By now you’re almost certainly aware of the accusations of widespread fraud leveled against banks and mortgage servicers entailing the falsification of affidavits, assignments, loan records, etc., in their efforts to speed up the process of foreclosure as mortgage defaults have soared since the housing bubble burst. In the latest round, JP Morgan Chase faces a class action lawsuit in California state court for their alleged bad behavior in foreclosure actions in Federal bankruptcy courts (via CompliancEX):

 Lead plaintiff Ernest Michael Bakenie claims that Chase’s “pattern and practice of playing ‘hide-and-seek’ with debtors, judges and other bankruptcy players” bore rich fruit: that Chase secured motions for relief of stay and proofs of claim in 95 percent of its cases.
“Through the use of fabricated assignments, endorsements and affidavits that purport to transfer deeds of trust, notes and the rights to all monies due under the terms of tens of thousands of non-negotiable promissory notes (the ‘MLNs’); Chase has demonstrated a pattern and practice of playing ‘hide-and-seek’ with debtors, judges and other bankruptcy players,” the complaint states.
“Chase intentionally conceals the identity of the true parties in interest entitled to enforce the tens of tens of thousands of residential non-negotiable promissory notes (the ‘MLNs’) for its own financial benefit, at the expense of the class and to the detriment of the integrity of the bankruptcy system.”

The suit goes on to allege that Chase used a network of attorneys to file more than 7,000 motions for relief (the process by which the stay is lifted against secured property so that foreclosure can proceed during a pending bankruptcy) and that attorneys were rewarded for how quickly they could get orders lifting the stay.

At issue in nearly all of these cases is the question of whether the foreclosing party, be it bank, servicer or MERS, the mortgage recording service, actually has legal title to the property and thus the right to foreclose. Explaining this issue requires more time or space than I have here, but if you’re looking for a pretty good explanation of the basics, the text of the recent complaint filed by Dallas County against MERS is a fairly decent primer.

Many of the allegations of bad behavior are in the context of civil court. Although there have been numerous individual decisions against the banks and servicers in bankruptcy court, this is the first case I’m aware of that alleges bad behavior across thousands of cases in multiple bankruptcy court districts. Bankruptcy adds another layer to it; in the civil cases, a variety of state laws apply that may or may not make such behavior criminal in nature. But in at least some of these cases, JP Morgan Chase would have relied on documents filed alongside a proof of claim in a bankruptcy case, and Federal bankruptcy law provides for criminal penalties for the filing of a false or fraudulent claim.  Filing false documents that purport to give you standing to foreclose such as a falsified mortgage assignment or note, is without question what is contemplated by this admonition. Yet somehow, despite that fact that it has been demonstrated that banks and servicers knowingly filed false documents, to my knowledge no bank or servicer has been charged with fraud for filing false documents attendant to a bankruptcy proof of claim. If you’re wondering why that’s so unusual, I suggest you try filing a fraudalent claim in someone’s bankruptcy case and see how long it takes before the FBI is giving you a phone call.

So why have banks for the most part (with rare exceptions) avoided criminal penalties, let alone some sort of Federal investigation given how widespread allegations of fraud are?  Well, on that topic:

 U.S. Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, were partners for years at a Washington law firm that represented a Who’s Who of big banks and other companies at the center of alleged foreclosure fraud, a Reuters inquiry shows.

The firm, Covington & Burling, is one of Washington’s biggest white shoe law firms. Law professors and other federal ethics experts said that federal conflict of interest rules required Holder and Breuer to recuse themselves from any Justice Department decisions relating to law firm clients they personally had done work for.

Both the Justice Department and Covington declined to say if either official had personally worked on matters for the big mortgage industry clients. Justice Department spokeswoman Tracy Schmaler said Holder and Breuer had complied fully with conflict of interest regulations, but she declined to say if they had recused themselves from any matters related to the former clients.

Reuters reported in December that under Holder and Breuer, the Justice Department hasn’t brought any criminal cases against big banks or other companies involved in mortgage servicing, even though copious evidence has surfaced of apparent criminal violations in foreclosure cases.

The evidence, including records from federal and state courts and local clerks’ offices around the country, shows widespread forgery, perjury, obstruction of justice, and illegal foreclosures on the homes of thousands of active-duty military personnel.

A particular concern by those pressing for an investigation is Covington’s involvement with Virginia-based MERS Corp, which runs a vast computerized registry of mortgages. Little known before the mortgage crisis hit, MERS, which stands for Mortgage Electronic Registration Systems, has been at the center of complaints about false or erroneous mortgage documents.

Court records show that Covington, in the late 1990s, provided legal opinion letters needed to create MERS on behalf of Fannie Mae, Freddie Mac, Bank of America, JP Morgan Chase and several other large banks. It was meant to speed up registration and transfers of mortgages. By 2010, MERS claimed to own about half of all mortgages in the U.S. — roughly 60 million loans.

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It isn’t known to what extent if any Covington has continued to represent the banks and other mortgage firms since Holder and Breuer left. Covington declined to respond to questions from Reuters. A Covington spokeswoman said the firm had no comment.

Several lawyers for homeowners have said that even if Holder and Breuer haven’t violated any ethics rules, their ties to Covington create an impression of bias toward the firms’ clients, especially in the absence of any prosecutions by the Justice Department.

I don’t have any reason to believe that Holder or Breuer have purposefully declined to investigate their former employers clients.  And if they recused themselves, then certainly they’ve done nothing improper either legally or ethically. But the government recruiting from powerful firms like Covington, whose clients could easily find themselves being eyed keenly by the DOJ, necessarily creates a conflict of interest. The worst of it though is not where government employees, from Holder down, have come from. It’s where they might go once they’ve completed their government service.  Without question our government has become something of a revolving door for some of the top enforcement officials in America. In the SECs case this coziness with the Wall Street titans whom they are charged with overseeing is unseemly, corrupt and should be criminal. In the DOJ it’s merely embarrassing. In all regards, it gives one the very strong impression that our government cannot be trusted to investigate crimes committed by people they once worked with, and with whom they might work again. So instead we plug along, one small civil suit after another, with only low-level executives facing the threat of jail time.  The banks and the servicers they employs certainly would prefer to stop spending tens or hundreds of millions of dollars to settle enforcement actions and lawsuits against them, but perhaps that’s less costly than reforming their procedures when for all practical purposes they enjoy immunity from criminal law. The same of course cannot be said for the little people like us.