Settling for Injustice: The Conundrum of Mortgage Crisis Settlements


By: Ramona Ortega

This week Bank of America finds itself facing the largest fraud lawsuit thus far as a result of the mortgage debacle.  The Justice Department filed the complaint in Manhattan federal court on Wednesday, and powerhouse U.S. Attorney Preet Bharara, who led the charge against Raj Rajaratnam of the Galleon Group, is at the head of the effort. This is the second suit involving mortgage back securities filed by the government this month. The lawsuit stems from the role BOA and Countrywide played  in a scheme called the “Hustle”.  The Hustle was a scheme that originated and sold defected loans to Fannie Mae and Freddie Mac.

This case follows a template of similar cases.  Just earlier this month, the Federal Housing Finance Agency (FHFA) sued Wells Fargo for essentially the same scheme – losses on mortgage securities sold to the Fannie and Freddie. In September of 2011, seventeen financial institutions were sued by the FHFA. This lawsuit represents the sixth brought against a bank in the last eighteen months.

There is no doubt that big banks, mortgage brokers and even Fannie and Freddie must be held accountable for the widespread malfeasance and complete lack of accountability that permeated the housing market before the crisis.  However, after a string of similar suits – how many are enough to get it right?  To what extent do settlements serve their purpose as being deterrents?

The onslaught of federal and civil cases brought against several of the big banks represents the general outrage and disdain at the amount of impropriety that took place by institutions so central to the American infrastructure.  Once a respected and trusted institution, banks have become associated with distrust and greed.  The litigation fervor is not contained to government agencies or homeowners, as investors, including other investment banks, are suing each other over losses caused by the rampant deceit.

At some point, we must assess whether the general no-fault settlements, which have become par for the course, are essentially the cost of high stakes business for many of these institutions.  It also begs the question why we are not seeing more criminal charges being brought.  Given that at the end of the day fraud is stealing and a regular citizen faces jail time for intentional theft, one wonders if criminal charges might send a more definitive message than fat fines.

Several of the most recent actions focus on the widespread discriminatory practices of lenders and mortgage servicers.  Just last week, the ACLU filed suit against Morgan Stanley for predatory loans to African-Americans under the Equal Credit Opportunity Act.  In July Wells Fargo settled for $175 Million and Countrywide settled for $335 million, for the same types of practices, but the sums pale in comparison to the profits made during the height of the boom.  At its height, Countrywide alone was worth $500 billion.  For many of these working class African-American and Latinos who were already struggling to get by, the settlements do little to reconcile the long term impact these practices will have on their future economic mobility.

At some point the disillusion the public has with banks is not reconciled by just settlements, and we must rethink society’s relationship with institutions that no longer serve the distinct function of safeguarding our money but operate as self serving investment vehicles. Many of the real victims of these frauds continue to face foreclosure and hefty debt that will follow them for years.  The $25 billion agreement entered into by Attorney General Eric Schneiderman, and 48 other states, against the five largest mortgage servicing banks, including Wells Fargo, JP Morgan Chase and Citi for abusive servicing practices, seems like the most beneficial template for homeowners facing foreclosure.  By providing principal reductions, refinancing and direct payments to homeowners the agreement helps the real victims of fraudulent home schemes.

In the meantime, lawyers across the country will remain busy drafting complaints to be the next in line to represent a subgroup of people either victimized or defrauded by the mortgage fiasco, yet, the barrage of litigation seems to overshadow the true reform that is evidently so needed.


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Fordham Journal of Corporate & Financial Law