November 17, 2004: During the last few months of the presidential race all eyes were
on the party cake. But other goodies were being served in the
United States of Real Estate. On September 20th an AP story
titled "FBI: Mortgage Fraud is Rampant in the U.S." was carried
by the national and international press. On October 7th, Chris
Swecker, Assistant Director of the Criminal Investigation
Division of the FBI, expanded on the subject before Congress.
Telling the House Financial Services Subcommittee on Housing and
Community Opportunity: "If fraudulent practices become systemic
within the mortgage industry and mortgage fraud is allowed to
become unrestrained, it will ultimately place financial
institutions at risk and threaten the stock market."
Assistant Director Swecker also described how the FBI Mortgage
Fraud Program was being ramped up. Until recently mortgage fraud
investigations by the FBI were handled by 2 different sections of
the agency: "... mortgage fraud that impacted government programs
(i.e. HUD) was managed by the Integrity in Government Section.
Mortgage Fraud affecting financial institutions was managed by
the Financial Crimes Section." Both sections have now been
consolidated into the Financial Crimes Section. Plus, the FBI
has adopted a strategy "to focus on insiders harming the industry
in order to disrupt and dismantle entire criminal enterprises".
The definition of insiders being "appraisers, accountants,
attorneys, real estate brokers, mortgage underwriters and
processors, settlement/title company employees, mortgage brokers,
loan originators and other mortgage professionals engaged in
the mortgage industry."
At the same congressional hearing, John C. Weicher, Assistant
Secretary, Housing/Federal Housing Commissioner at the U.S.
Department of Housing and Urban Development (HUD) testified
that "the costs resulting from a small number of disreputable
individuals are born in part by homebuyers and mortgage lenders,
as well as by taxpayers." Weicher stressed that HUD is combating
the disreputable individuals, as is its sub agency, the Federal
Housing Administration (FHA). The FHA is the largest mortgage
insurer in the world; one of its major missions is providing
mortgage insurance for homebuyers who might not otherwise
qualify for loans.
The Baker Boys
Several weeks later, on October 25th, a press release was issued
by the Appraisal Management Company (AMCO) an "independent
valuations solutions company" based in Cleveland, Ohio. Former
U.S. Housing Secretaries Jack Kemp (R.) and Andrew Cuomo (D.) had
joined the Advisory Board of AMCO! Jack Kemp headed HUD under
Bush I: Andrew Cuomo under Clinton. Both would now assist AMCO in
creating "leading-edge appraisal products and services, ensuring
the most accurate, cost efficient and compliant appraisals for
homebuyers currently on the market."
According to the press release, Kemp and Cuomo announced their
AMCO sign-on to reporters at a Mortgage Bankers of America
Conference. Both men praised current Housing Secretary Alphonso
Jackson for recent efforts to prevent appraisal fraud in mortgage
loans insured by the FHA. Kemp opined: "Secretary Jackson is
headed in the right direction. The question of how to insure
compliance and accuracy while maintaining industry profitability
has plagued the residential housing industry".
Which might translate: Disentangling inflated appraisal values
from the housing market without reducing profits is a tough chaw.
Neither I nor my colleague Andrew Cuomo, in our long years at
HUD and when we were responsible for the FHA, were able to do
so. None the less, we feel qualified to give the new guy a clap
on the back.
The two ex-HUD heads, along with former FHA Commissioner
William Apgar (another AMCO board member) also gave reporters
a six point national housing agenda "meant for the next
administration". The plan expanded upon work done by Henry
Cisneros (also a former U.S. Housing Secretary) and Harvard
University, where William Apgar serves as an in-house housing
expert. The Kemp/Cuomo/Apgar agenda calls for more state
and local urban planning "incentivised"* by HUD funding. No
big surprise there. The plan's position re Government Sponsored
Enterprises (GSEs) is a tad more intriguing.
GSEs are not actual government agencies-- but are granted special
advantages by government. Mortgage marketeers Fannie Mae and
Freddie Mac are the 2 largest GSEs. Between them, Fannie and
Freddie purchase, retain or guarantee roughly 3/4 of the U.S.
mortgage market. Fannie and Freddie don't originate loans: they
buy them in bulk from banks, then bundle them to be sold on Wall
Street as mortgage backed securities. Which enables banks to make
more mortgage loans, since they don't have to wait for earlier
ones to be paid off. Both Fannie Mae and Freddie Mac have serious
credibility problems with their accounting: both have been caught
juggling their books to spread profits more evenly from quarter
to quarter. Many believe the privileged, grey area status of the
GSEs has produced overly powerful institutions not subject to
sufficient oversight. And has led investors to believe taxpayers
will bail out Fannie and Freddie should major problems develop.
