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Crime and Lack of Punishment

JAN 29, 2013 4:52pm ET
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WE’RE HEARING…makers of a PBS documentary believe regulatory officials should have done more to find executives involved in the massive mortgage-related securities losses taken during the downturn that they could successfully levy criminal charges against.

I came away understanding the frustration but also wanting to clarify that doing so is less important than implementing and enforcing reform of the system as a whole.

Sure, we all want to punish when things go wrong and we want what sounds like appropriate punishment. But a more disturbing point in the documentary that is not necessarily acknowledged and more of a priority is the fact that the problem was a systemic one.

Can you fairly punish or blame an entire system, and which part of the system do you single out?  

Certainly, groups like Occupy Wall Street and others have argued so that the sell-side securities market mentality in conjunction with lax mortgage underwriting between 2005 and 2007 are largely to blame.

But others like veteran Wall Street researcher and executive Mark Adelson tell us the causes are much more far-reaching and complex. And as one regulatory official grilled in the documentary points out, the ramifications of taking a sweeping enforcement action that could jeopardize a large financial system are enough to keep you awake at night. The documentary is dismissive of this point but I’m not.

What regulators should be blamed for is allowing this to occur on too large a scale, either because recent history shows existing rules weren’t sufficient or that they weren’t enforced well enough.

The latter is where the documentary’s main point holds some water. Identifying a “criminal” level of behavior and showing that one “can’t get away with it” has some merit. And the RMBS Working Group should live up to its promise to look into both criminal and civil actions, or do a better job of explaining why the latter are not as feasible as the former if indeed they are not.

But given that government resources are scarce, I think there need to be priorities, and for regulators this means putting an emphasis on preventing financial crimes going forward rather than retroactively.

When it comes to a systemic problem, reforming the system’s the main way to do this, and it needs to be done in consultation with the industry so that it’s feasible. These won’t and haven’t always been friendly discussions, but they don’t need to be completely adversarial either. Both should be aligned in wanting to avoid to the extent possible the kind of market-driven punishment suffered by consumers, the government and businesses during the downturn.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.

Comments (11)
The fact is, anyone or anyone company that chooses to pay a fine up front without going to court is prove of being guilty. Any Government entity willing to accept money in exchange of pressing felony charges is proof of being corrupt. The system is not complex, it's man made. Enough with excuses.
Posted by | Wednesday, January 30 2013 at 9:37AM ET
For me, a few things are becoming clear in the years after - and with many eyes looking at - how things unfolded in the secondary mortgage market 2003 - 2009.
1. It is shameful how our political parties used this crisis for political advantage to the point where it interfered with fixing a major economic crisis and millions of people suffered.
2. No economic system or finacial approach is perfect or risk-free. So when talking about "systemic" problems, it seems ALL systems have them. You are trading one set of risks for another. So the objective is not to eliminate systemic risk, it is what do you set up that is the most practical and the one that can be managed?
3. For me, the rampant fraud and willfull neglect in the many different checks and balances throughout the system far outweighs the systemic faults.
4. ALL sectors had major contributions to fraud and willful neglect:
- federal and state agencies in enforcement
- Congress and Administrative branches for not providing adequate oversight and resources to allow agencies to enforce good, comprehensive laws that were in place for years
- poor management, ethics, and oversight of key executive and managerial, origination, and sales staff - all areas of mortgage production and secondary market sales for lenders and Wall Street players and rating agencies.
- consumers who either blatantly lied about their information or took no responsibility for their ignorance and management of their own financial affairs.

If only one of these sectors did NOT contribute in a major way to the events that unfolded, the scale of the crisis in my opinion would have been far, far less than it was.

