The Center for Public Integrity

In a new report, the Federal Bureau of Investigation pats itself on the back for using “sophisticated investigative techniques” to target mortgage fraudsters. The FBI’s 2010 “Year in Review” mortgage fraud report says the agency has used wiretaps, undercover operatives and “tactical analysis coupled with advanced statistical correlations and computer technologies.”

Not everyone is impressed.

Consumer advocates say the FBI is missing the big picture, focusing its investigative muscle on small-time crooks and turning a blind eye to misconduct by big banks.

While millions of homeowners have been put at risk by dishonest tactics used by the mortgage industry, these advocates say, the FBI has targeted low-level lender employees and street-level fraudsters.

Richard Eskow, a senior fellow with the Campaign for America’s Future, a progressive think tank, calls the new report the latest example of the “pseudo-investigatory approach” of the FBI, the Justice Department and the Obama administration in the aftermath of the mortgage meltdown.

“The only thing worse than doing nothing is to do what they've done―try to hoodwink the public into thinking they're doing something,” Eskow told iWatch News.

The Obama administration, Eskow claims, has taken the view that the nation’s largest banks are too important to the economy to be threatened by criminal investigations and indictments. “Too Big to Fail,” he says, also means “Too Big to Jail.”

A telephone call to the White House press office Monday afternoon wasn’t immediately returned.

A Chicago-based debt settlement company, Legal Helpers Debt Resolution, has been fined $314,000 for what the state financial regulator described as “exploitation of financially vulnerable families.”

The Illinois Department of Financial and Professional Regulation issued a cease and desist order saying Legal Helpers operated in the state without an appropriate license and failed to provide legal representation to consumers. The order said that Jeffrey Hyslip, who is not licensed to practice law in Illinois, improperly signed up at least 314 Illinois consumers for the Legal Helpers program.

iWatch News reported last month that Legal Helpers, which calls itself one of the largest debt settlement firms in the industry, was sued by Illinois Attorney General Lisa Madigan for stating or implying that lawyers would negotiate on behalf of clients, but then allegedly turning over the negotiations to non-law firm third parties. The company has denied any wrongdoing.

The fine was the first disciplinary action taken under a new state law, the Debt Settlement Act, which took effect in August, the Illinois financial regulator said.

“The Debt Settlement Act seeks to protect families that are struggling with debt from being preyed upon by companies posing as rescuers,” said Brent Adams, Illinois secretary of financial regulation. “The state will move aggressively whenever we learn of the exploitation of financially vulnerable families.”

In April 2002, Georgia Gov. Roy Barnes won legislative approval for a law to hold Wall Street accountable for bankrolling predatory lending. After the Democrat lost reelection that fall to Republican Sonny Perdue, the finance industry launched an all-out assault on the provisions of the law that held mortgage investors liable if they bought fraud-tainted home loans.

One of the defining moments in the legislative fight came when Standard & Poor’s, the giant debt rating company, announced it would no longer rate securities that might be backed by loans covered by the Georgia law, raising the specter that investors would cut off the flow of money into the state’s mortgage market and cripple its ability to provide credit to homeowners.

In March 2003, the legislature buckled to pressure and passed amendments shielding mortgage investors from liability. Other states saw what happened in Georgia and shied away.

“It’s outrageous,” Barnes, now an attorney in private practice, told iWatch News. “The same crowd that was telling us that predatory subprime loans were AAA credit is now telling us that the credit of the United States is not AAA.”

The “overbearing bureaucracy” that caused the last collapse, Barnes said, now may be “on its way to causing another collapse.”

S&P’s role in the financial crisis is coming under increasing attention after its decision last week to downgrade the U.S. government’s credit rating. Critics charge that S&P and other credit rating companies played an important role in lobbying to prevent Wall Street from being held accountable for abusive practices—and by providing their seal of approval to toxic mortgages that helped spark America’s economic woes.

In a news conference, S&P defended its downgrading of the U.S.’s credit rating, calling Washington’s high-stakes battle over the federal debt ceiling a “debacle.”

The stock market is in a tailspin after the U.S. government lost its AAA credit rating for the first time in history, raising echoes of the catastrophic Wall Street fallout three years ago.

