Mortgage Fraud Fines Are a Slap on the Wrist for Large Banks

In an effort to punish five of the nation’s biggest banks for underhanded mortgage dealings that contributed to the current home foreclosure crisis, a vast majority of states and the federal government recently reached an agreement with Citigroup, Bank of America, Wells Fargo, Ally Financial and JPMorgan Chase.

The banks will pay $25 billion to assist homeowners harmed by the banks’ fraudulent lending and other questionable practices, including those in Miami. However, some people are left questioning whether the fine is punishment enough to deter future conduct.

Citigroup made shaky mortgage loans which it misrepresented to the Federal Housing Administration as sound. The FHA accordingly provided insurance for over 30,000 loans, and, when a third of the borrowers were later unable to make payments, the agency had to pay off millions of dollars in insurance claims.

Some financial analysts apparently find it frustrating that big banks are not incurring tougher penalties for their misconduct. The sheer size of the banks and the depth of their pockets would make it appear as though the banks could choose to make things right. But the lack of criminal prosecutions for fraud means little motivation for bank executives to change their ways.

A Better Way to Deter Big Bank Conduct

One suggestion for a penalty with teeth in it is that misbehaving banks should be barred from applying for FHA backing of their mortgages. The FHA now is involved in about one-third of new mortgages, to the tune of $25 billion a month. One of the offenders, Bank of America, uses about a quarter of the FHA funding. Banning the banks from the government-backed program would almost certainly serve as a much harsher punishment than the monetary fine recently levied.

While a ban on working with the FHA would likely make the big banks sit up and take notice, it is a penalty that is unlikely to happen. In the current economic climate, worries over new home sales and the difficulty of obtaining mortgages without federal backing make it unlikely the government would agree to implement more severe punishment.

For now, taxpayers and those facing foreclosure in southern Florida will need to take solace that the banks have, at a minimum, been punished for their actions. However, it remains to be seen whether it is severe enough to deter this type of conduct in the future.