Third Way “Solution” to Foreclosure Fraud? Limits on Rule of Law

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The Third Way has just released a response to the US Bank v. Ibanez decision that purports to offer a solution to the foreclosure problem.

I’m sure others will point out other problems with this document: its embrace of the “strategic default” myth, its focus on the Uniform Commercial Code rather than the Pooling and Servicing Agreements that govern securitization, its confusion of the dual track problem with the robo-signer problem, its apparent ignorance of other problems in foreclosure fraud, such as insufficient notice to homeowners, even though that, too was an issue in Ibanez.

But I wanted to point out something about the first step in its purported remedy, in which it describes how to protect injured homeowners. It includes among its injured homeowners:

  • Those who were current on their mortgage payments but who were foreclosed on anyway
  • Those who were robo-signer foreclosed via on while awaiting a modification decision
  • Those who were robo-signer foreclosed while in the process of short-selling their home
  • Those who had made a payment on delinquent mortgage but were foreclosed “because of a faulty process that failed to take that payment into account”

Note how carefully this paper avoids admitting the improper payments that servicers often use to force people into foreclosure, which are a separate problem from robo-signing?

In any case, here’s the remedy the Third Way advocates:

These aggrieved borrowers should be entitled to four things: (1) the immediate suspension of foreclosure proceedings; (2) the right to sue for actual damages caused by a wrongful signed foreclosure; (3) access to a 30-day expedited application process for loan modification if they have an application pending (but without a guarantee the modification will be granted); and (4) a refund of any fees and charges assessed by the bank, as well as protection from any deficiency judgments (if a borrowers was seeking a modification or short sale). [my emphasis]

It goes on to suggest that banks should be in charge of points 1, 3, and 4. That is, while elsewhere it espouses putting the Consumer Finance Protection Board in charge of standardizing servicing, it does not want the government involved in the process of “protecting injured homeowners.” Maybe that’s so it can retain for the banks–as it does later in the paper–sole discretion whether or how to modify loans. That is, even while the paper admits Ibanez shows that the banks still have a shitpile problem, it doesn’t want banks to take the hit for the fact that they don’t have legal standing to foreclose on the loans they’re foreclosing on. Nor does it really provide a solution for what to do with truly delinquent loans on which banks do not have legal standing to foreclose. Nor does it say what happens when people are denied a modification by a bank that doesn’t have the legal right to foreclose.

Meanwhile, the paper remains silent on who should be in charge of point 2.

You know, the right to sue, that right protected by the Constitution?

But of course, point 2 is not actually a protection. Rather, it is a limitation on their protection. Rather than admit that property owners have the right to sue in this country, the Third Way thinks that we can best protect them by limiting their right to sue to actual damages.

And the Third Way supported limit to rule of law goes further. It calls for Congress to bail out the banks holding shitpile by:

  • Eliminating foreclosure challenges on vacant or abandoned homes
  • Eliminating foreclosure challenges on borrowers who defaulted 18 months ago who have not cured the default
  • Instituting 12-month statutes of limitation on “paperwork-related” lawsuits

To begin with, their envisioned bailout doesn’t account for many realities: homeowners who were harassed into leaving their home, homeowners who are only in default because of the often-undisclosed and exorbitant fees banks slap onto late payments, and homeowners who did not get proper notice of the foreclosure. The Third Way wants to take away the right to sue of all these people, even though they have a legitimate grievance.

But don’t worry, Third Way says, this does not amount to letting banksters avoid any consequences for their actions:

What it emphatically does not do is shield bad actors from the consequences of their behavior. A safe harbor and statute of limitations will do nothing to protect banks and their lawyers from the investigations currently underway by state attorneys’ general across the country.15 Nor will it prevent disbarment and other consequences that are likely to be suffered by lawyers at the “foreclosure mills” at the heart of the robo-signing scandal. The now infamous firm headed by David J. Stern in Florida, for example, “has seen its fortunes plummet, with major clients, like Fannie Mae, Freddie Mac, and Citigroup, cutting ties to Stern. Stern’s operation has also laid off hundreds of employees in recent weeks.”

The consequences the Third Way believes are adequate for bankster trying to take property they don’t have legal standing to take, resorting to legal fraud to do so, involves an Attorney Generals’ investigation that itself says will include no criminal charges, disbarment no one expects to happen, and the loss of business.

