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Anatomy of a Federal Home Loan Crackdown

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Home loan lenders are once again in the crosshairs of federal regulators. The government is beginning a nationwide crackdown on home loan lenders for past crimes against borrower victims.

Whether or not these victims asked the right home loan questions before taking out mortgages is irrelevant. Criminals and unethical individuals are to blame for the housing bubble and subprime home loan crisis—not victims. Justice will be served once the individuals responsible pay for their actions. Unfortunately, justice is not always a constant in the world—even in America—despite these most recent lawsuits.

The Opening Salvo

U.S. Attorney Preet Bharara has filed a lawsuit against financial juggernaut Wells Fargo, accusing it of lying to the government about the quality of the home loans that it had the Federal Housing Authority (FHA) insure. Wells Fargo is alleged to have cost the government $190 million in losses.

In another part of the federal crackdown, Attorney General Eric Holder—along with the Justice Department—has charged 530 individuals with criminal home loan fraud that cost victims more than $1 billion in losses. A few of these individuals—interestingly, none of which were from the big three financial giants—have even been sentenced to jail.

While these efforts deserve commendation, they may be just another federal—even Presidential—show of force and strength, similar to what has already been seen on Wall Street. Regardless, government officials feel strongly about this crackdown.

“Each of these efforts sends the same message. That when it comes to harming homeowners, no one is above the law,” said Housing and Urban Development Secretary Shaun Donovan in a press conference with Holder.

Unfortunately for both Holder and Donovan, there may not be many home loan lenders on Wall Street who are quivering with fear.

None of the “banksters” from Wall Street who were responsible for the housing bubble bursting and the subsequent economic recession have been charged for the damage they wrought. In fact, in all likelihood they may never be charged now that it has been years since the financial crisis took hold. For all their huffing and puffing, the Justice Department seems unable to blow down the robust brick financial houses that bankers seem to be safely walled up in. Likewise, not a single person was named in the lawsuit filed by New York Attorney General Eric Schneiderman.

While the accuracy and success of the lawsuits is open to interpretation—the timing of their announcements is far too coincidental.

Coincidence

The country is less than a month away from the Presidential election. This recent burst of anti-bank lawsuits and crackdowns may be a simple ploy to show the government is tough on white collar crime. Even Holder noted the coincidental timing.

“The notion that this is a campaign event—I mean, there’s a logical break. This thing started with the fiscal year last year and ends with the fiscal year September 30. So we’re now reporting on what happened over the past fiscal year. That’s what this is all about,” said Holder in an interview with Businessweek.

While Holder can deny all he wants that this is simply not a move by the Administration to show it is tough on “banksters,” the timing of this course of action shows the contrary. The presidential election is less than one month away and Republican Governor Mitt Romney is riding a wave of restored morale in the wake of his victory over President Obama in the first Presidential debate. The President may have pressured his subordinates into leading this recent charge, but the issue may flounder and fizzle away along with public interest in due time—possibly after his reelection.

“These comprehensive efforts represent a historic, government-wide commitment to eradicating mortgage fraud and related offenses,” said Holder.

Perhaps it would be more just—at least in the eyes of victims—for convictions to actually be brought up against Wall Street. If convictions don’t happen then another home loan scam will inevitably occur again. If the Justice Department truly wants to make history, then perhaps it is time for several prominent bankers to serve their time in federal prison.