Foreclosure headline in a newspaper
Foreclosure headline in a newspaper - 
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Kai Ryssdal: We'll use an economic factoid on housing that came out this morning as a way to get into the real estate news of this Tuesday. We learned, courtesy of the Commerce Department (PDF), that housing starts -- new groundbreaking, basically -- dropped 10 percent last month. So still an economic problem area.

Also troubling are some of the recent scandals over home mortgages. Banks have been in hot water for robo-signing and shoddy foreclosure practices. Now the new attorney general for the State of New York, Eric Schneiderman, is getting into the game with an investigation of how banks packaged those mortgages into the bonds they then sold out to investors.

Marketplace's Stacey Vanek Smith reports.

Stacey Vanek Smith: There is a lot of legal heat coming at the banks right now: federal regulators, homeowners, investors, a group of state attorneys general. But it's potential legal action from New York that has the banks shaking in their boots, says Georgetown law professor Donald Langevort.

Donald Langevort: No other state has anything like the Martin Act, which scares the banks immensely.

The Martin Act is a New York state securities law that's nearly a century old. And its power lies in its vagueness, says John Coffee, a professor of securities law at Columbia University.

John Coffee: It broadly authorizes the New York Attorney General to sue anytime there's been a misrepresentation or material omission in connection with the purchase or sale of securities. It's written very broadly and you don't have to show an intent to defraud.

Attorney General Eric Schneiderman has been looking into how banks created and marketed mortgage-backed securities. And the Martin Act relieves him of one burden of proof that's been a stumbling block for other prosecutors, says Georgetown's Donald Langevort.

Langevort: The banks have had reasonable luck thus far avoiding federal prosecution largely by arguing that it's hard to show that the senior executives of these banks knew that the market was about to melt down. The Martin Act doesn't require that kind of intent.

New York attorneys general like Eliot Spitzer have used the Martin Act to great effect in the past -- wrangling multi-million-dollar settlements out of financial giants. But the banks have some leverage too, says Langevort. He says Wall Street brings a lot of jobs and business to the Empire State, so prosecutors won't want to burn the banks too badly.

In New York, I'm Stacey Vanek Smith for Marketplace.

Follow Stacey Vanek Smith at @svaneksmith