S&P Close to $1B Settlement With DOJ Over Bad Mortgage Ratings

Standard & Poor’s, the credit rating giant, is nearing a $1 billion settlement agreement with the U.S. Department of Justice over allegations the company wrongly steered investors on the ratings of mortgage-backed securities prior to the subprime loan crisis.
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Insiders say a deal could be inked as early as the first quarter, though negotiations remain confidential.

Federal prosecutors have secured a number of settlements worth tens of billions of dollars over the last 24 months from banks and mortgage lenders who played a significant role in fueling the financial crisis of 2008. Those firms churned out piles of toxic mortgages that were then bundled and sold to investors as securities. Despite stellar investment ratings, those securities were in fact worthless.

Although lenders have tried to shift the blame to borrowers, our foreclosure defense attorneys in Miami are well aware banks intentionally pushed these loans on people they knew could not afford them. Even appraisers were in on the scheme, often significantly over-inflating the price of homes in an unspoken understanding for more contracts with the banks.

To date, S&P remains the only credit rater pursued by the DOJ in litigation. S&P alleges that is by design because it downgraded the U.S. debt rating in 2011, while other credit raters did not. The CEO alleges then-Treasury Secretary Timothy Geithner made a “threatening” phone call to him just a few days after the downgrade. Federal prosecutors have denied this and the assertion that prosecution is in any way connected to the debt downgrade.

If a deal isn’t reached, the federal trial in U.S. v. McGraw-Hill Cos. is scheduled tentatively for September in U.S. District Court in the Central District of California, Santa Ana. However, insiders doubt it will ever reach that phase.

Prosecutors say the company lied about the fact that its ratings were influenced by interest conflicts. The government indicated it could potentially demand as much as $5 billion in civil penalties to cover losses suffered by federally-backed banks and other financial firms that relied on the firm’s ratings to determine in which vehicles to invest.

The firm issued credit ratings on nearly $3 trillion worth of mortgage-backed securities, plus more than $1 trillion in collateralized debt obligations from the fall of 2004 through the fall of 2007.

The government offered to allow S&P to settle the case two years ago for $1 billion before it filed. However, the credit rating firm refused, and as a result, has racked up tens of millions of dollars in legal fees.

In total, banks and other financial firms have ponied up more than $40 billion in punitive fines and penalties for their role in the financial crisis.

While these settlement amounts appear eye-popping, the reality is banks have actually made out far better in the end. In many cases, the fine amounts weren’t paid in actual cash, but rather credit for consumer programs, such as loan modifications, principal reductions and short sales. In many cases, banks were found not to be fully compliant with those agreements anyway.

What’s more, these firms have still managed to wrangle significant concessions from federal prosecutors, who ultimately issue watered-down statement of facts and usually grant immunity for other serious charges.

To date, not a single top Wall Street executive has faced criminal charges.

If you’re battling debt collection in Miami or the surrounding areas contact Jacobs Keeley for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Debt Warriors with Bruce Jacobs,” discussing foreclosure topics that matter to YOU.

Additional Resources:
S.&P. Nears Settlement With Justice Dept. Over Inflated Ratings, Jan. 12, 2015, By Ben Protess, New York Times
More Blog Entries:
OCC: Banks Need Better Risk Culture, Nov. 24, 2014, Miami Foreclosure Lawyer Blog