Flaws Seen in ‘Almost Every’ Mortgage-Bond as Crash Began

May 21 (Bloomberg) -- Investigators probing mortgage-bond sales in the run-up to the financial crisis are finding improper actions occurred “not only occasionally, but in the end, with almost every” deal examined, a U.S. official said.

Authorities have uncovered evidence of lenders and bond issuers obscuring risk even more as the market began to crash to limit their own losses, with employees “laughing” about the environment, Michael P. Stephens, the Federal Housing Finance Agency’s acting inspector general, said.

“They were more concerned about their bonuses than what was going in these pools,” Stephens said today at a Mortgage Bankers Association conference in New York. “At the core of it is greed.”

A task force of state and federal authorities set up in 2012 to probe the practices still has “more than a dozen ongoing investigations,” including some that may be pursued criminally, according to Stephens. While the government “locking everybody up” is not “the long-term answer for the taxpayer being put in the target zone for all these bailouts,” enforcement is needed to address issues that “destroyed investor trust,” he said.

Stephens leads the Office of Inspector General section of the Residential Mortgage-Backed Securities Working Group, whose other members include the Department of Justice and state attorneys general. The group coordinated a $13 billion settlement between JPMorgan Chase & Co. and the government last year, among other actions. His own agency is the watchdog for the overseer of taxpayer-backed Fannie Mae and Freddie Mac.

‘Fifth Inning’

Banks are probably in the “fifth inning” of mortgage investigations, he said in response to a question, based on the regulation nine innings of a baseball game. That’s partly because the companies have been slow in negotiations and seeking broad settlements, he said.

“They may be anxious to get it behind them, but obviously not too anxious to write a check,” he said. “I don’t see anything in the near future that’s going to wipe the slate clean with all of the investigations.”

Americans should be aware that “hundreds and hundreds of people have been indicted and convicted of some form of mortgage fraud,” such as bankers and foreclosure firms, he said. His organization has indicted about 82 people in the past six months, including three who committed suicide, he said.

“When they do get caught, it’s a little bit more difficult for them to take it than a street criminal,” he said.

Stephens said he’s also “not a big fan” of the idea that banks shouldn’t be charged criminally because it could hurt their employees and shareholders.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Mitchell Martin, Richard Bravo