Calls for reform of Freddie and Fannie are coming from many
quarters and range from recommendations of a different form of
oversight (at present an agency within HUD is responsible) to
completely severing the relationship between the GSEs and
government. The Kemp/Cuomo/Apgar plan however, warns that the
"quasi-public-private" status of the GSEs "must be preserved":
its concept of reform is essentially one of HUD related
expansion. A review to determine the GSEs "maximum contribution"
to affordable housing is recommended-- though of course, that
potential maximum contribution by the GSEs musn't "endanger
their financial integrity".
Kemp/Cuomo/Apgar also sternly intone that "the need for
affordable housing is at an all time high". Yet HUD has been
working on the problem of affordable housing for decades.
Including lengthy stretches under the leadership of Kemp, Cuomo
and Cisneros. If the need for affordable housing is now "at an
all time high" what the heck has HUD been doing? And is it
possible that some HUD solutions are part of the problem?
But back to that 6 point plan.
Aspects of it show Reagan era influence. With neo-con faith in
quasi-public-private partnerings and targeted tax breaks.
Kemp/Cuomo/Apgar urge HUD to continue to incentivize private
sector growth and job creation in blighted urban areas via the
Enterprise Zone Program and its spin-off, the Empowerment Zone
Program. Both tax credit programs have indeed done a lot of
incentivizin'. More solid suburbs sign up for urban tax breaks
every day. Proving the inexorable law of the targeted tax break:
if you grant it, they will come. Dressed as poor people. In New
York (the home state of Jack Kemp and Andrew Cuomo) charges of
cronyism, insufficient job creation and poor cost effectiveness
within the EZ programs have received much publicity. But little
action. Meanwhile, NYS homeowners pick up the tax slack.
But if urban tax breaks go to suburban enterprises, it fits the
part of the Kemp/Cuomo/Apgar plan that says suburban and rural
areas shouldn't be excluded from HUD's "Continuum of Care". From
the heart of the city to the heart of the forest-- HUD will be
there! Perhaps the "U" in HUD should cease to stand for "Urban".
In favor of "Universal".
Though their party affiliation differs, ex HUD heads Kemp and
Cuomo are the Romulus and Remus of agency over-reach. Mission
creeps par excellence. Inflated by hubris, they stand atop a
mental mountain of public money, moving imaginary populations
around like game pieces. With grand plans for incentivizing more
and more people into doing what they, Kemp and Cuomo, think best.
Despite the growth in mortgage fraud (a sizable amount of
which is connected to HUD programs and home financing practices
advocated by both Kemp and Cuomo) the continuing decline of
many American cities, a string of major public corruption cases
involving taxpayer supported redevelopment, the formation of an
urban underclass that comes close to being a caste, and the
fact that after decades of HUD attention "the need for affordable
housing is at an all time high" Kemp and Cuomo call for more
of the same. Neither will ever look for the cause of negative
social effects in their own cherished brand of grand plans.
The Kemp/Cuomo/Apgar housing agenda presented at the Mortgage
Bankers of America Conference does address mortgage fraud. In
its own words "mortgage fraud and appraisal fraud exist
throughout the homebuying market". The answer is "federal
legislation". Including the establishment of "federal violations
for corrupt lenders and appraisers".
Mortgage fraud should be taken more seriously. The reasons for
doing so, as laid out by FBI Assistant Director Chris Swecker,
are compelling. Similar warnings from other people have been
coming down the pike for years. For example, by 2000 the
Association of Appraiser Regulatory Officials (AARO) was hearing
increasing complaints from appraisers about sellers and lenders
pressuring them to "make the numbers fit". There was even
speculation that the mortgage appetite of Fannie Mae and Freddie
Mac, was causing lenders to become careless. Appraisers were also
concerned that should the poop hit the fan, they'd be the easiest
targets for blame. Around the same time, then Hud Inspector
General Susan Gaffney was warning that HUD's mission had expanded
far beyond its original one and oversight for fraud in its
housing programs was becoming difficult.
So bring on tougher legal times for our rampant mortgage crooks.
But when crime is facilitated by the policies and wishful
thinking of grand planners, not every bit of blame can be laid
at the door of those who realize the possibilities.
Carola Von Hoffmannstahl-Solomonoff
"Do the Hucklebuck/ Do the Hucklebuck/ If you don't know how
to do it
man you're out of luck!"
The Hucklebuck, Chubby Checker, 1960, Written by Alfred & Gibson
*Though "incentive" appears in standard dictionaries,
"incentivized" or "incentivize" do not. However, both do
appear in the Podley and Stuckes 2004 edition of Guide to Bureaucratizing the English Language.
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