But nowhere does the Third Way envision the banksters will have to take a financial hit on the value of these loans, much less any legal consequences for fraud. Now, ultimately, the former may well be negotiated by the Attorneys General. But the Bill Daley-connected Third Way seems to see the Ibanez decision as a moment to offer pseudo-solutions that are not only inadequate, but stop short of what would otherwise come out of the Attorneys General “investigation.”

In short, this seems like an admission by the Third Way that the shitpile remains a serious problem. But also an attempt to preempt processes already underway to solve the shitpile. Not to mention eliminate legal recourse for many of the people who have been wronged here.

Update: The more I think about this paper, the more it seems like Third Way is saying, “Congress, we’ve had a major setback in the courts. Can you please make sure to 1) limit access to the courts and 2) preventing any more of these judgments that will reveal just how deep the shitpile really is?”

Timmeh Geithner to House of Representatives: Fuck Off And Die

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A month ago, Brad Miller and a dozen other Congressmen — including House Financial Services Committee Chair Barney Frank — wrote the Financial Stability Oversight Council to ask that they look into the systemic dangers of foreclosure fraud. The letter requested that three very specific things be included in upcoming stress tests and overall consideration of the systemic threat this represents to the economy:

  1. Examine random collateral loan files to see if they include all required documents, notably the note, the mortgage, and documents recording the assignment of the mortgage
  2. “Examine the servicing of first mortgages by servicers that hold second liens … [as some people contend] there is an indefensible conflict of interest for servicers of securitized first mortgages to hold second liens on the same property”
  3. Consider using the authority of Dodd-Frank to “require that financial companies divest affiliates or other holdings involved in servicing securitized mortgages”

Timmeh Geithner just responded to that letter. His response makes it clear he actually read Miller’s letter — because he references the first item I’ve laid out above, though rather than actually respond to that request, he describes what the FSOC is actually doing instead of examining collateral loan files. His response to the second and third requests is even more insolent; he refuses to even repeat the second one, and rather than consider either one seriously, he just says FSOC will take action “if abuses are found.”

Here is Timmeh’s response to Miller’s request that the Council examine random collateral files:

With regard to your suggestion of examinations of financial institutions by FSOC member agencies, these reviews are currently ongoing as part of a foreclosure task force formed by the Administration in early September.

[snip]

The main objectives of the task force are to determine the scope of the foreclosure problems, hold banks accountable for fixing these problems, protect the homeowners, and mitigate any long-term effects this misconduct could have on the housing market.

Note that even though Timmeh admits the banksters have engaged in “misconduct,” he makes no mention of holding them legally accountable. Instead, he simply repeats the Administration line that banks will “fix[] these problems.”

But rather than address Miller’s specific request — that investigators look at random collateral files — Timmeh describes how the investigators will examine other things, and then boasts of the (inadequate) number of investigators on the job.

Regulators are conducting onsite investigations to assess each servicer’s foreclosure policies and procedures, organization structure and staffing, vendor management, quality control and audit, loan documentation including custodial management, and foreclosure prevention processes. The task force is also closely reviewing related issues that include loss mitigation, origination put-backs, securitization trusts, and disclosure put-backs.

These examinations are extensive and resource intensive. For example, the Office of Thrift Supervision has approximately 80 examiners on-site at their four servicers, and the Office of the Comptroller of the Currency has 100 examiners at the top eight national bank servicers.

Now granted, some of the things the FSOC is investigating might cover Miller’s request. “Loan documentation including custodial management” might get at the issues Miller specifically requested FSOC examine. But Timmeh makes absolutely no promise that these 20 examiners per non-bank servicer or 8 examiners per bank servicer (Really, Timmeh!?!?! You think 8 people can investigate Bank of America’s morass?!?!) will actually look in detail at the actual loan files, much less a randomly selected collection of loan files.

That’s enough of a non-answer.

But here’s how Timmeh summarizes Miller’s two other requests.

You also suggest that the FSOC consider the potential risk associated with the role of large financial institutions in the servicing of mortgages and to consider requiring these firms to divest of their servicing affiliates.

Note what phrase Timmeh doesn’t utter there?

“Second lien.”

That little matter of the half a trillion dollars in conflicted exposure these banks have, which goes to the heart of the reason this is systemic issue.