But how did it all begin? Who were the key players? Where do regulators go from here? Here, we recount the Center for Public Integrity’s top stories on the 2008 financial meltdown and the subsequent market and government response.

Subprime mortgages underlying the road to financial ruin (May 6, 2009) – Just how did we get into this mess? Multiple factors have been cited: “blame, irresponsibility, lax government oversight, conflicts of interest and especially blind faith in a housing boom that seemingly had no end.” But fueled by subprime lending, the boom ended in bust. Borrowers took out too many loans they couldn’t afford, housing prices tanked, and by the summer of 2007, the subprime industry had all but disappeared because big banks had cut off access to credit. The government responded by promising to use taxpayer money to buy so-called “toxic” mortgage assets from banks so lending could start again. On Oct. 3, 2008, President Bush signed the $700 billion Emergency Economic Stabilization Act into law. Calls for increased regulation over the financial and housing industries would later yield stricter legislation.

Top 25 subprime lenders (May 6, 2009) – The top 25 subprime lenders accounted for nearly $1 trillion of subprime loans, about 72 percent of the high-priced loans reported to the government at the peak of the subprime market. The leader in lending was Countrywide Financial Corp, responsible for at least $97.2 billion, followed by Ameriquest Mortgage Co./ACC Capital Holdings Corp with at least $80.6 billion and New Century Financial Corp. at $75.9 billion.

As the financial markets roil, one of the critical factors weighing down the U.S. economy is the flood of home foreclosures. Thursday's crash underscores how difficult it will be for the economy to make significant strides while the housing market is still in tatters.

The pace of the housing market recovery may depend in part on the outcome of intense negotiations underway among state and federal authorities and the nation’s five largest mortgage servicers.

Government officials are negotiating with the firms — Bank of America, JP Morgan Chase & Co., Citigroup, Wells Fargo & Co. and Ally Financial Inc. — over allegations of widespread abuses in the foreclosure process. State attorneys general around the country have been investigating evidence that the big banks used falsified documentation to process foreclosures.

Four of the five companies under scrutiny—Bank of America, JP Morgan, Wells Fargo and Citigroup — are major donors for state and federal political campaigns. Between them, they have donated at least $8 million since the start of 2009 to candidates, party committees and other political action committees, according to an iWatch News analysis of campaign finance data. 

(Ally Financial hasn’t given money during that period to campaigns under its current name or is previous name, General Motors Acceptance Corp., or GMAC).

The fate of foreclosure negotiations could go a long way toward determining where the housing market will go in the next few years.

Normally, the housing market plays a leading role in any economic recovery. But that hasn’t been the case in the aftermath of the U.S. financial crisis of 2008.

Thursday’s dizzying stock market plunge is a sign that the U.S. financial system still needs serious reform, advocates for tougher regulation of the financial industry say.

The market swoon – the steepest drop in U.S. stocks since the 2008 financial crisis – comes amid a continuing debate over the economic impact of regulations to carry out the Wall Street reform law.

If the Democrats “had anything on the ball they would be hammering away at the notion that it was because of the lack of oversight that the market is crashing,” John Taylor, executive director of the National Community Reinvestment Coalition, told iWatch News.

“The roots of our recession and continuing economic decline are firmly dug into the soil of deregulation.  Every day the market drops is an opportunity for those who passed Dodd-Frank to remind people that oversight, accountability and the rule of law matter immensely – we need a free market, free to compete but also free from abuse and unsavory practices,” Taylor said.

GOP critics of the Dodd-Frank financial reform law contend that uncertainty about the effects of hundreds of new regulations are slowing the U.S. economic recovery.

Republican Spencer Bachus of Alabama, chairman of the House Financial Services Committee, has said that the economy is suffering under the weight of a “regulatory tsunami” that is discouraging U.S. banks from loaning money that could help spur investment and create jobs. “We've heard repeatedly how hard it is for small businesses to get loans and this law is certainly playing a role,” Bachus said last week.

The GOP-led committee has approved more than a dozen bills to kill or weaken various sections of the Dodd-Frank reform bill this year. None have advanced in the Democratic-controlled Senate.