NEW YORK -- New York Attorney General Andrew Cuomo’s widening investigation into whether wrongdoing contributed to the collapse of the U.S. subprime mortgage market is likely the first of many of its kind.
Real estate analysts and legal experts expect a flood of civil and criminal investigations to emerge as fallout from the turmoil spreads.
“We’re going to be seeing more criminal investigations and more civil lawsuits for some time to come,” said Mike Larson, a real estate analyst with Weiss Research in Jupiter, Fla.
Mike Shea, executive director of Acorn Housing, a national non-profit housing provider, said additional investigations by law enforcement agencies might serve as a deterrent in the future.
“We depend on having a sheriff in town to protect us from bad guys and we have to prevent this from happening in the future. How do you do that? If cracking down on the bad guys through law enforcement does that, then that’s where we have to get,” he said.
Cuomo has subpoenaed several big Wall Street banks, including Merrill Lynch & Co., Bear Stearns Co. and Deutsche Bank, in an effort to learn more about how these banks purchased, packaged and sold subprime mortgages. These mortgages, approved in thousands of cases to borrowers with bad credit, many of whom are now defaulting on their loans, are at the heart of the current troubles roiling global markets.
Cuomo is believed to be looking into how Wall Street bought and re-packaged these mortgages to sell to other investors, and whether they properly disclosed the risk that many of the underlying mortgages could suffer high default rates.
A spokesman for the attorney general’s office could not be reached for comment Thursday.
Last month, Cuomo filed suit against First American Corp., alleging that the big financial services company succumbed to pressure from lenders, notably Washington Mutual, to inflate home appraisals.
Richard Feinsilver, a foreclosure attorney in Nassau County, N.Y., said investigations like Cuomo’s could have a much-needed cleansing effect on the mortgage lending process.
On Wall Street, it could force big investment banks to “clean up their acts” in terms of the mortgage-backed loan products they bundle into larger securities that are then sold to other investors, according to Feinsilver.
That in turn would force mortgage lenders to tighten their requirements for borrowers, a move that would reduce the number of risky loans made in the first place.
“I think what he wants to do is prevent this from happening again. And if he can rattle enough cages to force action at the point of origination, it should clean up the entire process and meet his goal because the underwriting criteria will be more realistic,” said Feinsilver.
Easier said than done, however.
Big Wall Street banks have lots of attorneys who could tie up a complicated investigation like this for years, Feinsilver said. So Cuomo has to be in this for the long haul.
“I’m hoping that this is not just a sound bite,” he said.
Larson said Cuomo’s investigation into appraisals could prove more fruitful than his probe of Wall Street banks.
“It’s been an open secret that appraisers have been under pressure to play ball on home prices when lenders come to them,” he said.
Indeed, the Appraisal Institute, a trade group, conceded that problems existed when Cuomo announced his suit last month.
Added Larson, “Clearly something is broken in the appraiser/lender/broker relationship. That’s what he’s digging into. If he can pursue this far enough, I think there were bad actors and bad players in this market who deserve to be stopped.”
Wall Street, meanwhile, poses bigger problems.
It will be difficult for Cuomo to determine whether bankers were “just greedy and careless, or if it was criminal,” said Larson. “He’s got a tougher case to make there. There’s lots of disclosure involved in the bundling and sale of mortgages, and you’re dealing with sophisticated investors. So that’s a tougher standard to meet.”
Shea, the housing advocate, said he only wishes Cuomo had moved quicker.
“Unfortunately, it would have been a whole lot better if this AG activity had come sooner. We might have prevented the mess we’re in from being as severe,” he said.
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