If you were to read the news headlines and the fierce-sounding lawsuit filed by the Department of Justice against DeutscheBank on it “egregious” violations of FHA lending standards, you might be persuaded that Team Obama was getting serious about mortgage abuses.
Think again.
FHA lending was only a small portion of mortgage lending prior to the crisis and did not play a meaningful role in the implosion. A bit over $1 billion in possible charges ($386 million in losses and triple damages), even with treble damages, is a mere cost of doing business relative to the profits earned on mortgages in the bubble era. Moreover, as Marshall Auerback noted via e-mail:
God forbid they should sue an American bank. Because, of course, Wells Fargo and JP Morgan would never dream of introducing the kinds of “reckless” lending practices of the kind practised here by Deutsche Bank.
And indeed, the mortgage industry experts I’ve consulted confirm that there is no reason to think Deutsche was worse than other lenders. When, as Bloomberg notes, even the head of the Mortgage Bankers Association says the DoJ is probably looking at other banks, you know the conduct was widespread. Indeed, all the major mortgage packagers were buying drecky subprime originators in late 2006. You might argue some of them were trying to catch a falling safe, but Goldman and Deutsche also had ongoing synthetic CDO programs, which meant effectively betting against the market. And Bill Black points out this is a civil, not criminal suit.
US vs Deutsche Bank Filed 5-3-2011 – FHA Fraud
While it’s still better to have some enforcement rather than none, the FHA action is unlikely to be a sign of new-found seriousness at the DoJ, save possibly for other FHA-related litigation against other banks. As the suit recounts, the FHA program effectively outsourced loan underwriting to private firms and then guaranteed the loans due to the fact that the lenders had complied with a particularly strict and detailed set of program requirements. Direct Endorsement Lenders like Deutsche agreed to conduct due diligence on a loan by loan basis:
The Direct Endorsement Lender originates a proposed loan, or in some instances, acts as a spons~ing lender by underwriting and funding proposed mortgages originated by other FHA lenders known as loan correspondents. In either case, the Direct Endorsement Lender ultimatelr reviews the proposed mortgage. The borrower, along with the Direct Endorsement Lender’s representative, completes the loan application. A loan officer collects all supporting documentation from the borrower and submits the application and documentation to the Direct Endorsement Lender. The Direct Endorsement Lender obtains an appraisaL A professional underwriter employed by the Direct Endorsement Lender performs a mortgage credit analysis to determine the borrower’s ability and willingness to repay the mortgage debt in accordance with HUD rules. The Direct Endorsement Lender’s underwriter makes the underwrititing decision as to whether the mortgage may be approved for FHA insurance or not, according to HUD rules. If the underwriter has decided that the mortgage may be approved for FHA insurance in accordance with HUD rules, the Direct Endorsement Lender closes the loan with the borrower. Thereafter, the Direct Endorsement Lender certifies that the mortgage qualifies for FHA insurance. FHA endorses the loan on the basis of the Direct Endorsement Lender’s certification and provides the Direct Endorsement Lender with a mortgage insurance certificate.
There were considerably more procedures stipulated: what sort of borrower-level review had to be conducted, various quality control procedures (including monitoring initial defaults and taking corrective action if needed), certifications of individual loans and annual certifications of compliance with the overall program requirements.
Of the 39,000 Deutsche Bank originated loans guaranteed by the FHA, 12,500 defaulted. Historically, the strict documentation requirements of FHA loans kept default levels low. And some of the violations alleged, such as moving the lone audit staffer to origination and taking an outside audit report finding shortcomings and “literally” stuffing it in a closet unopened, would be awfully hard to minimize in court.
As Willem Buiter has noted in other contexts, self regulation is to regulation as self regard is to regard.
Eric Holder, in a briefing today, made remarks to the effect that if the mortgage settlement talks came to naught, he would bring prosecutions if there was a legal basis. Given that Eliot Spitzer’s criminal suit against AIG was depicted as a possible death knell for the company (funny, that, since AIG managed to do itself in with no official nudge), it appears pretty implausible that the bank-friendly Administration would take serious action against a major player.
