Ohio expands mortgage industry probe
NEW YORK (Reuters) - Ohio Attorney General Marc Dann on Wednesday said he would issue more than 15 new subpoenas to a range of mortgage companies, expanding his investigation into boom-time industry practices that are now causing pain for struggling homeowners and investors.
Last year, Dann said, he issued about 15 subpoenas probing a range of players in the mortgage industry -- from mortgage brokers and appraisers to rating agencies and Wall Street investment banks that created asset-backed bonds. Dann argues that industry players knowingly sold loans to inappropriate customers as others passed on risky loans to investors.
"We're going to issue our next wave of subpoenas in the next couple of weeks. We're working our way up the ladder," he said at the Reuters Housing Summit in New York.
Dann plans to issue more than 15 new subpoenas. He declined to identify the companies except to say they include "household-name companies everybody would know," and some in New York.
Surging home prices across the United States had fueled a mania in real estate and mortgages. Wall Street in particular enjoyed record profits fueled by a rising flow of new loans that could be packaged and sold to bond investors.
"The market was so insatiable, folks buying the paper from the wholesalers became more and more aggressive. They were more and more willing to accept worse and worse paper," he said.
But by the peak of the mortgage boom in 2005 and 2006, the loan-hungry machine had pushed people to borrow beyond their means, Dann told the Summit. It also created poor quality loans that have fueled tens of billions of dollars of investor losses as housing and mortgage markets tumbled last year.
"At some point it became obvious that there was something dramatically wrong," Dann said. "We're going to find out who knew. We've got to bring some justice and some equity."
Last year the Democrat, whose home state endures one of the highest foreclosure rates, issued civil investigative subpoenas to companies in the mortgage industry. The probe targets predatory lending schemes but also explores possible violations of antitrust, civil rights and consumer sales laws.
Dann also has said Wall Street underwriters were not just aware of the potential problems in subprime markets but likely fueled the subprime boom with their insatiable demand for loans that could be packaged and sold as asset-backed bonds and later collateralized debt obligations, or CDOs.
The number of subpoenas could mushroom to the hundreds over the next several years, he said in a previous interview. Ultimately, Dann said he wants to bring his mortgage fraud cases to a jury trial, rather than seek settlements.
"The only way to send a message to folks in this town (New York) is by suing them. We've got to step up and hold them accountable," he said. "If I can get this case to a jury in Ohio, you can't fit enough zeros on the check."
Dann on Wednesday also said his office was considering filing a shareholder lawsuit against Fannie Mae FNM.N over its failure to fully disclose its subprime holdings.
Last month, Dann sued Freddie Mac FRE.N, another government-sponsored housing finance company, on behalf of the Ohio Public Employees Retirement System, contending Freddie Mac had engaged in securities fraud because it did not tell investors of its exposure to risky mortgages.
"It appears that (Fannie Mae) also failed to advise their shareholders of the extent of their subprime holdings," he said.
Fannie Mae Chief Executive Daniel Mudd, speaking by phone to the Reuters Summit from Washington, said he was unaware of the potential litigation but that he was confident that the mortgage finance company had made complete disclosures.
"We are believers in transparency and disclosure, and I certainly stand behind everything that we've put out," he said.
Ohio in 2004 filed a shareholder lawsuit against Fannie Mae related to past accounting issues, alleging that it had manipulated earnings to inflate its share price.
Dann also told the Summit that Ohio is considering a suit on behalf of state pension funds that invested in auction rate securities, a market that is now nearly frozen.
Auction rate securities -- debt instruments touted as highly liquid, short-term cash management tools -- have been caught up in the credit crunch. Investors are finding that cash they thought would be accessible is tied up indefinitely.
"There are potential disclosure issues," Dann said. "They've been kind of treated as a cash equivalent. My guess is that somebody in our state government bought them."
(Reporting by Joe Giannone; Additional reporting by Emily Chasan and Martha Graybow; Editing by Brian Moss and Gerald E. McCormick)
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