The most powerful Wall Street banks are used to getting their own way, especially with politicians, but New York’s attorney general is trying to turn the tables on them. Eric Schneiderman is digging into the accumulating evidence of massive fraud and false documentation revealed by the foreclosure mess and asks a potentially explosive question: How bad is it?
The answer could prove devastating for some of the largest financial institutions in the land, confronting them with huge new losses and maybe renewing the banking crisis the Obama administration thought it had resolved. Perhaps that’s why law-enforcement agencies, state and federal, have not undertaken a thorough investigation of the scandal—they’re afraid of what they might find. The newly elected New York AG has been obliquely warned that his inquiry could “blow up the economy,” but he ignores the scare talk. If the evidence is there, it should definitely put the banks on the defensive, for a change.
In recent months, Schneiderman’s office has dispatched requests for records and information from seven of the biggest banks (Bank of America, JPMorgan Chase, Wells Fargo, Goldman Sachs, UBS, Royal Bank of Scotland and Deutsche Bank). One way or another, they were the leading players in the housing bubble, either by originating subprime mortgages of dubious quality or by packaging the mortgage-backed securities that turned into toxic assets for unwitting investors.
Schneiderman has further requested information from four bond insurers that backed the investment paper, a Buffalo law firm known as a mortgage mill and two private equity firms that owned processing firms in the mortgage market. Most important, however, is his request to see files from the two leading banks—Deutsche Bank and Bank of New York Mellon—that acted as trustees for the mortgage securities, certifying that all complied with property-law requirements and provided the proper documentation.
The storm of foreclosure litigation during the past year strongly suggests the opposite. Around the country, lawyers for homeowners have won scores of cases blocking banks from foreclosing on their clients. Courts have held that mortgages or securities were fatally flawed and therefore void. Banks filed false affidavits and unsupported documents, in effect defrauding the courts. When judges asked for backup evidence of ownership, lawyers went to the trustees and found that the mortgages and liens were not in the files. Bankers couldn’t prove they owned the homes they were seizing. Often they couldn’t even establish who owned the loans or whether borrowers were actually in default. Many documents were signed by untrained functionaries who didn’t bother to examine what they were signing.
Officials in Washington at first downplayed the implications, suggesting that bureaucratic sloppiness by the banks was not a reason to intervene in the foreclosure process. But the essence of this scandal goes to the heart of capitalism—the American system of property law. The most prestigious financial firms abused and distorted that system in their rush to accumulate greater profit, with less responsibility for the results.
The Congressional Oversight Panel, led by Elizabeth Warren, investigated the mess last year and warned in its report, “If documentation problems prove to be pervasive…the consequences could be severe.” The details are complicated, but the essential meaning was described by Damon Silvers, AFL-CIO associate general counsel and deputy chair of the COP. “Here’s why all this is so dangerous,” he explained. “Property law requires very precise documentation at every step in the process because the whole economy comes apart if you can’t be certain who owns what. When you buy a house, the bank insists you comply with the property-law regime, and you sign pages and pages of agreements to do so. And you can lose your home if you fail to comply. Yet in this situation the banks did not comply themselves—that’s what’s mind-boggling.”