooling, of mortgages by major banks. These pools of mortgages were, for the most part, deposited into New York and Delaware trusts, sliced into shares of toxic debt and sold for trillions of dollars as mortgage-backed securities. The banks sponsoring those trusts vouched for the quality and title of these mortgage pools to investors — and in their submissions to tax authorities, insurance companies and rating agencies.
Third, we are examining the continuing abuses in the servicing of millions of mortgages, most of which are the responsibility of other branches or divisions of the banks that assembled the pools of mortgages in the first place. This investigation includes allegations of widespread abuse of our courts and deed registries — such as the submission of false documents in legal proceedings. It also includes “dual tracking,” a practice in which borrowers are forced to negotiate a workout to a delinquent loan with their bank while simultaneously fighting the bank in a foreclosure action. There has also been widespread failure to adhere to the requirements of the Servicemembers Civil Relief Act.
The clearest example of the gross levels of misconduct during this process is the use and abuse of the Frankenstein’s monster of a recording system called the Mortgage Electronic Registration Systems. It was set up by financial institutions, including the government-sponsored enterprises Fannie Mae and Freddie Mac, as a means to evade the decades-old system of recording who owns interests in a given piece of property.
MERS, on behalf of its members, has foreclosed on properties in which it did not own any interest. In addition, MERS’s shoddy record keeping and opaque practices continue to wreak havoc on homeowners, investors and all stakeholders in our property system.
Delaware sued MERS — a Delaware corporation — on Oct. 27 for deceptive business practices. The state alleges that MERS does not follow its own rules, that its registry is inaccurate and unreliable, and that MERS often acts without authority to foreclose or transfer loans on behalf of securitization vehicles when those vehicles themselves have failed to follow the rules and, thus, do not own the loans on which MERS tries to take action.
New York has also expanded its investigation. The state issued a subpoena for MERS’s records relating to the banks using its services to bring foreclosure proceedings all across America. We are determined to get out in the open the troubling facts related to the banks’ use of MERS.
All 50 state attorneys general teamed up with federal agencies last fall to focus on the last of these four areas. As our colleagues seek to settle these servicing-related issues, the financial institutions on the other side of the negotiating table have predictably sought releases that are as broad as possible from future liabilities, delaying the process.
We look forward to doing whatever it takes to obtain servicing reforms — whether through a negotiated deal with banks or through regulations issued by the federal Consumer Financial Protection Bureau. But we will not release claims that we are currently investigating, including securitization, origination and MERS.
Reforming the servicing of mortgages is crucial. But these servicing abuses did not create the mortgage bubble. Robo-signing did not blow up the U.S. economy. Rather, these are symptoms of a more far-reaching and insidious problem.
The American people deserve a full investigation and public exposure of the conduct that got us into the economic quagmire we face today. We must ensure that it never happens again. And we must restore public confidence that ours is a nation committed to the goal of equal justice for all.
Eric Schneiderman is the attorney general of New York, and Beau Biden is the attorney general of Delaware.