The “so what?’ missing from Wells Fargo lawsuit story

In yet another chapter in the seemingly never-ending mortgage saga, the U.S. government sued Wells Fargo on Tuesday, claiming the bank approved less-than-stellar loans backed by the government then sought insurance to cover their losses once they defaulted.

From the Wall Street Journal story:

The complaint alleges nearly a decade of misconduct dating back to May 2001. The suit contends that San Francisco-based Wells engaged in “regular practice of reckless origination and underwriting” of government-backed loans. The company said that more than 100,000 FHA loans met federal guidelines when more than half of them didn’t, according to the complaint.

In a statement Tuesday, Wells Fargo denied the allegations. The company acted in “good faith and in compliance” with federal rules, it said. Many of the issues in the lawsuit had been previously addressed with federal agencies, the company also said. “The bank will present facts to vigorously defend itself against this action,” it said.

Add another bank to the long list that have been singled out by the government for their actions before the 2008 financial crisis. From the New York Times:

The action against Wells Fargo came after many civil lawsuits were filed by the government against large banks related to their lending practices. A number of the banks have settled the cases, including Deutsche Bank, which paid more than $200 million to resolve civil fraud charges; Citigroup’s Citimortgage unit, which settled claims for $158 million; and Bank of America, in a settlement connected to its Countrywide Financial business, for $1 billion.

To bring these cases, the government has used an obscure law called the Financial Institutions Reform, Recover, and Enforcement Act. The law, passed after the saving-and-loans scandals in the late 1980s, gives the government broad authority to bring civil claims and seek big financial penalties against federally insured banks. That law also has a lower standard of proof than criminal business fraud statutes.

Despite these civil actions against the large banks, the Justice Department has been criticized for bringing too few criminal cases against banks and their executives tied to their conduct during the housing boom and financial crisis. Prosecutors have said these cases are difficult to bring because they require proving an intent to defraud beyond a reasonable doubt.

It’s this last paragraph here that I find intriguing. “Beyond a reasonable doubt” is the cornerstone of our legal system and I would doubt anyone actually wants to see that standard pushed aside. As bitter as it is for taxpayers, it seems that civil actions are going to be the only way to recover some money after the debacle.

But there are other ways for the government to attempt to penalize banks for bad behavior. From the WSJ:

Another set of cases centers around the role of large banks in packaging mortgages into bonds and selling them to investors. Last week, New York’s top prosecutor filed a civil lawsuit against J.P. Morgan Chase, alleging widespread fraud by the company’s Bear Stearns unit in the sale of mortgage-backed securities. It was the first case to be brought under the aegis of a group of federal and state prosecutors and regulators formed by President Barack Obama in January.

J.P. Morgan Chase spokesman Joseph Evangelisti said the bank intends to contest the allegations, and that it is “disappointed” the New York attorney general “decided to pursue its civil action without ever offering us an opportunity to rebut the claims.”

Last month, Bank of America agreed to pay $2.43 billion without admitting wrongdoing to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co.

So, just add Wells to the growing list of firms potentially being fined for actions before or during the crisis. Sigh.

The stories out there from the major business papers did a good job pulling together all the suits and reasons banks might have to pay-up from the mortgage crisis, but I’m missing the “so what?” from all of these.

Who gets the money? Will it actually help consumers? If banks are getting sued for mortgages is this going to cause some to exit the business? I guess I’m just missing the big, grand state-of-the-mortgage industry now story. I want it spelled out for me. Implications for me, my potential to buy a home, you know, how are all these suits affecting real people.

What happened to all those lenders and servicers after the crisis? How are modified loans performing? Are banks even still working through that backlog or have they moved onto the next crisis?

As sad as it is, I think it’s time for the “Five Years After the Crisis State of the Mortgage Industry” story. So, who’s going to write it?