Christine Varney, the assistant attorney general in charge of the Justice Department’s Antitrust Division, has decided to scapegoat third-party investors for not doing enough to bail-out banks and home buyers who entered into risky mortgages. Since last year the Obama-created “Financial Fraud Enforcement Task Force,” which includes the FBI and Varney’s division, has been actively policing public foreclosure auctions and prosecuting bidders who, in Varney’s estimation, aren’t bidding high enough for properties. Instead of pursuing the scores of federal officials who inflated the housing bubble, Varney has chosen to prosecute — and imprison — these private bidders for what she deems illegal “price-fixing.”
Yesterday Varney announced eight individuals in California were forced to plead guilty to Sherman Act violations after participating in what Varney deemed an illegal scheme to drive down the prices paid at public foreclosure auctions by staging subsequent private auctions:
According to the court documents, the real estate investors conspired with others not to bid against one another at public real estate foreclosure auctions in Northern California, participating in a conspiracy in various lengths of time between May 2008 and January 2011. After the conspirators’ designated bidder bought a property, the conspirators would hold a secret, private auction at which each participant would bid the amount above the public auction price he was willing to pay. The [DOJ] said that the secret, private auctions took place at or near the courthouse steps where the public auctions were held. The highest bidder at the private auction won the property. According to the court documents, the difference between the public auction price and that at the second auction was the group’s illicit profit, and it was divided among the conspirators, often in cash.
The profit was “illicit,” according to Varney, because in her mind, any auction proceeds should go to pay off the original mortgage and, in some cases, to the original homeowner. Because the eight investors put their own financial interests ahead of banks that made bad loans, they are now felons according to Varney, who blamed the eight investors for exacerbating the country’s foreclosure crisis:
While the country faces unprecedented home foreclosure rates, the collusion taking place at these auctions is artificially driving down foreclosed home prices and is lining the pockets of the colluding real estate investors. The Antitrust Division will vigorously pursue these kinds of collusive schemes that eliminate competition from the marketplace.
Varney’s economic ignorance truly knows no bounds. In the first place, there was no “artificially driving down foreclosed home prices.” If anything, the investors were trying to restore the market wrecked by decades of government efforts to artificially inflate home prices. The reason the country “faces unprecedented home foreclosure rates” is that Varney’s sister regulators did everything in their power to ensure people with little or no credit obtained cheap mortgages. As Doug French noted in his recent book, Walk Away:
Congress gave Fannie Mae and Freddie Mac a mandate to increase their purchases of mortgages going to low and moderate income borrowers by passing the Federal Housing Enterprise Financial Safety and Soundness Act of 1992.
The very next year, regulators threw standard historical underwriting out the window. Forget about down payments, good credit, and adequate income to service a mortgage. “Substituted were liberalized lending standards that led to an unprecedented number of no down payment, minimal down payment and other weak loans, and a housing finance system ill-prepared to absorb the shock of declining prices,” writes [former Fannie Mae EVP Edward] Pinto.
In 1994, HUD Secretary Henry Cisneros, working in the Clinton Administration, rolled out a National Homeownership Strategy that championed the looser loan standards and partnered with most of the private mortgage industry, announcing that “Lending institutions, secondary market investors, mortgage insurers, and other members of the partnership [including Countrywide] should work collaboratively to reduce homebuyer downpayment requirements.”
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The looser lending standards had a chain reaction on the mortgage industry. Financial institutions had to compete with Fannie and Fred- die that “only needed $900 in capital behind a $200,000 mortgage— many of which had no down payment,” as Pinto points out. Private institutions did their best to lever up like the GSEs and they relaxed their underwriting to HUD’s affordable housing policies.
And yet, there was never a single DOJ antitrust investigation into whether these “collusive” activities artificially drove up home prices to the detriment of free-market competition. Now we’re supposed to believe there’s a massive problem — warranting a federal task force and prison sentences — for a handful of local speculators trying to salvage some of the wreckage of Freddie Mae and Freddie Mac’s bloated housing market.
The other major flaw in Varney’s argument is that it contradicts the very principle modern antitrust claims to cherish — the supremacy of the consumer. Since when does it violate antitrust law for buyers to join together and seek a better deal for themselves? Apparently, when the sellers are government-sponsored banks.
There’s no argument here that what the investors did harmed competition. By Varney’s own admission, there was robust competition among the defendants in the private after-auction. The crime, according to her, is that private investors got together behind the government’s back and formed a private market. The government wanted to maximize the return to banks and mortgagees. The crime was not that profit was made — it was that the most politically connected group didn’t get a big enough share.
And despite throwing around hollow pejoratives like “illicit profit” and “collusive schemes,” there’s nothing to suggest the investors engaged in any force or fraud. They didn’t prevent anyone from outside their group from out-bidding them at the public auctions. The banks were free to set the terms of the auction — including a minimum acceptable price — and the DOJ never said they weren’t paid the publicly bid prices. Again, Varney’s sole objection is that the investors didn’t take every action to maximize the bank’s profit from their prior bad loans.
This is actually the second time in recent weeks that Varney has demonstrated the crass politics that dominate her office. As I reported earlier, Varney tried to undo a chicken processing plant sale in Virginia on nonsensical antitrust grounds, only to be thwarted by a lack of evidence and external political support. Like the foreclosure auction cases, Varney tried to parlay a political initiative — in the chicken case, a series of “workshops” on how to more aggressively apply antitrust to the agricultural industry — into regulation-by-litigation. She’s trying to manufacture more and more “problems” that require antitrust solutions.