Holder also said that there were “variety of positions that need to be harmonized.” Ahem. That means at the very best this lawsuit might be used to apply a bit of pressure to the Office of Criminal Capitulation Office of the Comptroller of the Currency. I’m cynical enough to believe that this is merely window dressing, regulatory theater to make the effort to put the mortgage crisis abuses in mothballs look like a serious effort at law enforcement.
26 comments
Comments are closed.
After reading an earlier article from the BBC US accuses Deutsche Bank of lying, a pattern of action from the Obama’s administration seems to be emerging:
1. Replace the CIA director
2. Kill Osama bin Laden.
3. Sue the bankers
How is this a pattern? It only seems to have one iteration…
Petraus is a general, in a few months will head the CIA, if confirmed. Consider the military-grade anthrax and the nano-thermite are of military origin, one would argue that to deal with internal issues of the USA, Obama administration first signal the change of focus from external problems like Iraq and Afghanistan to internal problems by bringing closure to the bin Laden issue. Beginning with DB and not BoA with a civil lawsuit may continue the Obama’s style of not rocking the boat too hard. Well, that a dangerous pattern, so thay may not going to sue all banks, but some banking interests not in the core of American establishments.
What the heck is nano-thermite? What would it be used for that regular thermite couldn’t do just as well?
Wikipedia can be your friend. http://en.wikipedia.org/wiki/Nano-thermite
The nano- version would react quicker, more effective, as the Surface Area of reaction increases: in reactions on surfaces, the rate of reaction increases as the surface area does. That is because more particles of the solid are exposed and can be hit by reactant molecules. Thus more heat generated per second and with less reactant, the steel beams can be cut.
Most law enforcement involves making an example of someone for the deterrent effect. We do not have enough courts or prosecutors, or indeed people willing to serve on the juries to try everyone. It has been this way since Prohibition. So particularly in white collar cases you pick some one and make an example of them as a warning that they might just get you. Look at the IRS and the offshore accounts. Convict a few and then run an amnesty program.
Don’t think finding a jury is the issue, with 9% unemployment people need the money and have the time. To find an impartial
jury, now that’s a problem!
IMHO it’s no accident the target was a German bank. Treasury/Regulator logic has been to avoid going after American banks since any large penalties translate into another future bail-out, so logically no legal actions.
Going after the Deutsche bank provides the ability to say the regulators/administration is tough and prosecuting.
It’s also interesting that the U.S. tax-payer was gamed directly. The next logical comparison would be Countrywide/BAC and Fannie/Freddie with loan put-backs. Wonder how the dollars compare?
RE Auerback’s comment
They’d never go after an American bank… FIRST
They tried something like that with Countrywide and failed spectactularly, didn’t they?
Its easiest (and maybe not so stupid, given the power of the US bank lobby) to go for the precedent setting case against the politically weakest. For one thing there’s less loss of face for the DOJ if they lose to the Germans than the home team.
A win against DB would be an inconvenience to the US bank lobby. If the DOJ is serious and recognizes this is a war of attrition, its not a bad move.
DB is unlikely to bend over for anyone in the US. If they lose they could make trouble for their American rivals (and the folks who tried to use them as the scapegoat). They’re committed to maintaining the level playing field Geithner’s always going on about.
So on the surface it appears that the DOJ and Treasury are at cross purposes.
Could the harmonization comment mean Obama is finally trying to reconcile Treas and DOJ objectives as reelection season and economic meltdown converge? Has the moment arrived to choose if Treas or the DOJ gets thrown under the bus?
Can it be retaliation for the DB decision to shed its BHC license and avoid having to raise capital for its US subs?
http://www.ft.com/cms/s/0/e5ed9e0c-6576-11e0-b150-00144feab49a.html
http://www.risk.net/operational-risk-and-regulation/news/2045284/deutsche-restructures-taunus-avoid-unnecessary-capital-movement
(1) Deutsche Bank sold illegal tax shelters and was fined $554 million.
