Sorry “Distressed Borrowers,” Politicians Steal Money; It Is What They Do

Perhaps some of you are old enough to remember the housing crash in 2008. And maybe you heard allegations that came out that banks had been engaging in mortgage fraud. There was even a giant lawsuit. Naturally, it has its own web page.

About the Settlement

In February 2012, 49 state attorneys general and the federal government announced a historic joint state-federal settlement with the country’s five largest mortgage servicers:

This bipartisan settlement will provide as much as $25 billion in:

  • Relief to distressed borrowers in the states who signed on to the settlement; and
  • Direct payments to signing states and the federal government.

It’s the largest consumer financial protection settlement in US history.

The agreement settles state and federal investigations finding that the country’s five largest mortgage servicers routinely signed foreclosure related documents outside the presence of a notary public and without really knowing whether the facts they contained were correct.  Both of these practices violate the law. 

What is odd about this giant settlement is that it was executed by an administration that, while talking big about mortgage fraud, has made a point of not doing much about it.

From the New York Time’s Dealbook:

Four years after President Obama promised to crack down on mortgage fraud, his administration has quietly made the crime its lowest priority and has closed hundreds of cases after little or no investigation, the Justice Department’s internal watchdog said on Thursday.

The report by the department’s inspector general undercuts the president’s contentions that the government is holding people responsible for the collapse of the financial and housing markets. The administration has been criticized, in particular, for not pursuing large banks and their executives.

“In cities across the country, mortgage fraud crimes have reached crisis proportions,” Attorney General Eric H. Holder Jr. said at a mortgage fraud summit in Phoenix in 2010. “But we are fighting back.”

The inspector general’s report, however, shows that the F.B.I. considered mortgage fraud to be its lowest-ranked national criminal priority. In several large cities, including New York and Los Angeles, F.B.I. agents either ranked mortgage fraud as a low priority or did not rank it at all.

The FBI received an extra $196 million just to investigate mortgage fraud in 2009 and 2011, but they still didn’t prioritize these investigations.

If you are surprised by any of this, you are part of the problem.

But it gets better (by which I mean, of course, worse). Many state governments simply took the money from the settlement earmarked for “relief to distressed borrowers” and spent it on other things.

Three nonprofit groups offering homeowner counseling sued Gov. Jerry Brown of California on Friday, demanding the state replace $369 million that had been earmarked to help troubled borrowers but was used instead to pay down the state’s debt.


California is not the only state whose officials have diverted some of the $2.5 billion that was supposed to help troubled borrowers. A report in October 2012 by Enterprise Community Partners, a nonprofit organization that promotes affordable housing, found that half of the 49 states in the settlement had used roughly $1 billion of the homeowner counseling money for other purposes, such as putting it into their general funds or toward nonhousing needs.

What is missing from the story is mention of any interest on the part of the Federal government in how these funds are being misused by the states. Since the Department of Justice was party to the lawsuit, courageously fighting on behalf of “distressed borrowers” (they assure us), then why aren’t they investigating?

My conclusion is that, as far as Holder’s Justice Department is concerned, everything is working as planned.

There was never any intention on the part of many of the states or the Feds to actually use the money it got from those banks for its stated purpose. This was all just a way that politicians could gain more money for the machine.

Whenever a company does something wrong, or is perceived to have done something wrong, the government swoops in to grab some more cash. It is looking for an excuse. And, as much as possible, it will keep the money for itself.

That being said, my dismal outlook may be a bit too cynical. I’m amazed that half the states only used the money for its stated purpose.