HUD Concludes Five Largest Mortgage Servicers Defrauding Taxpayers after Two Month Investigation.

CORRECTION:  The HUD audit that found evidence of fraud was concluded two months ago, not that it was completed in two months.

Well this is interesting.  An two-month investigation by HUD finds extensive documentation errors when it comes to foreclosed properties going through the  procedure for reimbursements.  If HUD can find that in two months how actively do other regulators have to be in not finding problems?

Shahien Nasiripour has the story:

A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.

The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.

The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges….

The resulting reports read like veritable indictments of major lenders, the sources said. State officials are now wielding the documents as leverage in their ongoing talks with mortgage companies aimed at forcing the firms to agree to pay fines to resolve allegations of routine violations in their handling of foreclosures.

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

Some good responses on the internet.  Adam Levitin:

Second, the all-clear sounded by the OCC and Fed on the servicing front just isn’t credible. This is a major problem for the US financial recovery. Financial regulators are the guarantors of the credibility and soundness of the US banking system. The financial system is built on trust. In fall 2008, that trust disappeared and there was paralysis until the US government substituted its own credit for those of the major banks. But that’s a situation that no one wants to continue indefinitely. To ween ourselves off of the government, however, the market must be confident in the quality of the banks’ books. And that’s where the federal bank regulators’ credibility comes into play.

Yves Smith:

This revelation, that HUD audits of the biggest servicers over a mere two-month period, showed extensive fraud, is proof that abuses were extensive. It also establishes that the effort by Tom Miller to settle the 50 state attorneys general investigation quickly and and the recent “see no evil” Federal consent orders are a cover up. The fact that HUD found extensive misconduct over a similar time frame as the Foreclosure Task Force, which Assistant Treasury Secretary Michael Barr described as a ““11-agency, 8-week review of servicer practices, with hundreds of investigators crawling all over the banks” proves that the latter to be pure regulatory theater. And as we’ve noted, the Tom Miller-led effort has done no investigations, guaranteeing that the negotiators would have no bargaining power.

I’m curious about how this plays out.  The stalled 50-AG settlement should be put on hold until more is disclosed about what an actual investigation can get you. This finding by HUD should also tell skeptics that there is a there-there to these problems.  And hopefully it can give new AG investigations, like the newest one launched by NY AG Schneiderman’s on the process for mortgage securitization and foreclosures, a better roadmap on where to look for the problems that are choking our fragile housing market.