In fact, Timmeh doesn’t utter the phrase “second lien” anywhere in his letter. It is, apparently, the elephant in the bank vault that shall not be named, for fear Timmeh would have to acknowledge the magnitude of the problem. Timmeh apparently wants to spin the problem of second liens as nothing more than part of the size of the institutions in question, and not the very real conflict of interest that provides motivation for all the foreclosure fraud Timmeh doesn’t want to criminally prosecute.

And while Timmeh does use the word “divest,” here’s his actual response to Miller’s description of the very real and very avoidable problem of having the banksters service the loans that threaten to expose their insolvency.

As you suggest, the Dodd-Frank Act also provides the FSOC, and its member agencies, with a variety of tools to recommend heightened prudential standards and take other remedial actions when necessary for financial stability. With that in mind, the FSOC and its member agencies will remain critically focused on working with the foreclosure task force, and will use all appropriate authorities available to them if abuses are found.

So while Timmeh can manage to at least utter “divest” (unlike his apparent allergy to “second lien”), when push comes to shove, he won’t admit that FSOC has the ability to force bankster to divest of a part of their business. More importantly, he envisions using the power granted him under Dodd-Frank (and remember, Frank is one of the recipients of this letter) only “if abuses are found.”

Because it would be too much to ask for Timmeh actually take an obvious proactive move to fix one of the problems weighing down our housing market and with it our entire economy. I guess if he did, he might actually have to think about those second liens he’s refusing to acknowledge.

It Starts With: “Hello. I am a Prosecutor in Nigeria …

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[Ed. note: Mary provides some background on what may be up with Nigeria’s announced plan to charge Dick Cheney.]

… ready to sue your Vice President. Please send 130 Million Dollars by reply mail to …”

After the news about charges against Dick Cheney relating to the Nigerian bribery scandal it may be worthwhile to sip some coffee and swap clues on what the heck might (or might not) be going on. Let’s start with a little background on one sliver of a very complicated matter.

In 1995-2004, KBR was involved in a joint venture in Nigeria that included KBR/Halliburton; a Dutch subsidiary Snamprogetti Netherlands B.V/Italian parent ENI S.p.A. (aka Snamprogetti, ENI), a Paris-based oilfield engineering company Technip S.A., and a Japanese company, JGC. The joint venture set up some special purpose corporations (not that unusual when companies joint venture) in Portugal (okay, maybe they don’t always use Portugal). The business entities and structures are pretty much oversimplified here, but since these pretty much track the pleas deals the Department of Justice worked out, let’s not make it more complicated.

This joint venture wanted to split up some liquefied natural gas (LNG) contracts in Nigeria that were going to be worth around $6 billion to them.  Those kinds of big contract almost always get split up, for various (and some actually pretty darn good) reasons.  When the “TSKJ” group was trying to get the liquefied natural gas (LNG) contracts, their bidding rival was another consortium, BCSA (Bechtel, Chiyoda, Spibat, Ansaldo).

Not to jump around, but for context, you need to know how the Nigeria scandal (arrangements to bribe Nigerian officials to get the LNG contract)  was “exposed.”  A former “Director General” of Technip, Georges Krammer, was accused of wrongdoing in a different deal (involving France’s Elf) and argued that he was just following company policy.  Supposedly, Technip hung him out to dry and he decided to return the favor by offering up info against Technip, regarding deals that included the Nigerian LNG bribes.  .

When the French began investigating, the Swiss and US and Nigeria also started investigations.  If, by investigation, you mean the thing that happens when you throw a hunk of raw meat into a pen of well fed dogs and see which one grabs it and growls loudest, whether it plans on doing anything much with it or not.  Read more →

Senate Banking Commitee on Foreclosure Fraud

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Follow along on CSPAN or the Committee Site.

Dodd started by noting the increasing evidence that foreclosure fraud is a giant mess, both by referencing the Bank of America testimony that notes did not get sent to trusts during the securitization process, and by noting that the estimates for how much this may cost the bank have gone up, to $134 billion.

Btw, it’s not part of the hearing, but consider this stat:

Housing and aggregate demand have not recovered because nearly 15 million owners are estimated to owe about $771 billion more on their homes than they are worth.

That basically means that roughly 15 million families have had a $51,000 tax imposed on them, largely because of the bank-created inflated prices.