To continue to call for a complete overhaul of the system without recognizing the dynamic of what happened from each sector carries with it the risk of destroying what HAS worked well before the "perfect storm" of events combined. It is the wrong way to proceed.
Posted by | Wednesday, January 30 2013 at 9:48AM ET
The name of the documentary you wrote about was the "Untouchables" for a good reason. It clearly showed that the Department of Justice ignored easy to obtain evidence and witness testimony showing that high level bank executives clearly ignored stark warnings that loans being purchased were out of compliance with the banks own guidelines. The warnings were from the very people within their organization as well as outside vendors responsible for carrying out the banks fiduciary responsibilities. By choosing not to carry out their fiduciary obligations to the best of their abilities these executives raked in hundreds of millions of dollars in bonuses by deciding to allow 30% or more of the mortgages they securitized go to borrower's who's only requirement was to fog a mirror, as noted in the documentary. As measured in money, power and responsibility, these executives are the brightest and the best and they failed to put a stop to an out of control process. The systemic problem is not an unknown as you suggest, it continues to be that the money and power make certain people untouchable. We live in a country based on laws and if we fail to enforce them and punish the guilty in the most obvious cases of willful misconduct which created billions of dollars in damages then we will never implement them as intended prospectively as you suggested.
Posted by Robert R | Wednesday, January 30 2013 at 10:23AM ET
As far as mortgage and the housing collapse having programs for no doc, high ltv, low credit scores was a recipe for disaster. Top this off with those who are greedy, and when I say that I mean across the board equally working for banks as well as brokers.

I maintain had the government been doing their job in oversight we would not be where we are, but when you have Dodd and others taking sweetheart loans and lobbyists chumming up to Washington, what is the expected outcome?

Brokers have taken it on the chin along with good honest appraisers which in turn has increased costs to consumers. I have no problem with more discerning guidelines; my problem is that the new rules are fixing nothing. When a person is of the ilk to defraud and greedy, the new rules will be broken as well. When rules are written to pick winners and losers, they will not be useful.

A good example of how the rules don't work; LO's working for some banks are still talking to appraisers, appraisers talking to consumers, etc., particularly smaller banks. All the appraisal rule did was make sure brokers could not order appraisals from reputable appraisers and cause reputable appraisers to work harder for their money while the inept are guaranteed a handsome income.

My theory is that you cannot regulate honesty. I've said it for years. If your parents did not teach you right from wrong, the government is not going to do so.
Posted by | Wednesday, January 30 2013 at 11:07AM ET
Given the millions of examples of forgery, document fabrication, and perjury uncovered in the robosigning scandal, all of which are normally felonies, the failure to prosecute -except for a few small fish - shows a contemptible disregard by government for the public welfare.

It is incredible that none of the reforms address the fundamental flaw in the US home loan process. Virtually all originators are paid on commission, with an inherent bias toward closing the loan. But it is rare that any other financial professional (CPA, atty, CFP, CLU, etc) would have enough knowledge of the mortgage market to be able to tell the borrower whether the proposed loan is the most suitable option. Almost always, borrowers rely on the advice of the originators, with their inherent bias. Until loan origination becomes part of a collaborative financial planning process, borrowers will continue to be steered into inappropriate loans and/or rates.

The problem has been compounded by lenders deliberately designing loan programs -especially the Option ARMs - to be confusing and unintelligible to borrowers. [E.g., how many people know that most Option ARMs never disclosed the actual interest rate ("fully-indexed rate")? Lenders knew those loans were often going neg am from Day 1, but never quantified tht to borrowers.] Lenders were guilty of paying kickbacks such as 4+ point rebates that clearly violated the HUD standards, all to lure originators into steering their clients into loans that were the most lucrative on the secondary market, rather than loans that were most suited to the borrowers. Lenders repeatedly misrepresented to ARM borrowers that ARMs would be refinanced in the future, even when falling values (and rising balances for Option ARMs) made those representations knowing false at the time.

Finally, we know that the Wall Street securitization chain made massive and widespread misrepresentations to investors about the quality of loans within the MBS (now resulting in numerous multi-billion dollar settlements). Coupled with the phony ratings, Wall Street created a massive, artificial demand for RMBS that allowed lenders to sell the loans into securitization without recourse and thereby abandon any pretense of underwriting standards.

In view of all the foregoing the lack of any high-level prosecution is astounding and discouraging. So lenders persist with illegal foreclosures, knowing that there will be no consequences, even if they are caught. Crony capitalism at work.
Posted by | Wednesday, January 30 2013 at 2:11PM ET
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