Why No Investigation?

Here's a bombshell: the San Francisco City Assessor commissioned a serious audit of foreclosure documentation filed in the past few years. The audit examined 400 foreclosures.  It found problems with 85% of them, often multiple problems. What's more, some of the problems are pretty serious as they implicate not only borrowers' rights, but the integrity of mortgage-backed securities and the property title system.  

The San Francisco City Assessor's audit also serves as a benchmark for evaluating the Federal-State servicing settlement.  The San Francisco City Assessor managed to accomplish in a few months what the Federal government and state Attorneys General weren't able to do in nearly a year and a half with far greater resources at their disposal:  perform a credible investigation of foreclosure documentation with serious implications about the securitization process in general.  That's a lot of egg on the face of Shaun Donovan, Eric Holder, Tom Miller, et al.  The SF City Assessor report shows that it really wasn't so hard for a motivated party to undertake a serious investigation. And that raises the question of why the largest consumer fraud settlement in history proceeded with virtually no investigation. 

The lack of investigation was the compelling criticism that led the NY and DE AGs to stay out of the settlement for quite a while. I've never heard an answer as to why no serious investigation. As the SF City Assessor's audit shows, the documentation is all a matter of public record.  It's not that hard to do, especially if you have the resources of the federal government.  So the resources were there. The capability was there. So why no investigation?  The answer has to lie with lack of motivation. Were the Feds and AGs scared of what they would find if they delved too deeply into the issue? 

I hope that members of Congress will question the Attorney General and HUD Secretary the next time they show up to testify on the Hill.  The issue is also worthy of a GAO or IG examination.  

Now to be fair, there was a federal bank regulator review of some 2800 foreclosures and state banking supervisers did some sort of audit of Ally Financial's practices (the results of which are not public). But these audits are only as good as what they were looking for.  If the focus was on narrow robosigning--the mindless signing of documents without verify the statements therein--that's a really different audit from what the SF City Assessor did.  

The robosigning itself and similar lack of internal controls are the small potatoes. There are much more serious things in the SF City Assessor report.  

First, the SFCA audit compared assignments in the public record with those that were represented to MBS investors in SEC filings. Anyone who's been following this blog knows that this is the securitization fail problem. And the SFCA audit finds evidence aplenty of this. Curiously, the OCC foreclosure review protocols don't include this sort of examination. Hmmmm.  Wouldn't want to find out that we've got a massive securitization fail problem. That could trigger another financial crisis. So let's not look into it. If we ignore it, then Levitin and Yves Smith and others can just keep howling into the wind. 

Similarly, the SFCA audit does a cross check between MERS records and foreclosure filings.  As alleged in the DE AG suit against MERS, these records often don't match. That's a problem. Let me rephrase that:  this is a HUGE problem. MERS is a self-privatization of part of a real property title system. Whatever one thinks of self-privatization of property records (reversing an Anglo-American tradition of government recordation that goes back to at least Richard I in 1194), the unreliability of the MERS system is just disasterous for real property title.  As Judge Young said, MERS is the "wikipedia of land registration systems". The SFCA audit makes that seem like a generous comparison, as Wikipedia is often more accurate. Pretending the problem doesn't exist isn't going to make it go away.    

The SF City Assessor report is yet another indication of how thoroughly rotten the Federal-state settlement is. While I'm on the topic, though, let me add in another one:  the Federal-state settlement has folded into it a settlement between HUD and Bank of America for BoA embezzling from the FHA. The price tag for this was $1B, which seems to be double counted as part of BoA's contribution.  That's appalling. Lee Farkas went to jail for a smaller fraud on the FHA. Think anyone from BoA is going to be in the pokey?

Let me suggest this: when a federally-chartered entity commits insurance fraud on the federal government, it should lose its charter and FDIC insurance. National banks exist by the grace of the federal government.  That grace can be removed.  Oh wait, we can't do that to BoA--it's too big to fail!  Stripping BoA of its charter for defrauding the government just does not compute in the bank regulator mindset, which ignores that a federal banking charter is a privilege, not a right.

So there we have it. Once again, the federal government is held captive by the banks. The Too Big to Fail problem isn't a financial risk problem--it's a political problem, as too-big-to-fail means too big to regulate.  The administration has had three chances to deal with too-big-to-fail:  the bailouts, Dodd-Frank, and now the mortgage crisis, and it has shyed away every time. It's hard to think of a greater failing of this Administration.  

Yes, the Administration did pass Dodd-Frank, which has important reforms in it, like the CFPB. But on what is really the most important financial regulatory issue--the need to end the political power of the banks, which will otherwise always be used to stymie effective financial regulation (or the administration of justice as we see here). Successful financial reform requires political reform, and breaking up the large banks is the only way we will see that political reform happen.  

Note by way of comparison how the Feds brought the hammer down on Milken and Drexel for creating a junk bond bubble through a daisy chain of S&Ls (and a corrupt life insurer) that financed the destructive corporate raiding of the 1980s (and resulted in the creation of the CDO!). Drexel wasn't Too Big to Fail, and Milken wasn't from the same social millieu as many of the regulators. He wasn't their classmate, he wasn't white shoe, his lawyers hadn't been the regulators previous, and the regulators weren't looking for future employment with DBL.  And he went to jail.  

Today TBTF is a get-out-of-jail free card.  But I want to emphasize that TBTF isn't the only thing going on here.  Part of the problem, I think is a social one, as our political leadership is part of the same social milieu as our financial leadership and unwilling to call out criminal acts by their peers. The white shoe firms who were having their lunch eaten by Milken had no such qualms.    

In the end, despite lack of investigation, 49 AGs signed onto the federal-state deal. Some of them signed on because they were able to narrow the scope of the release and get some level of federal buy-in and support for investigations on the securitization side of the bubble. In other words, for them, this settlement is conceived of as a first step, and signing on was part of a bargain. I hope it turns out to be a wise bargain, but thus far, the settlement seems an awful lot like Swiss cheese--it's got plenty of wholes and smells ever worse with time.