Thus far, FDIC head Sheila Bair has said that second lien-holders need to take a hit, and Fed Governor Dan Tarullo has said that banks will need to provide estimates for expected putback losses.

OCC Acting head John Walsh says they’ve got 100 Bank Examiners investigating foreclosure fraud.

John Walsh, in response to Dodd’s question about why the regulators have been so delayed, said, “We were conducting horizontal exams in 2008, saw rise in complaints, there were clear deficiencies. We were pushing servicers.” No. He hasn’t explained why they haven’t done anything about these deficiencies.

Tarullo: The attention was focused on pace of modifications, not on the process itself.

Shelby to Tarullo: When did you first learn of the problems.Tarullo: When Ally came to us the day before the public announcement.

Shelby: Are we close to solving problem. Tarullo: Related to relative balance of foreclosures to mods. Need integrated approach.

Shebly: They have standards.

Tarullo: No, the banks are required to have their own processes. Race to foreclose among owners, but be standardized.

Reed: Should 100% of loans be evaluated for mod.

Bair: We think a global settlement.

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SEC Inspector General: Yes, BoA Got Special Treatment

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The WaPo reports that an SEC Inspector General report shows that the SEC gave Bank of America lenient treatment when it fined BoA for its funny business surrounding the Merrill Lynch acquisition, but did not place limits on BoA’s ability to issue securities that would normally be placed on a firm that violates securities law.

The inspector general found that the SEC showed leniency in the first settlement. He did not find that Bank of America’s status as a bailed-out bank affected the settlement’s price tag. Rather, he found that the SEC exempted Bank of America from other sanctions.

Like many of its competitors, Bank of America has long enjoyed a special status with the SEC that allows it to issue securities more easily.

Customarily, a firm that agrees to settle violations of securities law related to disclosures would lose this special status, thereby penalizing the firm with a lengthier and costlier process for issuing securities.

In settlement discussions with the SEC, Bank of America asked to retain that special status. The SEC, at first, declined, insisting that firms that violate the disclosure requirements of securities laws must suffer the consequences of those actions.

The agency reversed course in a last-minute meeting with Bank of America before the full commission voted to approve the settlement.

“In this meeting, BofA argued that the dire state of the financial markets made it critical that it be able to raise money quickly” by issuing securities, according to the inspector general’s report.

SEC officials decided to allow the bank to retain the special status because it had received taxpayer bailouts and “it would not be in the interest of the market or investors to prevent them from getting to the market,” according to the report.

This first settlement, btw, was the one Judge Jed Rakoff rejected, saying this of the settlement itself:

Overall, indeed, the parties submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the façade of enforcement and the management of the Bank with a quick resolution to an embarrassing inquiry…

Mind you, this IG finding appears to represent the facade of oversight. In addition to finding the teeny fine and the way it was assessed to be no problem, SEC’s IG also had no problem with the way Treasury and the Fed were involved in the merger of BoA and Merrill Lynch.

The whole thing sort of makes you wonder about what other special treatment BoA has been getting all this time, all in an effort to avoid admitting that it is insolvent. Maybe Julian Assange can help us out there?

Fines and “Resolving this Mess”

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Yves does a thorough smackdown on the departing Michael Barr’s description of all the things the government is going to get to the bottom of the foreclosure fraud problem, noting that the foreclosure task force simply isn’t investigating the problem in enough detail to understand, much less solve, the problem.

But I wanted to look just at Barr’s language, both in his interview with Felix Salmon and in his presentation to the Financial Stability Oversight Council yesterday. Here are the five things he described as the key focus of the Foreclosure Working Group:

  1. Determining the scope of problems
  2. Holding the banks accountable for fixing these problems
  3. Making sure individuals who have been harmed are given redress and that firms pay penalties where appropriate for their actions
  4. Getting the mortgage servicing industry to do a better job for households in financial difficulty by providing alternatives to foreclosure
  5. Acting in a coordinated and comprehensive way to hold the firms accountable, bring clarity and certainty, and help households

Note, already, the choice of language here. The working group will “hold the banks accountable … for fixing these problems.” The firms will “pay penalties where appropriate for their actions.”

