Getting to the Bottom of the Housing Crisis

New Obama Administration Effort Can Hold Accountable Those Who Caused the Crisis

CAP’s housing experts detail how President Obama’s new mortgage crisis working group can bring order and justice to our housing finance system and help rebuild our economy.

New York Attorney General Eric Schneiderman speaks at the Justice Department in Washington, Friday, January 27, 2012, following Attorney General Eric Holder's announcement of the formation of the Residential Mortgage-Backed Securities Working Group. (AP/Cliff Owen)
New York Attorney General Eric Schneiderman speaks at the Justice Department in Washington, Friday, January 27, 2012, following Attorney General Eric Holder's announcement of the formation of the Residential Mortgage-Backed Securities Working Group. (AP/Cliff Owen)

Talk about critical timing. President Barack Obama’s newly formed mortgage crisis working group within the Department of Justice is charged with investigating fraud in the home mortgage market that led to the housing and financial crises and the Great Recession. The new group will begin its work just as state attorneys general from around the country are reportedly about to finalize negotiations with the nation’s leading mortgage servicers over a settlement for misconduct in the wake of the housing market collapse.

The president’s working group is officially known as the Residential Mortgage-Backed Securities Working Group and is led by New York Attorney General Eric Schneiderman. Its creation signals that the proposed mortgage-servicing settlement by the state attorneys general is just one part of a comprehensive strategy to prosecute the wrongdoings in the home mortgage market that created and deepened the Great Recession of 2007–2009 and still haunt our economic recovery. President Obama got it right when he announced the reasons for his new working group in his State of the Union address last week:

Tonight, I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.

Here’s what the new working group can accomplish.

First, it can help restore faith in our financial markets and institutions, not just through civil and criminal penalties but also by bringing to light the actions of individuals and financial institutions that contributed to the housing and financial crises. We cannot underestimate the importance of reinstilling confidence in a system badly damaged by opacity, from complicated loan products that neither borrowers nor investors understood to the difficulties faced by homeowners trying to work with lenders to save their homes. Investigating any fraud in this running crisis will make the home mortgage market a safe place for those who play by the rules, which in turn means middle-class families can again invest with confidence in their homes.

Second, the new working group will have the wherewithal to better coordinate investigations with the many different federal and state agencies to get to the root causes of the housing and financial crises. The working group includes representatives from several state and federal enforcement bodies that, together, oversee all areas of the mortgage origination and the securitization process. Says New York Attorney General Schneiderman of the new working group’s mission:

We’re undertaking a more coordinated effort to pull together all of the various strands of investigations relating to the conduct that created the mortgage-backed securities bubble and led to the market crash.

One of the vexing issues in resolving the housing crisis is the breadth of the problems. The various but interdependent parties involved operate in a regulatory patchwork. These interdependencies are part of the reason why there have been so few claims by the Department of Justice, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and other federal and state enforcement bodies targeting those whose misdeeds caused the crisis or made it worse. The president’s new working group can change that by fostering coordination between agencies and deploying the resources needed to investigate wrongdoings, hold the right parties accountable, and compensate households harmed by their misconduct.

Indeed, the third task of the new working group—finally holding accountable those responsible for any fraud in the home mortgage market—can go beyond the settlement between the state attorneys general and the mortgage servicers—Bank of America Corp., Citigroup Inc., Wells Fargo, JPMorgan Chase & Co., and Ally Financial Inc. What Schneiderman refers to as post-crash issues deal with how lenders and servicers treated their existing borrowers, particularly when they began to miss mortgage payments. This includes the infamous “robo-signing” of foreclosure paperwork. These abuses extended and deepened the foreclosure financial crisis for homeowners, neighborhoods, and communities, but they did not bring on the crisis. So Schneiderman is right to note that the ambit of his working group is not at all constrained by the anticipated settlement.

What’s more, reports indicate that the state attorneys general settlement will not release these five financial institutions from other liabilities. Schneiderman had previously expressed concern that the pending state settlement would not go far enough. But his recent appointments signal that any settlement is far from the end of the line. This means the new working group can focus on those responsible for the “pre-crash” abuses in such areas as origination, securitization, and fair housing and lending.

There are other reports that speculate that the bulk of the rumored $25 billion servicing settlement with the five financial institutions will be set aside for the reduction of principal owed by American homeowners. Mortgage principal reduction also figures prominently in the Obama administration’s plan to stabilize the housing market by making changes to the so-called Home Affordable Modification Program.

We look forward to more details from the new working group as it moves forward with its work. But recent news suggests that it will move aggressively to pursue those suspected of wrongdoing. Already this week, it has subpoenaed 11 financial institutions in relation to a mortgage fraud investigation. That’s why a broad range of progressive groups such as the National Council of La Raza and the National Urban League are supporting this initiative.

We, too, are optimistic. The president’s decision to pursue wrongdoing via this new working group at the Department of Justice is about more than just going after the bad guys. We believe it will prove to be a crucial step to restoring trust in our financial markets and institutions by making sure that all Americans play by the rules and helping those hurt by wrongdoing in the mortgage market. Putting the housing crisis well and truly behind us is one key step to helping rebuild our middle class so that sustained economic growth and broad-based prosperity can start in earnest.

Janneke Ratcliffe is a Senior Fellow at the Center for American Progress working on housing issues. Alon Cohen is a consultant for the Center on Housing. Jordan Eizenga is a Policy Analyst with the Economic Policy team at the Center.

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Janneke Ratcliffe

Senior Fellow

Alon Cohen