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U.S. Probes Banks' Mortgage Practices

Stocks in this article: BAC C JPM WFC BZH FMCC.OB FNMA.OB

Mass layoffs in mortgage divisions and mass foreclosures have created plenty of potential whistleblowers with first-hand knowledge of banks' behavior -- and an axe to grind. Plaintiffs' attorneys have been aggressively courting potential plaintiffs.

"They have identified all of these fraudulent schemes and have Web sites out there saying, 'Hey, if you know anything of this sort, you need to contact me right away,'" says Feinberg.

Kenney's firm is one that's set up such a site . "There are causes of action that would allow the federal government to go after banks and financial institutions that have lent money based on fraudulent mortgage applications, so long as the federal government has lost money somewhere in the process," he says.

Still, some are skeptical that False Claims Act cases against big banks' mortgage divisions will gain significant traction. Besides the fact that the banks are already being targeted by all 50 state attorneys general, federal regulators, private litigants, Fannie Mae and Freddie Mac, the Justice Department would have to mount several legal hurdles, with limited resources to do so.

First, prosecutors would have to prove that whistleblower claims actually represent fraud. Prosecutors would have to prove that fraudulent practices were spread throughout the organization's culture and enforced by management -- not just related to a few rogue underwriters. And they'd have to determine beyond a reasonable doubt that banks are the ones to blame.

Burns, of Taxpayers Against Fraud, points out that there are many bad actors in most fraudulent mortgage cases: Borrowers who signed documents that misstated their income and home values, appraisers who determined those inflated values and intermediaries who rubber-stamped the documents before pushing it through to the bank.

"Let's say a house was sold for $300,000 but it's only worth $100,000," says Burns. "Well, is that the bank's fault? Or is that the appraiser's fault? Mind you, the appraiser doesn't have any money. So, if you find that every appraisal done by Bank of America was bupkis -- that all of the homes were appraised at $300,000 but only worth $100,000 -- then you've got a pattern. But if it's only these 15 houses in upstate Michigan, then you can argue that the problem is episodic, it's not chronic."

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