New York probes bank's role in mortgage crisis

Mortgage troubles

UPDATED INTERVIEW

JEREMY HOBSON: The New York State Attorney General has reportedly opened an investigation into how big banks packaged loans into securities during the housing boom. The inquiry is said to target major financial institutions including Bank of America and Goldman Sachs.

Marketplace's Mitchell Hartman is on this story for us this morning and he joins us live. Good morning, Mitchell.

MITCHELL HARTMAN: Hi Jeremy.

HOBSON: Well what do we know so far about this investigation?

HARTMAN: Remember -- big banks pooled home mortgages and then they sold the securities on to investors in the housing boom. But some of those loans were so risky they never should have been made -- let alone put into securities.

Now, the New York Attorney General is looking into the role that Wall Street banks played creating and marketing these mortgage pools. Did they know how risky they were and try to hide that? Did they make sure the mortgages themselves were properly documented? The banks and the AG's office aren't commenting, by the way.

HOBSON: And Mitchell we're talking about the New York State Attorney General who has some powers that are pretty unique to that positions right?

HARTMAN: Right, something called the Martin Act of 1921. Basically, it's a big stick -- it's only available under New York State law -- with sweeping subpoena powers and a low bar for proving fraud, according to Chris Whalen at Institutional Risk Analytics.

CHRIS WALEN: Most of the securities world operates under New York law. And insurance companies that wrote cover for mortgage-backed securities did so from New York. Combine that with the punitive aspects of the Martin Act - -it really has probably more teeth.

And Whalen says New York could hit targets harder than the Feds. And this whole thing may signal the New York AG doesn't want to go a weaker settlement that a bunch of other states are pursuing -- over abuses of homeowners in foreclosure.

HOBSON: Marketplace's Mitchell Hartman, thanks.

HARTMAN: You're welcome.


ORIGINAL INTERVIEW

JEREMY HOBSON: The New York State Attorney General has reportedly opened an investigation into the mortgage industry. The investigation is looking into how big banks packaged loans into securities. And the inquiry is said to target Bank of America, Morgan Stanley and Goldman Sachs.

Marketplace's Mitchell Hartman is on this story for us this morning and he joins us live. Good morning, Mitchell.

MITCHELL HARTMAN: Hi Jeremy.

HOBSON: Well what do we know right now about this investigation?

HARTMAN: Well, remember, this is how the big banks made a lot of their money during the housing boom in the early 2000s. They pooled mortgages into securities and then sold them on to investors. The problem is, some of those mortgages were really risky. They might not have been backed by income statements. The loans probably should never have been made to the homeowners. And then, let alone loaded into these securities. When the housing bubble burst, a lot of the mortgages went bad, and investors lost billions.

Now, the office of New York Attorney General Eric Schneiderman is asking for documents and meetings with B of A, Morgan Stanley and Goldman Sachs, as you said at the top. He's reportedly looking for evidence of possible fraud in the creation of these mortgage-backed securities.

HOBSON: And Mitchell -- this is just the latest legal action against the banks. Remind us what else is going on right now.

HARTMAN: Well, they do have a lot of trouble on their plates.There are already private lawsuits against some of the banks over these pools of lousy mortgages. Some of the pension funds and mutual funds and insurance companies that bought into them now want restitution. And then, there's the ongoing settlement talks between federal and state officials, and banks that do what's called mortgage servicing. Some of this engaged in so-called "robo-signing" and other possible abuses of homeowners who lost their homes to foreclosure after the bubble burst.

HOBSON: Marketplace's Mitchell Hartman, thanks Mitchell.

HARTMAN: You're welcome.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...