In last night’s State of the Union address, President Obama announced a potentially important new partnership between the federal prosecutors and state attorneys general who are investigating our nation’s mortgage crisis. Critically, the investigation will be chaired by New York State Attorney General Eric Schneiderman, who has spoken out on the need to hold banks accountable for predatory and risky practices, and who has used his office to help provide struggling homeowners with much-needed foreclosure prevention counseling and legal services. We applaud this move and will be watching closely to see that it succeeds in its promise of helping families and communities around the nation.
As the President explained: “I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”
This announcement offers hope that the long-delayed (and much-criticized) 50-state settlement talks over “robo-signing” by foreclosing lenders will be only a first step. The reported rumors surrounding the talks have suggested that a handful of major lenders (Bank of America, JPMorgan Chase, Wells Fargo, Citibank, and Ally Financial) would be required to contribute up to $8 billion for foreclosure prevention and refinancing efforts. This is in addition to setting aside $17 billion for principal reductions for underwater mortgages.
In exchange, the banks would receive waivers of liability for past unlawful practices. The critical question is how broad these liability waivers will be. If the banks are let off the hook, not just for “robo-signing,” but also for abusive and misleading practices in their loan origination and securitization, then there will be little leverage left to ensure future settlements that are better matched to the enormity of the current crisis. Attorney General Schneiderman has been a key critic of any deal that would let lenders off the hook, and his participation in this new effort is a positive sign.
President Obama also illustrated a keen awareness of the roots of this problem. As he said: “Let’s remember how we got here…In 2008, the house of cards collapsed. We learned that mortgages had been sold to people who couldn’t afford or understand them. Banks had made huge bets and bonuses with other people’s money. Regulators had looked the other way, or didn’t have the authority to stop the bad behavior.”
More than three years later, we are only halfway through our nation’s foreclosure crisis — but we have yet to see accountability for this misconduct. Instead, lenders have dragged their feet on helping to get borrowers back on track with their payments — despite the fact that foreclosure prevention will benefit families, communities, and the lenders themselves by helping the housing market to recover.
We need a serious investigation into the origins of this crisis. And we need federal and state authorities to leverage those investigations, and to press lenders to finally embrace the kind of large-scale modifications of failing and at-risk mortgages that must take place to dig us out of our economic malaise. We hope this federal/state initiative will help provide the leadership needed to steer us out of this crisis once and for all.