Barr uses the language the federal government has been consistently using since the scope of this problem became widely clear, in which the government envisions “holding banks accountable” by forcing them to operate effectively going forward, while making right the crimes of the past. Nowhere, in his presentation to the FSOC at least, does Barr envision holding the people who committed fraud accountable. In fact, there’s a lovely detail at 7:54 where Barr describes that the process is designed to assess whether affidavits and claims “are accurate.” Now, the government learned sometime since May–six months ago now–that they are not. But they have not yet prosecuted anyone for fraud. Which leads me to believe that when Barr says “assess whether affidavits are accurate,” he means, “assess whether they accurately reflect the state of the loan,” and not whether “the claims made by robo-signers are in fact true.”

And besides, how in hell could the government give those who have been harmed redress if the government is only reviewing a select subset of the loan files? Is the government going to provide everyone who believes they were screwed some legal aid to prove their claim?

Now compare what the soon-to-be-gone Barr told the FSOC in its kabuki public session with what he told Salmon.

And keeping everything coordinated is the new Financial Fraud Enforcement Task Force which has been put together under the leadership of Justice’s Tom Perrelli.“Why are we investing these resources and including Tom Perelli in the discussions?” asked Barr. “We’re holding the banks accountable to fix it.” I asked him whether he thought that was even possible. “Their conduct suggests they can’t,” he said, adding that “they can be held accountable for not following the law. HUD can assess significant fines on them.”

Barr was clear about what he expected to happen in 2011. Specifically, he said, “if there are legal violations found, banks are responsible for fixing them and for addressing the problems.” And more generally, the government’s actions “will increase the chance that when foreclosures happen, they will happen according to established law.”

After listing all the investigating going on, Barr stresses they’re coordinating with DOJ’s Financial Fraud Task Force. Why are they including the FFTF (which, btw, seems to focus primarily on origination fraud)? As a way, Barr explains, “to hold the banks accountable to fix it”–echoing that same formula of holding banks accountable to fix problems, but not to be prosecuted for committing fraud. Now jump ahead to where Barr describes how they can be held accountable: “they can be held accountable for not following the law. HUD can assess significant fines on them.” Let me repeat, again, that HUD has been aware of the foreclosure problems since around May and has thus far levied no fines. More importantly, note how (at least in Salmon’s presentation) Barr jumped from having DOJ hold the banks accountable to HUD doing so? Either Barr doesn’t believe DOJ has the power or the will to hold banks accountable and he reverts to fines as the magical way the federal government will holds the banks accountable. And the outcome of all this? To “increase the chance that when foreclosures happen, they will happen according to established law.” Not, “to make sure we restore the integrity of the property system,” but to increase the overall odds but not guarantee that when a family is thrown out of its home, they were done so legally.

Barr doesn’t even envision ending foreclosure fraud! He just envisions making it much less likely, shifting the odds somewhat from the stacked odds the banksters currently enjoy.

Read more →

FSOC’s 15 Minutes to Save the World

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As I noted, the Financial Stability Oversight Council is meeting today. As announced, they discussed foreclosure fraud and securitization.

For less than 15 minutes.

And then they moved on, without once raising the issue of whether or not the banks’ exposure due to securitization problems posed a systemic risk to our financial system.

As the first order of business in the public session (the Council had an hour of private business before the public session), the departing Michael Barr reviewed what the “foreclosure working group” was doing about the problem. He noted that there seemed to be problems, but described that onsite examiners were collecting information and would not be done doing that until the end of the year; they’d issue a substantive report in January. He did, however, say that there had been significant putbacks and he expected them to continue.

And that was it. Timmeh Geithner asked if anyone had questions. And no one did. No one asked, “What do you expect will happen between now and January?” No one asked, “Do you think this is systemic?” No one asked, “What kind of exposure are we talking about here? Are the banks insolvent?”

No one even pointed out that existing home sales were sliding again, at least partly because the banksters couldn’t sell their foreclosures and partly because consumers weren’t stupid enough to buy them. So no one mentioned that waiting until January may not be so smart, as nothing is getting fixed in the meantime.

Now perhaps they did ask these questions during the hour of private business before the cameras started rolling. Perhaps they spent the hour before we got to watch screaming “hair’s on fire, hair’s on fire, hair’s on fire,” before taking a sip of tea, and then performing a complete lack of concern about this. Perhaps they talked about how serious this might be before we were allowed to watch, not wanting to concern the markets (which are busy freaking out, in any case, about a run on Europe’s banks).

