|February 25, 2009: During the housing bubble years mortgage fraud became the white collar crime of our time. The FBI issued report after report about its epidemic growth as did other entities, both public and private, that track financial crime trends. Yet mainstream news coverage was spotty. Some strong stories did appear but overall the topic was buried by odes to climbing the property ladder, flipping rehabs, and reaping home equity via refi. Real estate touts were quoted as impartial economic sages and depending on the journalistic slant, ideological support was culled from Ownership Society boosters (Bush was big dog) or the affordable housing holy rollers whose real estate deals get called “non-profit”. Hallelujah! There was a wack mortgage out there for everyone. Free market or taxpayer-backed. No deadbeat left behind. |
Thanks to identity theft by mortgage fraudsters, actual stiffs were eligible too.
Before subprime ruled the world of riskier mortgages, fraudsters partied with loans backed by the U.S. Department of Housing and Urban Development (HUD) through its sub-agency the Federal Housing Administration (FHA). (The FHA doesn't make mortgage loans; it guarantees ones made by approved lenders.) In early 2001, former HUD Inspector General Susan Gaffney told a congressional committee that fraudulent flips of FHA mortgage properties were a growing problem in inner city neighborhoods. Later that year Senator Susan M. Collins, Chair of the United State Senate Permanent Subcommittee on Investigations, said the federal government had “essentially subsidized” much of the mortgage fraud in the nation's cities. Senator Collin's comments appear in the report “Property Flipping: HUD's Failure to Curb Mortgage Fraud” issued by the Committee on Governmental Affairs in September 2001.
Out in the free market fields, subprime was coming on strong. Subprime demanded less borrower skin than FHA mortgages. The FHA also set a ceiling on loan size. As subprime surged the FHA attempted to compete by lowering standards and lifting its ceiling. But subprime standards limboed down to the ground. As for loan size, the sky was the limit. Deluxe condos in hot urban areas and suburban McMansions could be flipped like inner city slums for a whole lot more profit. And subprime made inner city slums look (on fraudulent paper) like deluxe condos and suburban McMansions. The grandest illusion of all was the air loan-- a mortgage for nonexistent property.
By early 2002 the FBI was mulling intelligence about pervasive fraud in the subprime mortgage industry. But their eyes were on mid level mortgage brokers; they missed the nexus of lenders who packaged “dung”* and the investment banks that peddled it as mortgage-backed securities. Apparently, the relevant/irrelevant regulatory and oversight agencies weren't whistle blowing to the feds and manpower for financial crime investigations was stretched thin by Enron et al and attention to terrorist financing.
In 2004 former FBI Assistant Director Chris Swecker turned psychic in testimony to the House Financial Services Subcommittee. He predicted that if “mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market”. The FBI continued to issue a string of warnings and reports. They also launched takedowns; including Operation Continued Action, Operation Quick Flip, and in 2008, Operation Malicious Mortgage. The latter involved 46 FBI field offices and rounded up some 400 perps. Primarily mid level real estate professionals operating in organized rings.
On February 11th 2009, FBI Deputy Director John S. Pistole testified before a panel of the U.S. Senate Judiciary Committee headed by Senator Patrick Leahy (D-Vt.). The hearing's topic was “The Need for Increased Fraud Enforcement in the Wake of the Economic Downturn.” According to Pistole, the case load of mortgage and corporate fraud is “straining the FBI's limited white-collar crime resources”**. Neil Barofsky, special inspector of the Troubled Assets Relief Program (TARP) also testified. Barofsky sees fraud clouds looming over not just TARP, but the Holy Stimulus. Saying “history teaches us that an outlay of so much money in such a short period of time will inevitably draw those seeking to profit criminally.”
The original version of the stimulus package included a $75 million allotment for FBI job creation; 165 new agents would have been trained to focus on mortgage fraud. When the stimulus emerged in its final form the FBI beef-up was gone. According to the Kansas City Star (FBI's anti-fraud efforts get no boost from stimulus package, 02/13/09) Republicans pushed the removal. If only Democrats had gone to the wall. As Senator Leahy, a former prosecutor, said at the Judiciary Committee hearing “you can have all the laws of the world in the books but if you don't have the resources to enforce the laws, and actually go out there after the people who have broken the laws, they are meaningless.”
Senator Patrick Leahy, along with Senator Chuck Grassely (R-Iowa) recently introduced the Fraud Enforcement and Recovery Act of 2009. The bill contains a number of provisions aimed at plugging the holes in which mortgage fraud and other financial crimes flourish.
