The feds investigate the mortgage mess: What took so long?

In this week's State of the Union address, President Obama announced to cheers the formation of a new Justice Department unit tasked with going after the big banks and mortgage companies whose reckless lending led to the collapse of the housing market and caused millions of Americans to lose their homes through foreclosure. The bursting of the housing bubble deepened the recession that began in 2007, and it continues to drag down the economy's recovery.

It's about time the people responsible for this mess were held to account. But three years into his term, skeptics of the president's latest proposal to punish financial industry wrongdoing have every right to ask, what took so long? We are among those who are still awaiting an answer to that question.


The president promised back in 2009 to target the industrial-scale mortgage fraud and predatory lending practices that had left cities like Baltimore, Cleveland, Oakland, Calif., and Memphis, Tenn., filled with boarded-up, vacant houses when their owners couldn't repay the high-interest-rate loans they were lured into signing. The effects were particularly devastating in low-income minority communities, where even borrowers with good credit were steered into high-rate subprime mortgages the lenders knew they couldn't afford.

When the lenders foreclosed on these properties and resold them for a fraction of their original value, the prices of nearby homes — and the property tax revenues of the cities and towns where they were located — plummeted. The result was a snowballing effect that nearly ground local governments and businesses to a halt.


Meanwhile, the banks that had underwritten those same mortgages made billions in profits by bundling the bad loans on their books into securitized bonds and selling them to investors who had little if any way of knowing that the financial instruments they were buying — graded AAA by the credit rating firms — were actually worth next to nothing.

The whole enormous Ponzi scheme finally came crashing down in the months before the 2008 presidential election. After taking office in early 2009, Mr. Obama pledged to make investigating the wrongdoing of those responsible for the crisis one of his administration's top priorities. Not only did he promise to go after the unscrupulous mortgage brokers and loan officers who had defrauded their customers, but he pledged to target "virtually every step of the process, from predatory lending on Main Street to the manipulation on Wall Street."

And then, nothing. Instead, the administration, following in the footsteps of its predecessor, continued the bailout out banks with billions of taxpayer dollars — and then essentially told them to go and sin no more. To this day, not a single person has spent a day in jail for any of the crimes that caused the worst economic downturn in recent American history.

Given the federal government's inaction, it has been left to individual cities and states to try to secure compensation for the eight million Americans who lost their homes to predatory lenders and for local governments crippled by the precipitous decline in property tax revenues and the costs of boarding up vacant houses. Baltimore City filed one the country's first such lawsuits in 2009 against Wells Fargo. The city's complaint was dismissed twice before it was finally allowed into federal court in October 2010, and the case is now slowly wending its way toward trial.

The city of Cleveland filed a similar lawsuit against a group of Wall Street banks even earlier, in 2008, but that case never made it into court over the opposition of attorneys for the banks, and it is apparently dead in the water for the moment. It did, however, become the subject of a 2010 French documentary — Cleveland v. Wall Street — detailing the pattern of predatory lending that led to the foreclosure of hundreds of homes in the city's low-income and minority neighborhoods and the suffering endured by their former residents. Though the film was well received in Europe, it has rarely been shown in the United States.

This week, Maryland Attorney GeneralDouglas F. Ganslermet in Chicago with attorneys general from across the country to discuss a multi-state settlement proposed by the nation's largest mortgage servicers that would give states and municipalities some $25 billion to compensate victims of mortgage fraud and predatory lending. A spokesman for the attorney general's office said Mr. Gansler has not made up his mind whether to accept the deal. But other state attorneys general, including Eric Schneiderman of New York andKamala D. Harrisof California, have questioned whether the banks wouldn't get off too lightly if, in exchange for the payments, they were granted immunity from future prosecution.

Mr. Schneiderman will be a co-chairman of the task force on mortgage fraud announced by President Obama. He is by all accounts a tenacious and effective prosecutor of white-collar corruption whose views will carry great weight among his colleagues on the panel. But only a few months remain before the presidential election season drowns out all other concerns. We hope within that short time Mr. Obama's team can prove the president meant what he said about cleaning up the financial industry's mess and holding people accountable. Too many people have been hurt by the collapse of the housing market and the financial meltdown that followed to let the perpetrators of them get off scot free.