Massachusetts Sues 5 Major Banks Over Foreclosure Practices

Attorney General Martha Coakley announcing the legal action.

PHOTO CREDIT:
Jodi Hilton for The New York Times

Original Source Article By GRETCHEN MORGENSON

As reported in the New York Times (and elsewhere), Massachusetts attorney general Martha Coakley sued the five largest mortgage lenders Thursday, seeking relief for consumers hurt by unfair and deceptive business practices.

The Massachusetts action not only creates significant new legal headaches for the banks named (Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and GMAC Mortgage), but it also diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials.

Also named as a defendant was MERS, an entity set up by lenders to speed property transfers by circumventing local land recording officials.

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Coakley and her investigators contend that the banks improperly foreclosed on troubled borrowers by relying on fraudulent legal documentation or by failing to modify loans for homeowners after promising to do so. The suit also contends that the banks’ use of MERS “corrupted” the state’s public land recording system by not properly registering legal transfers.

“There is no question that the deceptive and unlawful conduct by Wall Street and the large banks played a central role in this crisis through predatory lending and securitization of those loans,” said Ms. Coakley. “The banks may think they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”

AG Coakley has been among the most aggressive state regulators of financial institutions.  She has also conducted far-reaching investigations into predatory lending and securitization abuses.

Since 2009, Ms. Coakley has extracted more than $600 million in restitution and penalties from mortgage originators like Option One and Fremont Investment and Loan and Wall Street firms like Goldman Sachs and Morgan Stanley, which bundled loans into mortgage securities.

As Ms. Coakley made clear, her office doesn't accept the negotiating stance taken by the banks in the protracted settlement talks.

“When those negotiations began over a year ago, I was hopeful that we would be able to reach a strong and effective solution,” she said. “It is over a year later and I believe the banks have failed to offer meaningful relief to homeowners.”

Delaware, Nevada and New York have also objected to the direction the settlement negotiations were taking.

Kurt Eggert, a professor at Chapman University School of Law in California (an expert in mortgages and securitization) said the Massachusetts lawsuit was a significant step because it opened the banks’ practices to far greater scrutiny than they had been subject to.

“So far the servicers have escaped any real review or punishment for their bad practices because federal regulators have by and large given them a pass on whether they followed the law in foreclosures,” Mr. Eggert said. “This lawsuit argues that they haven’t followed the law and that they can’t just fix all their problems after the fact.”

Among the misconduct cited in the Massachusetts complaint were 14 cases of foreclosures by institutions that had not shown proof that they had the legal right to seize the underlying properties when they did so. All the banks also deceived troubled borrowers, the complaint said, about the loan modification process. For example, some banks incorrectly advised borrowers that they would receive priority treatment if they were more than 90 days delinquent on their loans. Other borrowers were misled when told that they must be more than two months’ delinquent to receive a loan modification, it said.

“If the state can go forward and do real discovery, it will be the first time that anyone has really dug into the servicers’ files to see what they have done,” he added. “The feds conducted an investigation where they looked at very few files, and here the state could demand to see a lot.”

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TOM’S COMMENTARY:

Much of what this lawsuit alleges is identical to the points which we have been making in fighting mortgage foreclosure cases for the last three years.

The banks DO try to use at best dubious (and frequently fraudulent) documents to put people out of their homes.  They DO trick people into foreclosure by telling them that they don't qualify for modifications until they are two or three months in arrrears in their payments.  They DO mislead and minipulate them in a thousand ways, large and small.  And MERS IS designed to mislead the homeowner and the public about mortgaes, which are supposed to be transparent (and used to be before Wall Street got involved in mortgages).

Many of the worst practices which led to the foreclosure crisis also took place decades ago in the Savings and Loan crisis, but the wrongdoers weren't prosecuted, so the abuses were repeated on a much larger scale during the real estate bubble.

It's time to dig deeply into these abuses, punish them to protect the economy from a third iteration of economic chaos, and give actual relief to homeowners.

Just my opinion.

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