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The Daily Need

New task force to investigate mortgage-backed securities

Back in April of last year, we reported on the case of Charlie Engle, a professional ultra-marathoner who had been convicted and sentenced to prison time for lying on mortgage applications. It was a story originally reported on by New York Times columnist Joe Nocera, who questioned why the government had gone to such great lengths to prosecute Engle, while the lenders and banks responsible for the subprime mortgage crisis had not faced criminal punishment.

Could we finally see some of those prosecutions that Nocera and other critics have been calling for since the housing crisis?

During the State of the Union address earlier last week, President Obama announced the creation of a new “special unit of federal prosecutors and leading state attorneys general” to expand “investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.” The new effort, which has been formally dubbed the Financial Fraud Enforcement Task Force’s New Residential Mortgage-Backed Securities Working Group, is being co-chaired by New York Attorney General Eric Schneiderman.

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Partially fueled by his original refusal to sign on to the nationwide settlement with banks in the wake of the robosigning scandal, Schneiderman has been heralded by some liberal groups as a great progressive hope. Writing in Politico last November with Delaware Attorney General Beau Biden, Schneiderman described the need for “a more comprehensive investigation before the financial institutions at the heart of the crisis are granted broad releases from liability,” a call echoed by many critics who saw the potential deal between banks and the State Attorneys General as not being punitive enough.

But more than three years since the collapse of Lehman brothers in September 2008, and more than two years since the establishment of the Financial Fraud Enforcement Task Force in November 2009, some critics are still skeptical of what will be accomplished by the creation of a new unit.

Neil Barofsky, who was Special Inspector General of the Troubled Assets Relief Program and now a senior fellow at NYU Law School, told WNYC last week, “of course it’s a good thing to take a second look and to perhaps use some of the more flexible state laws to look to see if there is criminal conduct and to bring those people to justice. But with that said, this reeks a lot more of political opportunism than a new chapter in the investigation of financial fraud.”

At a press conference last Friday, Schneiderman heralded that unique state and federal collaboration as being crucial to the task forces’ success. “Having all of us together enables us to go places where each of us individually could not go,” he said.

The new task force will be focused on “securitization-related origination conduct,” according to Housing and Urban Development Secretary Shaun Donovan. Donovan made clear that he saw this effort as separate from the mortgage servicing settlement that is currently being negotiated with State Attorneys General and Banks, and in fact more central to addressing the issues that actually caused the financial crisis. “[O]rigination and securitization was the conduct that really led to the crash. The service of the mortgages compounded the harm, but didn’t create it… the issues that we’re looking at here really are the larger issues,” said Donovan.

Schneiderman added that there’s a recognition by the financial services industry that ”we know what they did, they know what they did, they know we know what they did – and we’re putting our resources together to do this.”

Charlie Engle, whose case has been heralded by the existing federal task force, has been serving a 21-month sentence since last February. But just last week his attorneys filed a motion asking for a new trial, alleging prosecutorial misconduct. As the News-Record reports, Engle’s attorneys argued that “misleading and incomplete testimony was offered in the Grand Jury, perjured, incomplete and misleading testimony was offered at trial, and exculpatory evidence was systematically suppressed and withheld.”

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