The Untouchables

Back during Prohibition federal agents were used to break up the crime syndicate of Chicago’s Al Capone, using federal law, because local law enforcement was unwilling or unable to do so. Unsuccessful bribery attempts by the syndicate were widely publicised, hence their nickname.

Now the situation seems reversed, with state attorneys general taking virtually the only steps to investigate allegations of fraud, in this case state law governing evidence submitted by plaintiffs, which have arisen from foreclosures nationwide:

Ever since the financial crisis began two years ago, the federal overseers of the banking industry have been consistently unwilling to take the rod to the institutions they regulate. The robo-signing scandal — and it is, unquestionably, a scandal — hasn’t changed that attitude one iota.

The Treasury Department and the Federal Reserve have made it clear that they are more concerned about keeping the foreclosure mill going full speed than they are about determining whether the banks broke the law. Somehow throwing people out of their homes quickly is supposed to help the economy.

Joe Nocera – The States Take on Foreclosures NYT 29 Oct 10

On 13 October forty-nine states, now joined by Alabama, announced a joint investigation into allegations of fraud and perjury resulting from submissions by mortgage servicers and their agents in foreclosure cases:

“This is not simply about a glitch in paperwork,” said Iowa Attorney General Tom Miller, who is leading the probe. “It’s also about some companies violating the law and many people losing their homes.” […]

“What we have seen are not mere technicalities,” said Ohio Attorney General Richard Cordray. “This is about the private property rights of homeowners facing foreclosure and the integrity of our court system, which cannot enter judgements based on fraudulent evidence.”

Alan Zibel – Officials in 49 states launch foreclosure probe AP via MSNBC 13 Oct 10

While there was initially some doubt that this probe would produce significant results there are signs the states’ attorneys general are increasingly concerned with their findings and may take an aggressive role in asserting state law, tightening requirements in their court procedures and establishing evidence which may eventually lead to criminal prosecutions.

It certainly raises questions as to why federal agencies have not intervened in these matters themselves, except that we presume they have a vested interest in streamlining the foreclosure process so that they can insure the profitability of the banks and hit federal economic targets. And it isn’t like the state attorneys general were asleep at the wheel back at the other end of the sub-prime crisis, either:

During the bubble, it was the state attorneys general who first saw the problems in subprime lending. But whenever they tried to do something to halt the predatory lending and outright fraud, they were stopped cold by the federal bank regulators, who consistently sided with the banks in court. It is not too much to say that if the states had succeeded, the subprime crisis might never have occurred.

Now, with the mortgage foreclosure mess, they’re back — and the feds can’t stop them. It’s about time.

Joe Nocera – The States Take on Foreclosures NYT 29 Oct 10

And is is starting to bite. New York now requires signed affidavits of document accuracy from plaintiffs’ attorneys. The standing of MERS has been challenged by a binding statement of enforcement in DC and challenged elsewhere, listings of suspected robo-signers are circulated among states and are being used to identify potentially fraudulent affidavits, and most recently a stiff-arm on free ‘do-overs:’

“It is not acceptable for a party who believes they submitted false court documents to merely replace those documents. Wells Fargo and any other banks are not simply allowed a ‘do-over,'” he wrote in the letter to Wells. The other letter was sent to Ohio judges, who were asked to notify [Ohio State Attorney General Cordray] when banks file substitute affidavits.

He demanded that the banks vacate any court order or motion that was based on an improper paperwork. In an interview Friday, Mr. Cordray said the banks would “be well-served to work out a settlement with the borrowers to modify the loans and work out payments.”

Mr. Cordray’s letters come as several banks say they have reviewed their foreclosure procedures and are resuming evictions. But his insistence that they go beyond replacing affidavits by employees who have been labeled “robo-signers”—who didn’t adequately review underlying foreclosure documentation—threatens to upend banks’ efforts to resolve their foreclosure problems.

Robbie Whelan – Big Banks Told Not to ‘Fix’ a Fraud WSJ 30 Oct 10

Makes sense, but poses problems to the mortgage servicers which may prove ultimately insurmountable. It seems that the end-game for attorneys general is to force lenders to renegotiate agreements with borrowers which permit them to stay in their homes, sort of a grassroots HAMP, rather than bring down the banks through criminal prosecutions. But this admirable objective actually runs counter to the strategy of sucking up foreclosures and mitigating losses facing financial institutions, and the federal government, which may burden them so heavily as to erode the fragile ‘recovery’ we are led to believe we are experiencing. But the states have new powers:

As a result of the Dodd-Frank law, it will be much harder for a federal regulator to use pre-emption to shut down a state investigation into a financial institution. Under the new law, states can enforce their own state consumer laws against nationally chartered banks — even when those laws are stronger than any parallel federal law. And state attorneys general have been given the explicit right under the new law to enforce the rules and regulations that will soon emerge from the new Consumer Financial Protection Bureau. They might even get some federal money from the agency to help them do it.

Joe Nocera – The States Take on Foreclosures NYT 29 Oct 10

Look for some manoeuvring against the new agency and knives out for Elizabeth Warren from those invested in the fragile solvency of the major banks as the way out of this mess. And, in the meantime, lets see what attorney generals and judges nationwide can do to blunt the arrogance and disproportionate power of our financial giants as they act hastily and unilaterally against home owners to prop up their troubled balance sheets.