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Let’s Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud

Let’s Set the Record Straight on Bank of America, Part 2: Eliminating Foreclosure Fraud


William K. Black and L. Randall Wray

Posted: November 5, 2010 01:23 PM

This is the second installment of a two-part series. Read the first here.

We have explained in prior posts and interviews that there are two foreclosure-related crises. Our first two-part post called on the U.S. to begin “foreclosing on the foreclosure fraudsters.” We concentrated on how the underlying epidemic of mortgage fraud by lenders inevitably produced endemic foreclosure fraud. We wrote to urge government policymakers to get Bank of America and other lenders and servicers to clean up the massive fraud. We obviously cannot on rely solely on Bank of America assessing its own culpability.

Note also that while we have supported a moratorium on foreclosures, this is only to stop the foreclosure frauds — the illegal seizure of homes by fraudulent means. We do not suppose that financial institutions can afford to maintain toxic assets on their books. The experience of the thrift crisis of the 1980s demonstrates the inherent problems created by forbearance in the case of institutions that are run as control frauds. All of the incentives of a control fraud bank are worsened with forbearance. Our posts on the Prompt Corrective Action (PCA) law (which mandates that the regulators place insolvent banks in receivership) have focused on the banks’ failure to foreclose as a deliberate strategy to avoid recognizing their massive losses in order to escape receivership and to allow their managers to further loot the banks through huge bonuses based on fictional income (which ignores real losses). We have previously noted the massive rise in the “shadow inventory” of loans that have received no payments for years, yet have not led to foreclosure:

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Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership

Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership


Posted: October 22, 2010 02:08 PM
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After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported:

A government review of botched foreclosure paperwork so far has found that the problems do not pose a “systemic” threat to the financial system, a top Obama administration official said Wednesday.

Yes, that’s right. HUD reviewed the “paperwork” problem to see whether it threatened the banks — not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud.

The Justice Department is leading an investigation of possible crimes involving mortgage fraud.

That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its “partnership” with the Mortgage Bankers Association (MBA). The MBA is the trade association of the “perps.” It created a ridiculous on its face definition of “mortgage fraud.” Under that definition the lenders — who led the mortgage frauds — are the victims. The FBI still parrots this long discredited “definition.” That is one of the primary reasons why — in complete contrast to prior financial crises — the Justice Department has not convicted a single senior officer of the large nonprime lenders who directed, committed, and profited enormously from the frauds.

Note that the Justice Department is not investigating foreclosure fraud. HUD Secretary Donovan’s statement shows why:

“We will not tolerate business as usual in the mortgage market,” he said. “Where there have been mistakes made or errors, we will hold those entities, those institutions, accountable to stop those processes, review them and fix them as quickly as possible.”

Note the language: “mistakes”, “errors”, “processes” (following the initial use of “paperwork”). No mention of “fraud”, “felony”, “criminal investigations”, or “prosecutions” for the tens of thousands of felonies that representatives of the entities foreclosing on homes have admitted that they committed. Note that Donovan does not even demand that the felons remedy the harm caused by their past fraudulent foreclosures. Donovan wants them to “fix” “processes” — not repair the harm their frauds caused to their victims.

The fraudulent CEOs looted with impunity, were left in power, and were granted their fondest wish when Congress, at the behest of the Chamber of Commerce, Chairman Bernanke, and the bankers’ trade associations, successfully extorted the professional Financial Accounting Standards Board (FASB) to turn the accounting rules into a farce. The FASB’s new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional “income” and “capital” at the banks. The fictional income produces real bonuses to the CEOs that make them even wealthier. The fictional bank capital allows the regulators to evade their statutory duties under the Prompt Corrective Action (PCA) law to close the insolvent and failing banks.

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