Holder Announces Working Unit on Mortgage-Backed Bonds Fraud

A new U.S. government unit will investigate misconduct in the bundling of mortgage loans into securities that fueled the housing bubble and contributed to the financial crisis, Attorney General Eric Holder said.

In providing details about the new group, Holder said that the Justice Department in the past few days has subpoenaed 11 financial institutions in related investigations.

The mortgage fraud unit will “streamline” and “strengthen” current efforts to investigate fraud in residential mortgage-backed securities, he said today at a news conference in Washington.

The unit is intended to help “restore faith in our financial markets and institutions,” Holder said. “We will marshal our civil and criminal capabilities” in pursuing the investigations, he said.

President Barack Obama announced the new effort during his State of the Union speech on Jan. 24.

A coalition of labor unions, consumer advocates and political activists, including MoveOn.org, has been pressuring the administration to do more to probe banks’ home lending and the creation and sale of mortgage-backed securities.

Coordinating Efforts

The new unit will take control of existing civil and criminal investigations in an attempt to better coordinate efforts on mortgage fraud, according to the Justice Department.

Holder said that those who question why the administration is forming the group years after the housing bubble burst don’t have the “facts.”

“It’s not as if we haven’t been doing anything” until now, he said.

The unit will include officials from the Justice Department and the Securities and Exchange Commission as well as U.S. attorneys and state attorneys general. Holder was joined at today’s press conference by other officials, including Housing and Urban Development Secretary Shaun Donovan, Securities and Exchange Commission enforcement director Robert Khuzami and New York Attorney General Eric Schneiderman.

About 55 Justice Department attorneys, analysts and investigators and 10 Federal Bureau of Investigation agents and analysts will be assigned to the unit. An additional 30 investigators and other staff will join the staff in the coming weeks, according to the Justice Department.

Help for Homeowners

The stepped-up enforcement effort also should result in some “benefits” for homeowners saddled with debt because of the mortgage crisis, Donovan said, declining to be more specific.

“It would be a tragedy if the investors were made whole but homeowners who were wronged at the same time” received no help, he said.

In his State of the Union speech, Obama said the unit “will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.”

State and federal officials have been negotiating with the five largest mortgage servicers -- Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. (C), Wells Fargo & Co. and Ally Financial Inc. (ALLY) -- to settle claims that they used so-called robo-signing and faulty documentation to justify foreclosures. All 50 states announced investigations into the practices in 2010.

Deal With Banks

The deal with the banks for loan forgiveness, interest-rate reductions and other aid for homeowners could be valued as high as $25 billion, said a person familiar with negotiations who declined to be identified because the terms weren’t public.

Schneiderman is among a group of state attorneys general that has raised concerns about the scope of liability releases granted to the banks in the settlement, saying any agreement shouldn’t protect banks from claims that haven’t been investigated.

Schneiderman said in a telephone interview that the proposed releases won’t impede investigations by the unit announced today. Any final agreement will be narrowly focused to release banks from claims related only to documentation errors and other so-called robo-signing conduct, according to a person briefed on the talks.

“I’m now confident that the releases are going to allow this investigation to go forward,” Schneiderman said.

The joint federal-state mortgage investigative unit will be part of a task force Obama created in a 2009 executive order to probe financial fraud cases. The task force, led by Holder, is made up of 20 federal agencies, including the Justice, Treasury, Commerce and Labor departments, 94 U.S. attorneys and state and local agencies.

Since its formation, the task force has charged more than 1,200 defendants for crimes related to mortgage fraud, including schemes that resulted in financial losses to homeowners and banks and attempts to illegally obtain government money, according to the Justice Department.

To contact the reporters on this story: Jeff Bliss in Washington at jbliss@bloomberg.net David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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