October Surprise Lawsuit or Template for Holding Wrongdoers Accountable in the Mortgage Crisis?

A security is a contract that can be assigned a value and traded – something Wall Street does all the time.  It may be a bond or a share, and backed by something of value, such as a mortgage.  When you hear or read about “mortgage-backed securities” you are reading about contracts backed by mortgages.  In reference to the housing bubble collapse and economic meltdown of 2008, these are often mortgages of dubious value that were sold by the mortgage-originator, a financial lender, and then pooled and “securitized” and re-sold to investors. 

And when you hear or read about the lawsuit filed October 1, 2012 through Attorney General Eric Schneiderman’s Office, you are finally hearing about some of the baby steps of government trying to do something (late in consideration of the statute of limitations and when much of the deception and the bulk of the harm was done) to hold those allegedly engaged in illegal and deceptive mortgage contract conduct accountable.  The suit focuses on making investors, who purchased mortgage-backed securities, not the now-foreclosed upon homeowners duped into many of these fine-print fairy tale mortgages, whole. 

The state-federal coalition known as the RMBS (Residential Mortgage-Backed Securities) Working Group set up in January 2012, and co-chaired by Schneiderman, has yet to do much to hold wrongdoers accountable (much less send anyone to jail), but apparently helped to bring this suit in which the federal coalition actors are not named plaintiffs.  Instead, the civil, 31-page complaint is filed on behalf of the People of New York through the AG’s office against J.P. Morgan Securities, LLC (f/k/a “Bear, Stearns & Co. Inc.”), JPMorgan Chase Bank, N.A., EMC Mortgage LLC (f/k/a “EMC Mortgage Corporation”).  Bear Stearns, before it was bought out by JPMorgan (at the federal government’s urging and with deal sweeteners) was a major and proud peddler of “mortgage-backed securities.” 

The lawsuit, a copy of which can be read here, asks for an accounting, disgorgement, restitution, unspecified damages, fees, and for the defendants and anybody affiliated with them from ceasing their behavior along these lines.  The Attorney General’s Office press release states that “Bear Stearns was well aware that its due diligence processes were fundamentally compromised by the massive number of loans that the company sought to have reviewed in very short periods of time.”

Even though this is a suit against only one major actor in the mortgage-backed securities market, the AG’s press release claims that it is a template for others to come and that:  “This lawsuit will bring accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy.”  That’s a tall order. 

And we shall see—because even though AG Schneiderman initially held out from and fought for better terms in the disgracefully small, 50-state-AG, $25 billion foreclosure settlement, this lawsuit also comes on the coattails of an earlier lawsuit filed by the NY AG’s Office in February 2012 with much fanfare against JPMorgan Chase, Bank of America Corp. and Wells Fargo & Co and MERS over their use of MERS—the Mortgage Electronic Registration Systems, Inc., and theoretically worth billions of dollars.  Shortly after filing, Schneiderman then partially settled the suit with some of the defendants for a pittance:  $25 million, or chump change on New York’s share of the trillions lost by American homeowners, investors, and communities throughout this crisis.   This latest suit could be a late-breaking template, or it could be, as several seasoned commentators following the mortgage crisis have intimated, an October surprise designed in part to curry favor with voters for the upcoming election.