Home > Uncategorized > Mortgage and Securitization Fraud: Where’s the Task Force?

Mortgage and Securitization Fraud: Where’s the Task Force?

from Dean Baker

It was almost four years ago that Federal Reserve Board Chairman Ben Bernanke, Treasury Secretary Henry Paul Paulson, and then New York Fed Bank President Timothy Geithner ran to Congress warning that the end of the world was near. They told members of Congress that the banks were drowning in bad debt and without a massive bailout they would soon be forced into bankruptcy. Congress quickly coughed up the money in the form of $700 billion in TARP loans. The Fed contributed trillions more.

Undoubtedly most of the bad debt was due to stupidity, which does not seem to be in short supply on Wall Street despite the high paychecks. The folks running the major banks somehow could not see the largest asset bubble in the history of the world. The fact that house prices had risen by more than 70 percent above their trend level, with no plausible explanation in the fundamentals of the housing market, did not trouble these high-flyers.

But there was more than just stupidity involved here. There was an epidemic of mortgage fraud that was identified by the FBI as early as 2004. The general story was that the big subprime issuers were pushing their agents to issue as many mortgages as possible, because they knew that they could sell almost any mortgage the next day in the secondary market. As a result many mortgage agents put down information that they knew to be false, often changing information provided by applicants, to allow borrowers to get mortgages for which they were not actually qualified.

Clearly much of this sort of fraud took place. There were many accounts of people who received mortgages with payments that would have taken up their entire income. In some cases, the applicants may have been responsible for the false information. According to the FBI, in most of the cases it was the lenders who put down the false information so that they would be able to issue a loan that could be sold in the secondary market.

During the bubble years I had several people send me e-mails saying that friends or relatives were being told by their supervisors at major lenders to fill in false numbers to allow people to get mortgages for which they were not qualified. While anyone can make up anything in an e-mail, the fact that I got similar accounts from multiple sources suggests that this sort of fraud was actually taking place on a substantial scale. (The alternative explanation, that there was a conspiracy to fool me, hardly seem very plausible.)  The question is how high up in the corporate hierarchy did this fraud originate?

A serious investigation would start at the bottom and work up. It would find offices where many of the especially bad mortgages were issued. The investigators would question the mortgage agents about how so much false information ended up on loan forms.

After scaring some number of mortgage agents into talking, they would then talk to the branch managers. If they got 2-3 branch managers to acknowledge that they had pushed such agents to falsify information, they would then press them to reveal how they decided to engage in mortgage fraud. This practice could lead to the top levels of the bank.

The same policy could be followed with securitization. There have been enough e-mails uncovered and public statements from insiders to know that some people within the major investment banks knew that many of the mortgages that they were securitizing were fraudulent. It is of course against the law to deliberately pass on fraudulent mortgages. It is also against the law to ignore clear evidence of fraud when rating these issues, as appears to have been the practice of the bond-rating agencies.

In short, it seems that there was a lot of crime here, but not much effort at enforcement? In its first three years the Obama administration did almost nothing to investigate criminal practices that contributed to the bubble and the subsequent meltdown. The attorneys general settlement on robo-signing in January called for a task force to be headed by New York Attorney General Eric Schneiderman.

Almost four months later there is little evidence that this task force is making much progress. For example, if someone wanted to contact the task force to report evidence of fraud, they would certainly have a difficult time surfing the web to find a phone number to call or an e-mail address.

With the statute of limitation for many possible offences being reached in the near future, if it has not already been reached, there should be a serious sense of urgency about this issue that is altogether lacking. If the Obama administration pursued Al Queda with the same vigor as it’s investigating financial fraud, Osama Bin Laden would be sunning himself on some beach in the Caribbean.

This is not just a question of holding the bad guys accountable as a matter of justice. The far more important point is to alter the incentives in the financial industry to change their future conduct. It should not be acceptable for people in the industry to commit fraud and there should be serious consequences for those who do. At the moment, fraud for profit looks like a bet that only has an upside.

See article on original website

  1. henry1941
    May 26, 2012 at 9:14 pm

    Can’t the suspects be held in Guantanamo bay whilst the investigations are in progress?

    • Garrett Connelly
      May 26, 2012 at 10:31 pm

      Yes, national security criminals can be detained indefinitely on secret evidence. Or send them to Hurlong with Tim de Christopher.

  2. May 27, 2012 at 12:20 pm

    Dean Baker (DB) said: “Undoubtedly most of the bad debt was due to stupidity…”, if only stupidity pays so well. Then he goes on to contradict himself by saying: “Clearly much of this sort of fraud took place.” and “In short, it seems that there was a lot of crime here, but not much effort at enforcement?” DB needs to make up his mind between stupidity, fraud, crime or whatever. Best of all, he should do some serious research, gather some facts and read some writers who do more than speculate, before he wastes my time.

    • SM
      May 27, 2012 at 6:02 pm

      The bad debt was at the wall street banks(lehman, etc) in the secondary market, which was stupidity. The mortgage companies (countrywide, etc) were the ones committing the fraud because they knew “stupid” was buying the fraudulent mortgages tomorrow. I’m not sure how you couldn’t understand such a simple article.

      And how do you expect him to gather facts when there was no investigation to do precisely that? Ask nicely?

    • buermann
      May 28, 2012 at 5:22 pm

      How does “most” contradict “much”? For that matter, how does stupidity exclude criminality? The sole point of this post is that the task force should be doing “some serious research, gather some facts”.

  3. Roman Berry
    May 27, 2012 at 12:26 pm

    With the statute of limitation for many possible offences being reached in the near future…

    …the plan has worked exactly as intended. (We have seen this game before from the Obama admin.)

  4. May 27, 2012 at 5:12 pm

    Anyone who examined the HUD 1 Settlement Statements would have seen huge problems with mortgage loans.Many people didn’t qualify. Many straw buyers were used, and very little was done to make sure that loans were made to buyers who actually earned enough to repay them. It’s easy to blame the victims, and there were plenty of people who cheated. But there was an entire industry geared to churning mortgages and flipping houses.
    It was a crook’s paradise. And the consequence is that there are still people out there struggling to hang on to their homes.


  5. bbbar
    May 28, 2012 at 6:28 pm

    Criminologist William Black (professor of economics and law at the University of Missouri KC) has written about this extensively. In fact, he writes about almost nothing else. He describes and documents pervasive control fraud at these financial institutions.

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