NY AG, tapped by Obama, sues large banks for foreclosure errors

By Peter Schroeder - 02/03/12 04:06 PM ET

A state attorney general recently tapped by President Obama to head a unit devoted to criminal activity in the housing sector is suing some of the nation's largest banks for pushing "deceptive and fraudulent" foreclosures.

New York Attorney General Eric Schneiderman announced Friday that he had filed lawsuits against Bank of America, J.P. Morgan Chase and Wells Fargo, alleging that they had repeatedly presented courts with "false and misleading information" when pursuing foreclosures.

In particular, he said that the banks' usage of a national system to electronically register mortgages, known as MERS, has made it impossible for the public to keep track of who actually owns a mortgage. He said the system is rife with errors, shielded from public view and controlled solely by financial institutions.

"The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages. Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law," he said. "Only through real accountability for the illegal and deceptive conduct in the foreclosure crisis will there be justice for New York’s homeowners.”

Financial institutions created MERS in 1995 as a way to electronically track the movement of mortgages through the financial system while avoiding local county recording fees, according to his office.

However, once the housing bubble burst and foreclosures began to occur at a rapid pace, it became difficult to track within MERS exactly where mortgages had ended up, resulting in a number of faulty foreclosure filings.

During his State of the Union address, Obama announced he was establishing a new unit within the executive branch devoted to investigating financial crimes. He also announced that Schneiderman would help run a subset of that unit specifically devoted to criminal activity in the housing market.

Schneiderman has become a favorite among liberal groups for his staunch opposition to a proposed settlement with banks over widespread problems emerging from the foreclosure crisis.

“We welcome this lawsuit," said the left-leaning Campaign for America's Future. "We applaud Mr. Schneiderman and his staff for their efforts on behalf of New York state residents and bank customers throughout the nation.”