Posted on Monday, October 18, 2010
What were banking regulators doing while some of the biggest U.S. lenders routinely filed false foreclosure documents in local courthouses around the country? In the case of IndyMac Federal Bank, it turns out the Federal Deposit Insurance Corp. was running the joint.
This may help explain why the mortgage-servicing industry got away with such misbehavior for so long. The government, in one form or another, was doing it, too.
The facts are there for anyone to see in the records of a Florida circuit court lawsuit against Israel and Neena Machado, a West Palm Beach couple who last year beat back IndyMac’s attempts to foreclose on their home mortgage. They even won a judgment ordering IndyMac to pay $38,117 in legal fees.
IndyMac sued the Machados in November 2008, four months after the government closed its predecessor, Pasadena, California-based IndyMac Bank, which had $32 billion in assets when it was seized. The FDIC formed IndyMac Federal in July 2008 as the successor to the failed bank, and continued operating it in conservatorship before selling it in March 2009.
Among the sworn statements IndyMac filed with the court was a December 2008 affidavit by an IndyMac vice president, Erica Johnson-Seck, who said she had personal knowledge of the amount of money the Machados owed on the mortgage. That wasn’t true, she later testified in a deposition. To be fair, there’s every reason to believe the old IndyMac was engaged in this sort of conduct already, before it was shut down.
"There’s a lie in the affidavit," the judge in the case, Meenu Sasser, said at a September 2009 court hearing, where she dismissed IndyMac’s complaint. "It’s a false affidavit."
An FDIC spokesman, Andrew Gray, said the agency is looking into the matter. "While this issue has only recently come to our attention, it is something that the FDIC takes very seriously," he said. "The FDIC was unaware of any violation of state laws applying to servicing practices while we were in control of IndyMac Federal. FDIC staff is currently investigating this further. We are committed to working with all parties to correct any issues or violations that may be found."
Another point in dispute was whether IndyMac held the Machados’ mortgage note, as the bank claimed in its complaint. The Machados said it didn’t. The court never resolved the question. Whoever owns it, no one has since filed any new foreclosure action against the Machados, who continue to live in the same home, according to their attorney, Thomas Ice.
A similar pattern is playing out around the country. So- called robo-signers penned their names to untold numbers of affidavits and other foreclosure documents that proved to be false, prompting judges in some states to throw out the banks’ claims.
Bank of America Corp. said it would stop foreclosure sales nationwide while it reviewed its practices. JPMorgan Chase & Co. says it is examining files in 41 states. Ally Financial Inc.’s GMAC Mortgage last month halted evictions tied to foreclosures in 23 states. Ally is majority-owned by the Treasury Department. The attorneys general for all 50 states have opened a joint investigation.
In her July 2009 deposition, Johnson-Seck said she and seven other people in her department signed about 6,000 foreclosure documents a week, including affidavits. She said she didn’t read all the documents before signing them and spent "not more than 30 seconds" on each one.
The corporations for which she had signing authority included the FDIC as conservator for IndyMac, she said. Johnson- Seck declined to comment. She’s now a vice president in Austin, Texas, for OneWest Bank, which bought IndyMac from the FDIC.
Now let’s look at the bigger picture. Where were the banking regulators while all this mischief was going down? For years the leaders of the Federal Reserve and the Office of the Comptroller of the Currency, among others, have been assuring the public they have onsite examiners and supervisors at all of the country’s largest banks. Before IndyMac was seized, its primary regulator had been the Office of Thrift Supervision.
Yet there’s no sign these agencies did anything to stop any of these institutions from treating the country’s courts so contemptuously. Perhaps the regulators were clueless. Or maybe they knew there was a problem and decided to let the banks run wild in the interest of keeping their foreclosure mills humming.
Whatever the case, they let the banking industry deal another huge, self-inflicted blow to its reputation. That’s the sort of damage regulators are charged with preventing, as part of their mission to preserve public confidence in the financial system. And to think Congress just gave the banking regulators, including the FDIC, even more authority under the Dodd-Frank Act. The more they fail, the more power they get.
Meanwhile, it’s an open question why the mortgage servicers and their lawyers resorted to tactics such as filing bogus court affidavits. Was it just about cutting corners? Or was it because they often don’t know who owns the mortgages on which they’re foreclosing, and decided to cheat?
Americans expect banks to do shady things to promote their own self-interest. It’s what banks do. That’s why we have regulators -- to keep the banks from putting the country at risk of, say, a nationwide foreclosure fiasco.
The regulators keep blowing it. At IndyMac, though, the FDIC wasn’t just overseeing the bank. It was operating the bank. The industry’s minders have hit a new low.
Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.