New Group to Probe Origins of Housing Bubble
by Brian Tumulty
WASHINGTON — The public should expect to see results within weeks from an effort to document criminal and civil violations at the root of the housing bubble, New York Attorney General Eric Schneiderman said Friday.
“Americans lost close to $7.5 trillion in home equity over the last five years,” Schneiderman said. “That’s where the wealth of the working class and the wealth of the middle class was. And that’s why we have to make sure we hold people accountable.”
Schneiderman, New York’s top law enforcement official, wouldn’t predict when any the architects of the housing bubble might go to jail.
“I can’t comment on the specifics of the investigation,” he said.
The investigation is being undertaken as part of a collaboration, announced Friday, among state attorneys general and federal agencies.
Schneiderman joined U.S. Attorney General Eric Holder and other officials Friday at a news conference to discuss the formation of the Residential Mortgage-Backed Securities Working Group.
Federal and state officials will target the creation, promotion and sale of the financial instruments that provided fuel for the overheated housing market and the run-up in prices. They will share information and staff while deciding which agency has the most appropriate jurisdiction to pursue criminal or civil charges.
“Mortgage-backed securities were, in many ways ground zero,” Robert Zhuzami, director of enforcement at the U.S. Securities and Exchange Commission, said at Friday’s news conference.
The promoters of these securities lied, cheated and misled investors, although not all of their actions broke the law, Zhuzami said.
The mortgage-based securities market is dominated by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which have been partly blamed for the housing bubble.
But the higher-risk mortgages, including interest-only loans, were packaged in private-label securities issued by firms incorporated as trusts, mainly in New York and Delaware.
Schneiderman and Delaware Attorney General Beau Biden have been leading the investigation into these instruments.
President Barack Obama announced during Tuesday’s State of the Union address that he asked Holder to form what he described as “a special unit of federal prosecutors and leading state attorneys general.”
Schneiderman, who serves as co-chairman, said the group will operate separately from negotiations to reach a financial settlement over abuses by the mortgage servicing industry — including making harassing phone calls demanding payments and filing false documents — after the housing market crashed.
Those abuses, involving homeowners who were behind on mortgage payments and faced foreclosure, involved hundreds of thousands of New Yorkers, according to Schneiderman. The abusive practices were most concentrated in Brooklyn, Queens, Nassau and Suffolk counties.
The formation of the Residential Mortgage-Backed Securities Working Group gives Schneiderman and other state attorneys general an assurance the pending settlement won’t pre-empt their investigation of the mortgage securities industry.
The Associated Press reported that the pending settlement involves the Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial.
Tumulty is a staff writer at the Gannett Washington Bureau.