housing

President Obama, in his State of the Union address, pushed forward the idea of creating a new unit to investigate the financial excesses that led to the housing crisis, so that those accountable could be brought to law. The Residential Mortgage-Backed Securities Working Group, formed to implement the president’s program, will be headed by Eric H Holder Jr., the attorney general, and will be supported by 55 lawyers, agents and analysts.  The group will be co-chaired by Robert Khuzami of the S.E.C.; theNew Yorkattorney general, Eric T. Schneiderman, and Tony West, the assistant attorney general for the Justice Department’s Civil Division.

 Mr. Holder, in a news conference to announce the formation of the investigative team, said that the Justice Department recently issued 11 civil subpoenas to financial institutions. But issuing subpoenas, in itself, won’t yield much of result, as Robert Khuzami, director of the Securities and Exchange Commission’s enforcement division, pointed out at that news conference. The government is unlikely to run after every firm that was in one way or the other linked to the financial crisis, and the only way out to reduce the volume of  work, is to narrow the investigative focus to the creation and sale of residential mortgage-backed securities. The Financial Crisis Inquiry Commission and the Senate Permanent Subcommittee on Investigations carried out an extensive investigation that looked into firms like Goldman Sachs and Washington Mutual, which were involved in the mortgage market. Last year, the subcommittee referred its report for possible criminal prosecution, to the Justice Department, but there are no indications of a grand jury investigation of the securities transactions it discussed.

 

The financial fraud that led to the housing crisis, when the market for residential mortgage-backed securities was at its peak, will be very difficult to pin down, because over time memories fade and the documents often do not reflect the intent of those involved in a transaction, which is the crucial element in a fraud case. So investigators, laden with stale evidences and dim recollections, are going to face substantial hurdle. The statute of limitations may also create roadblocks for investigators of the new working group. In case of crimes like securities fraud, the general federal limitations period is five years, although in the case of offences in which a financial institution, like a bank or credit union, was the victim, it is 10 years. The passage of time may prevent the filing of charges in the case of criminal conduct in transactions involving institutional investors, like pension funds and mutual funds.

The collapse in value of mortgage-backed securities resulted in unprecedented losses, but in the past three years, since the investigations started, federal investigators have only been able to prosecute and put four individuals associated with the fraud, into prison.