(2) Deutsche Bank has now been found to have defrauded the FHA mortgage program.
(3) Deutsche Bank was bailed out through AIG in the amount of $12 billion.
(4) Deutsche Bank was probably bailed out on European loans through loans to the IMF.
I think its outrageous that no criminal charges have been filed against the management of this company and that U.S. taxpayers have been bailing these clowns out.
Seems like Deutsche Bank will be able to pay this fine/damages/etc – if any – from the money they got in the AIG bailout.
Or in other words, the taxpayer even pays the banks’ fines.
something cookin in the kitchen?
Bank of America’s Mortgage-Servicer Ratings Cut by Moody’s
http://www.bloomberg.com/news/2011-05-03/bank-of-america-mortgage-servicer-ratings-downgraded-by-moody-s.html
http://www.housingwire.com/2011/05/03/moodys-downgrades-bank-of-america-mortgage-servicer-ratings
Servicer ratings mean very little. They don’t have an implications for the parent bank.
Surprising it’s MortgageIT’s FHA loans that are being included in the suit. They were the poster-child for abusive Option ARM loans, offering brokers 3.75 points in rebate for “selling” the NegAM. That’s like putting crack out on the street for mortgage brokers. I wonder how those loans are performing today?
We have learned the lesson that any failure of banks is going to be paid by taxpayers. Together with unemployment rate it has a significant effect on the economy and housing market is not excluding. This domino effect doesn’t have boundaries.
Despite/because of being a German, I have no high regard for the DB mafia.
Still, these kind of legal problems come from a subsidiary they acquired and later closed down. Any knowledge of huch much of the transgressions went on before and after the acquisition and how much liability the sellers of the company and/or its former management might incur in this ?
I know it’s sound and fury…but as someone who deals with tenants in foreclosed properties, I was to see Deutsche Bank get nailed for something, anything. Their behavior is more than egregious.
I wonder if this has anything to do with Deutsche Bank suing our beloved Bank of America. Perhaps it’s an intimidation tactic to stop that suit from going forward.
Bank of America Sued by BNP, Deutsche Bank Over Notes (Update3)
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aIwJ6N5fgjk8
And the FDIC is just not a happy camper that BOA is suing them either. The circle is now complete.
BofA sues FDIC over Taylor Bean mortgage losses
http://www.reuters.com/article/2010/10/20/bankofamerica-fdic-taylorbean-idUSN2021282320101020
Decimal points don’t mean anything anymore either.
Because the point being made over and over is that the state defines reality according to state-defined necessity: the basis of imperialism.
If one wants to look how to go after corporate fraudsters, then look to how Spitzer did it to AIG. This is well recounted in the recent Fatal Risk: a Cautionary Tale of AIG’s collpse. This could be done now by either AGs or the DOJ. However, neither group appears to have grown a set to do so. Remember, the Pecora commssion didn’t start to over three after the crash of ’29, so there may still be time.
“The Justice Department didn’t file criminal charges or identify employees.
“Not every lie is a crime,”(U.S. Attorney Preet Bharara) said.”
http://www.bloomberg.com/news/2011-05-03/u-s-to-announce-lawsuit-over-deutsche-bank-unit-s-mortgage-practices.html
So . . . what about SEC Rule 10b-5 ?
“Rule 10b-5: Employment of Manipulative and Deceptive Practices”
IT SHALL BE UNLAWFUL for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
And Los Angeles is specifically trying to nail Deutsche Bank for its conduct toward tenants in foreclosed properties. See http://latimesblogs.latimes.com/lanow/2011/05/la-says-deutsche-bank-among-citys-largest-slumlords-files-suit-seeking-hundreds-of-millions.html?source=patrick.net#entry-6a00d8341c630a53ef0154321d1f75970c
Yippee!
http://www.marketwatch.com/story/germany-wants-concessions-for-backing-draghi-2011-05-01