Mortgages: No Jail Time For Lenders
How many lenders have gone to jail as a result of the financial crisis? Other than Bernie Madoff and a few others, not many.
This is very different from the S&L crisis of the early 1990s. Back then, says the Financial Times, almost 1,100 S&L officials and 2,600 bankers literally went to jail. (See: Insight: A matter of retribution, September 3, 2009)
“There are precious few other financiers behind bars, or facing momentous fines,” says the paper. “Compared to the S&L days, the level of retribution so far seems almost non existent.”
(The numbers cited by the Financial Times came originally from a Justice Department special report entitled Financial Institution Fraud (June 30 1995) as cited in The Great Texas Savings and Loan Financial Debacle By Tom S. King.)
Actually, there are several reasons why so few mortgage lenders have wound up in jail.
First, predatory lending is not a federal crime. It’s perfectly okay under federal rules to sell a borrower who qualifies for an FHA loan a subprime mortgage with a higher rate and steeper costs. If that more expensive loan ultimately leads to foreclosure and bankruptcy, that’s a problem for the borrower — the loan officer, the underwriter and the originating lender were paid long ago.
Some would make the argument that the borrower is entirely responsible for the mortgage because he signed the paperwork at closing.
However, two attorneys who happen to have recently been HUD Secretaries obviously disagree with this line of thinking:
Alphonso Jackson: “I’m an attorney and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan.” (See: Jackson: Mortgage fine print not read, The Washington Times, March 20, 2008)
Mel Martinez: “You know if I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work’ to be done fixing the system.” (See: HUD Chief Seeks Simpler Sale Closings, The Washington Post, June 2, 2001)
It should be fairly obvious that many lenders took advantage of a large number of borrowers by steering them into loan products which were costly, unneeded and filled with gotcha clauses. How do we know? The Wall Street Journal studied mortgages from 2005 and found that 55 percent of all subprime borrowers actually qualified for conventional financing. By 2006, 61 percent of all subprime financing went to borrowers who qualified for better — and less expensive — mortgages. (See: Subprime Debacle Traps Even Very Credit-Worthy, December 3, 2007)
Second, insider trading may be a crime for stocks and bonds but that’s not the case for commodities such as oil futures or derivatives.
As Damon Silvers, associate general counsel for AFL-CIO, told Reuters, “the Commodities Exchange Act does not recognize insider trading as a violation of law.” (See: SEC, CFTC urged to align rules to police markets, September 3, 2009)
As the great songwriter Woody Guthrie wrote long ago, some people will rob you with a gun — and some with a pen.
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