Before subprime imploded many people, both in and out of government, pooh poohed mortgage fraud. The social bennies of home ownership for everyone, as enabled by EZ lending, outweighed the danger of EZ mortgage fraud. The threat of foreclosure fallout was overstated. Banks don't want to be in the real estate business; they'd never foreclose on a large number of properties. The few homes that bounced back could easily be recycled back into the boom. And if property values were inflated by phony appraisals, insider flips, and oversize loans so what? When it came to inner cities, fraud was doing the Lord's work by boosting values. As it was in feeding an equity-dependent consumer economy and local governments hungry for property taxes. Besides, real estate always goes up. False values would soon become real. Why shouldn't people benefit sooner rather than later?
The danger of encouraging a widespread wink-wink re financial fraud didn't register either.
There was (and is) disagreement over the nature of mortgage fraudsters as well. Some perish the thought of the little guy as willful cheat. If Lil' Guy lied on bank docs about income and employment, took downpayments from interested parties and kick-backs from inflated loans, and dumped the home he “bought” when big payments came due, he was manipulated into doing so by predatory lenders and their cohorts. The story of how Lil' Guy had his American Dream of Home Ownership stolen has been in the news every day for the past two years. Gung-ho proponents of the Lil' Guy theory even give out-and-out strawbuyers (low level mortgage fraud players who serve as fronts for flippers) a pass.
Then there's the theory of limited engagement. Sure, crap underwriting caused much of the mortgage mess and fed the immensely profitable secondary market in crap securities. But the crap crop which caused the crash was erroneous not felonious. No lenders and investment entities colluded in massive organized mortgage frauds. The real fraudsters were few in number and their impact was small. They were/are mid-level bad apples. Mainly mortgage brokers and appraisers. Maybe a rogue loan officer or two. Bad apples should be rooted out. More regulation is in order. But please-- no criminal probes above the knees.
Amazingly, the two theories about mortgage fraud perps sometimes coexist in one brain.
When subprime first hit the fan, mortgage fraud and its perpetrators, lil' and big, got some hard looks. For about 15 minutes. Now it's mortgage modification time in the United States of Real Estate. We all have skin in the game. Cue the violins and roll out the taxpayer subsidized cram-downs for Lil' Guy. (Rest assured, only the deserving will be rescued.) Put a taxpayer cushion under financial institutions that at Pollyana-best turned a blind eye to mortgage fraud and then flung the dung at investors. Away with all free-market real estate fraud. Back to the kind backed by taxpayers from the get-go, not after the fact. The Holy Stimulus won't be packing FBI heat but it will pump billions into HUD.
The mortgage mess has given HUD a shot in the arm. As well as being the parent agency of the FHA, HUD is uber the Federal Housing Finance Agency (FHFA). The latter morphed out of OFHEO, the notoriously ineffective oversight organ for the taxpayer-backed mortgage financiers Fannie Mae and Freddie Mac. Once upon a time their mission was to help moderate income homebuyers by providing a secondary market for mortgages. Eventually Fan and Fred's mission shifted to housing bubble support. Good news from the FHFA on that front: thanks to the American Recovery and Reinvestment Act (ARRA) Fan and Fred will be allowed to buy mortgages from lenders at a new top rate of $729,750 for single unit properties. The top dollar is particularly needed in areas where property values were hyper inflated and voluntary investors in the secondary mortgage market are scarcer than hen's teeth.
Any anxiety re HUD's ability to cram down fraud in Fan and Fred's mortgage aquisitions should be assuaged by the attitude of new HUD head Shaun Donovan. According to the New York Times (A Homecoming for HUD's New Secretary, 02/13/09) Donovan frankly acknowledges that HUD has long had an “inability to accurately report what we are spending, how we are spending it.” Donovan is determined to change HUD's dysfunctional ways. He should be able to get right to it, sans learning curve. Donovan piloted the FHA during its transition from Clinton to Bush. Right around the time when the two Susans (Gaffney and Collins) were pinning the inner city mortgage fraud tail on HUD and the FHA in congressional hearings.
Carola Von Hoffmannstahl-Solomonoff
*FBI saw mortgage fraud early, Paul Shukovsky, Seattle Post-Intelligencer, 02/09
**'Exponential Rise' in Mortgage Fraud Seen by FBI (Update1), Justin Blum, Bloomberg.com, 02/11/09
Sources include but are not limited to:
2009 Conforming Loan Limits Increased By American Recovery and Reinvestment Act, News Release, Federal Housing Finance Agency, 02/23/09
Mortgage Fraud Surges: Report, Kelly Curran, Housing Wire, 02/09/09
Mortgage Fraud: A Scourge of the 21st Century? Joseph T. Wells, The CPA Journal/Insurance News Net, 02/09
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