But the optics of it–this apparent lack of concern about the way the banks will postpone admitting to their own insolvency by degrading the private property system in this country at the expense of real people–suck. They sure provide zero confidence that the FSOC intends to do its job to prevent this from becoming a systemic crisis.

Update: Felix Salmon has a good article describing where Michael Barr thinks this is all going.

Me? I’m w/Salmon. This isn’t going to fix things. Note, particularly, that Barr (who is probably one of the more aggressive folks at Treasury on this, at least for the next two weeks) is still just talking about fines, not prison.

Michael Barr–Liaison on Foreclosure Fraud Investigation–Leaves Treasury

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Just one week ago, Iowa’s Attorney General Tom Miller told Chris Dodd that Assistant Secretary of the Treasury for Financial Institutions Michael Barr was the key person from Treasury working with the Attorneys General investigation into foreclosure fraud.

Miller: We haven’t had any contact with the [Financial Stability Oversight Council]. We have had repeated contact with the Department of the Treasury, with Assistant Secretary Michael Barr and his staff. We’ve developed a terrific ongoing relationship with them. We talk about these issues and try and help and support each other on these issues. So we’ve had a lot of discussions with Treasury but not with that particular Council.

That’s funny. Because Barr is leaving Treasury. Imminently.

Diana Farrell, deputy director of President Barack Obama’s National Economic Council, and Assistant Treasury Secretary Michael Barr are leaving the administration, adding to the turnover in the ranks of the White House economic team that worked on the government’s response to the worst financial crisis in more than 70 years.

Farrell will leave by the end of the year and Barr’s last day at Treasury will be Dec. 3. Both played key roles in shaping Obama’s financial regulatory overhaul plan, which was signed into law in July.

[snip]

Treasury spokesman Steve Adamske said Barr would continue his academic career at the University of Michigan in Ann Arbor.

(Note, Barr is not currently listed as teaching next semester.)

In addition to working with the Attorneys General “investigating” the banksters’ foreclosure fraud, Barr had been considered a leading candidate–after Elizabeth Warren–to lead the Consumer Finance Protection Board and/or the Office of the Comptroller of the Currency (the agency that regulates the big banks) and (as the Bloomberg piece makes clear) had a key role in Dodd-Frank.

As you recall, the same day that Tom Miller told Dodd he was working closely with Barr, at almost the moment when Miller said the investigation would take months, sources that sounded an awful lot like the banks were suggesting a deal on the “settlement” ending the “investigation” was close. But even that article didn’t seem to suggest it’d be done by December 3.

Also note, the Financial Stability Oversight Council–the entity set up by Dodd-Frank to stave off systemic crises–meets on Tuesday; they promise to address efforts so far on the foreclosure fraud problem.

The group will provide an update on what various agencies are doing to investigate widespread paperwork problems that have called into question millions of foreclosures across the country, as well as how regulators are coordinating with the Justice Department, state attorneys general and other officials scrutinizing the mess.

Mind you, I don’t know what Barr’s departure means. But I find it notable that–after recently being floated for key positions going forward and given his role in efforts to respond to the foreclosure mess–he is leaving now.

Oversight and Investigation: “Why Should They Take You Seriously?”

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Yves Smith has a post laying out one of the most troublesome aspects of the response to the revelation of foreclosure fraud. As she explains, to conduct an “independent review” of its PR-servicing “review” of its own servicing practices, GMAC picked the lawfirm that has been in charge of its national counsel on servicing issues.

A Birmingham, Alabama law firm, Bradley Arant Boult Cummings, has been GMAC’s national counsel on real estate servicing matters for some time (see here for examples of some of the matters it has handled).

Curiously, Bradley Arant is one of the firms that GMAC engaged to conduct an “independent review” after its use of robo signing became public:

GMAC Mortgage is initiating an independent review of foreclosures in all 50 states and examining foreclosure sales nationwide to ensure procedures and documentation are accurate….

The firms hired to conduct the review are Sullivan & Cromwell LLP, Bradley Arant Boult Cummings LLP, Morrison & Foerster LLP and PricewaterhouseCoopers LLP, said a person familiar with the matter.

Given Bradley Arant’s long-standing and extensive involvement in GMAC’s mortgage business, how can it legitimately be part of the team conducting the review? It’s incentives will be to minimize any problems, for a host of reasons, the most important being so as not to ruffle a big meal ticket and to avoid the exposure of any issues that might create liability for the firm.

