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Have Mortgage Giants been held Accountable in the $25 Billion Foreclosure Settlement?

Mortgage Fraud Exposed: Subprime Loans, Fraudulent Foreclosure Practices and Robo-Signings

The month of February has seen darks days for the largest mortgage companies in the U.S. Federal and state officials on February 9 announced a landmark $25-billion agreement with the nation’s five largest mortgage servicers to settle investigations involving foreclosure abuses and try to stabilize the housing market.

The deal would give $17 billion in relief to current homeowners, mostly by reducing the amount of principal they owe on their mortgages.

An additional $5 billion would be paid in cash to California and more than 40 other states as restitution for foreclosure paperwork problems, commonly referred to as robo-signing, and other improprieties by the servicers in the foreclosure process. Officials said hundreds of thousands of homeowners would probably get $1,700 to $2,000 each under that part of the deal -- an amount hardly sufficient given the agony they suffered due to mortgage fraud.

About $1.5 billion of the $5 billion would be distributed directly to people whose homes were foreclosed on from 2008 through 2011.

In addition, the five servicers – Bank of America Corp., JP Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. (formerly GMAC) -- agreed to spend about $3 billion to refinance about 1 million existing mortgages, most of those likely to be for homeowners whose properties are worth less than they owe on their loans. These five banks handle payments on more than half the nation's outstanding 27 million home loans and therefore have been at the center of the servicing and foreclosure abuses the settlement is supposed to end.

The $3 billion is the amount the servicers would lose on the refinancings, not the total amount of principal to be written down, which officials expect will be much larger. And as part of the deal, $1 billion will come from one of the servicers to settle other outstanding claims.

Federal and state officials will try to get another nine large mortgage servicers to sign on to the settlement, which could increase the deal to $30 billion.

Before you jump for joy and proclaim “Finally, the mortgage giants are being held accountable for their misdeeds that fostered in a period of despicable mortgage lending practices related to subprime loans and rob-signing foreclosures,” consider that the banks are not really putting up $25 billion. The only cash the banks are paying is a combined $5 billion, including $1.5 billion to compensate borrowers whose homes were foreclosed on from 2008 through the end of last year – in some cases without due process -- with the rest going to the federal and state governments to pay for regulatory programs. Most of the balance is in mortgage relief for stressed or underwater mortgage holders, including principal reductions, refinancings and other modifications.

Something else to consider is that many of the loans destined to be modified under the settlement aren't even owned by the banks, but rather by investors — the banks just collect the checks. The banks had long ago sold off millions of mortgage loans as mortgage-backed securities to unwitting investors such as pension funds, 401(k) plans, insurance companies and the like — parties that did not themselves engage in any of the wrongdoing covered by the settlement. Other investors such as Goldman Sachs are not so innocent because they sold off their holdings as securitized investments to third parties unaware of the risks.

Subsequent to the February 9 agreement, it was announced on February 17 that Citigroup has agreed to pay $158.3 million to settle U.S. civil claims that it defrauded the government into insuring thousands of risky home loans made by its CitiMortgage unit.

That settlement is unique in that it resolves claims under the federal False Claims Act against the bank, and arose from a "whistleblower" lawsuit brought by Sherry Hunt, a CitiMortgage employee in Missouri.

The United States joined the civil fraud case, which raised claims under the False Claims Act, a federal law designed to recover money taken from the government by fraud, and discourage further wrongdoing. Whistleblowers can receive up to 25% of settlement amounts in such cases.

Citigroup agreed to pay the $158.3 million to settle. Hunt said her share will be $31 million.

In settling, Citigroup accepted responsibility for conduct alleged in the complaint, dating back to 2004, admitting that it had misled the government into insuring risky home loans, according to settlement papers filed in U.S. District Court in New York. Investigators said the misconduct lasted for more than six years.

The civil fraud case is part of a crackdown by the Department of Justice against lenders it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold. That’s good news but I have to wonder whether it is too little, too late. Why in the world have these mega-institutions been allowed to get away with mortgage fraud for so long? After all, the first signs of such behavior were in 2008. Cynics would say that the delay was due to political factors. Realists say that the reason for action now is that the Obama administration can claim it is cleaning up the mess brought on before the President took office.

The ethical issues abound in the mortgage fraud scandal. In my view the most important is whether the American public should trust the banks and investment houses, such as Bank of America and Citigroup, to act as responsible corporate citizens. What about the Goldman Sachs' of the world that enabled the bad behavior by purchasing mortgage-backed securities and then re-selling them as securitized assets to unwitting investors left holding the bag.

To whom do these financial institutions owe ultimate allegiance? Is it to their shareholders who are mainly interested in maximizing their wealth? Is it to the homeowner who expects these institutions to act in the public good? Or, is it to the greedy interests of top managers, which seems to be the case and was the motivating force for improper lending practices that led to the financial meltdown? These are important questions and ones best left to a future blog.

Blog posted by Steven Mintz, aka Ethics Sage, on February 20, 2012