Back in February, 2012 the attorneys general of 49 states reached a settlement with five of the nation’s largest mortgage lenders to put an end to possible litigation surrounding allegations of fraud. The case was borne out of a thorough investigation and subsequent whistle-blower report by 63-year-old Lynn Szymoniak, an attorney and former insurance industry investigator. For her efforts Szymoniak earned some $18 million out of a total $25 billion settlement.

In reporting the story late last week Bloomberg cited Szymoniak’s lawyer, Richard Harpootlian, who claims the banks picked the wrong individual to go after. Her many years of investigative experience meant she was well-prepared to uncover the truth.

“When they did this to her, they picked the wrong person at the wrong time in the wrong place,” said Harpootlian. “They stuck their hand into the beehive.”

For their part, the banks refused to admit any culpability in agreeing to the settlement. They claim that the procedures put in place by the federal government over the last 20 years has led to such confusion that it’s nearly impossible to process a foreclosure without getting something wrong. Nonetheless, all five have implemented procedural changes to help prevent document errors in the future. Citibank has specifically stated they don’t believe there are any systemic issues within their foreclosure process.

According to spokesman Mark Rogers “the changes and safeguards implemented give Citigroup confidence that there are no systemic issues in its existing foreclosure process.”

Plenty of blame to go around

For many, the news of the settlement and subsequent awards to whistle-blowers is good in that it holds banks accountable for their actions. Regardless of how convoluted and complicated the mortgage process has become it remains a bank’s responsibility to keep proper records. There really is no excuse for a bank to not know who owns a mortgage – whether that is the bank itself, Fannie Mae or Freddie Mac, an investment bank, or an individual investor.

By the same token, we can’t ignore the actions of the federal government which contributed largely to the housing bust; actions that continue today and could potentially lead to a repeat crisis. Those actions include the Housing and Community Development Act of 1992 which essentially inserted Fannie Mae and Freddie Mac into the business of risky mortgages and forced them and their lending partners to make loans they would not otherwise make.

Other changes throughout the administrations of George H.W. Bush and Bill Clinton created further risk to the extent that the New York Times published a report in 1999 warning of the potential collapse of Fannie and Freddie if the country ever ran into tough economic times. Their prediction came true in 2008 when too many distressed homeowners could not make good on their mortgages.

Finally, we also can’t ignore homeowners who, like those involved in the tobacco settlement of 1998, made the choice to take on mortgages they couldn’t afford. While it is unfortunate that loss of employment, health issues, and other circumstances have caused people to fall behind on their mortgages it is not reasonable to expect banks to simply absorb all those losses. Doing so would eventually lead to their collapse and the total destruction of the U.S. economy.

Lessons learned?

If nothing else, the foreclosure settlement indicates we probably have not learned our lessons yet. Rather than actually fixing the problems that have caused the mess we are simply glossing them over by collecting money from banks and redistributing it to chosen individuals. This does nothing to prevent a repeat in the future.