[snip]

Bradley Arant is certain to frame its examination as narrowly as possible and not consider potentially troublesome but germane questions such as who at the contracting organizations (LPS, Fannie, other servicers) might also be culpable.A broader look is key to understand who really bears responsibility. Foreclosures of securitized loans increasingly look to be what Bill Black would call a criminogenic environment, in which the major perps are deeply entwined and work together. And if caught, it is clearly in their best interest to cut loose the weakest, most dispensable actor in their tidy group, the foreclosure mill.

So in many ways, the selection of Bradley Arant makes perfect sense. It is familiar with the terrain, so it will be able to issue a plausible-sounding report. It is also so deeply part of this questionable backwater that it is highly unlikely to make a bottoms up investigation and potentially rock the boat.

Couple the prospect of law firms involved in the fraud conducting “independent” investigations of their own fraud with this exchange from Thursday’s House Financial Services hearing on robo-signing. Maxine Waters asks the Acting Comptroller of the Currency, John Walsh, whether or not OCC (which regulates the big banks) has imposed any penalties on the servicers for their fraud.

Waters: I asked earlier about whether or not fines had been levied from the Treasury Department [see that exchange here]. Let me turn to the OCC. Since we started experiencing the fallout from the subprime boom, has OCC taken any enforcement actions against servicers?

[long pause]

Walsh: We have certainly issued supervisory requirements on them, matters requiring attention and other things to remedy–

Waters: Have you levied any fines?

Walsh: I do not believe that we have.

Waters: Have you issued any cease and desist orders?

Walsh: I don’t believe that there have been any public actions against them.

Waters: Have you threatened to revoke any charters?

Walsh: No.

Waters: Do you think that the servicers really believe that you mean business if they don’t have to fear any consequences?

Walsh: Well, I think the consequences are quite clear and present to them. I mean that we can compel action and the threat of more serious penalties–

Waters: But you haven’t done that. You haven’t done any of that! Why should they take you seriously?

Walsh: The supervisory process is one that happens–does not mainly happen in the public spotlight. It happens in the dealings directly with the institution through the process of examination, matters requiring attention, and other things. Only when a particular problem is identified that rises to the appropriate level do we get into the area–

Waters: Let’s talk about examiners. If you have examiners onsite, can you explain how you don’t know about all the problems that have recently come to light? What do the examiners do?

Walsh: There’s, as I mentioned, our attention was focused on the modification process, it would be quite unusual for us to be in the room or present at the point where an affidavit is being signed or a notarization is taking place. We do rely on the systems and controls of the financial institution, its own internal audit, or any flags that raise the issue, like our complaint function. And unfortunately those did not raise an alarm about this process. [my emphasis]

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Both Dodd and Frank Call on Admin to Use Powers of Dodd-Frank

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DDay has a really important post that–along with a great interview with Brad Miller–includes a letter from Miller and other members of Congress, urging the Financial Stability Oversight Council to take action to prevent the foreclosure fraud problem from becoming a systemic crisis. The letter reminds the FSOC that Dodd-Frank gives them the power to avoid a systemic crisis.

An important purpose of the Dodd-Frank Act is to identify risks to the financial system as early as possible, so that regulators can take corrective action or minimize the disruption to the financial system that results from the insolvency of systemically significant financial companies. It is also a purpose of the Act to make risk to our nation’s financial system transparent in order to restore the confidence of the American people in the financial system and in their government.

And lists three things the FSOC should do to prevent the foreclosure fraud problem from becoming a systemic crisis:

  1. Examine a representative sample of loans to see whether they comply with legal requirements and pooling and servicing agreements.
  2. Determine whether the second liens servicers have on loans have led them to act contrary to the interests of the first lien holders.
  3. Require big banks to divest themselves of servicing businesses.

House Financial Services Committee Chair Barney Frank is one of the first ten people to sign this letter.

Put together with Senate Banking Committee Chair Chris Dodd’s call on Tim Geithner to consider how the FSOC can mitigate the risks of this crisis, you’ve got both Chairmen of the relevant committees urging the FSOC to do something about the potential systemic risk of this crisis. You’ve got Dodd and Frank, the two guys with their name on the financial reform bill, calling on the Administration to use the authority granted under Dodd-Frank to prevent another meltdown.

And thus far?

Crickets. From both the Administration and the media.