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
Mondo QT
*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 Send comments or confidential tips to:
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8 users commented in " Mortgage Fraud Modification For Dummies "
Follow-up comment rss or Leave a TrackbackYou got it! it is exactly what you wrote, I m in the mortgage business in California (Southern California) mortgage capital of the world and full of dishonest brokers, lenders, appraiser, loan officer and processor.
It make me sad to see nothing being done and the only thing I see is a house leaking everywhere and we can putting more water on top…meaning I see to many bad characters making money from the government and the governtment keep giving them more money, instead of stopping the leaks.
The leaks are all those dishonestbrokers and lenders.
Those fraudsters are clever, all right. And surely the little guys being unearthed will contribute more mass to an economy plummeting in sickening freefall. But they’re small potatoes, aren’t they, compared to the collusion of some others that just blew the world to hell. Anywhere you go these days you hear anger boiling up. People are seething, saying these rats should be in jail.
Frank Rich (NY Times), once again, asks THE question: “Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips.”
Who’s going to start going after the big bad guys? They’ve really, really hurt a lot of people.
And when will the press raise a voice demanding the BIG investigations?
Excellent question. And I agree that the “big bad guys” did more damage than the myriad small spuds who gamed the system. But the contribution that the latter made to the situation needs to be acknowledged– not swept under a carpet of taxpayer money. Without the spuds, the big guys would have had nothing to slice and dice.
I’m sure most of these loan modifications are useless. The banks have no real intention of helping people, but some Government programs may help certain people. The following article has some good information on the Mortgage Modification program….
http://www.bearmarketinvestments.com/mortgage-modification#mortgage-modification
Words from a Very Outspoken and Opinionated California Litigation Attorney (like there’s any other kind)
Here in California, our Department of Real Estate website (dub dub dub dot dre dot gov) lists the companies that have DRE “permission” to modify loans… add to this list any licensed California attorney, and that is where you should begin your due diligence search when you seek help in California. Other states probably have similar laws, so check with your own state DRE and state bar.
My law firm has been getting more and more calls recently from homeowners that were victims of predatory lenders who put them into an unaffordable loan and now fell into the hands of those same people who sold the toxic loans but profess to be saviors… DON’T BE A VICTIM TWICE! What’s that they say, “Fool me once, shame on you, but fool me twice, and I’ll sue your butt!”
Do your homework and THOROUGHLY investigate any firm before hiring them to save your biggest asset and the place you call “home.” Scammers are popping up like dandelions on a freshly mowed lawn in April. They advertise on the Internet, freeway billboards, radio, television, and print media everywhere, not to mention spamming your email box with those third-world widows needing someone to receive three million dollars for them. Make no mistake, in many cases, these “loan modification experts” are the exact same loan officers and mortgage brokers who fleeced homeowners the first time around. After losing their jobs with the crash of the mortgage industry, they have found a new way to make ill-gotten profits from hard-working homeowners through loan modifications.
In California, with very few exceptions (and attorneys are one exception… no coincidence there… attorneys make the laws), it is against the law for anyone to take money up front for helping a homeowner who is in default. Don’t trust a company that begins its relationship with you by breaking the law.
HERE’S THE BOTTOM LINE!
Hire an attorney – and not just any attorney either - one with experience in mortgage law, not just one with real estate law experience but one with experience in both FEDERAL and STATE litigation against mortgage companies, one who doesn’t also do family law, criminal law, admiralty law, and immigration law as well, one who limits the practice to mortgage law (or at least a great majority of it), one who has the experienced staff, training, and know how to take on the big lenders and their top notch lawyers (lenders have attorneys – and darn good ones – check out their counsel on the web – big names top schools, shouldn’t you have a lawyer too?).
We are not talking about a refund on your broken television here, we are talking about hundreds of thousands of dollars and your HOME – if you don’t think this is the time to hire a highly educated and experienced professional instead of a weekend schooled, almost out of work, broker slash loan officer slash “expensive water in a wine bottle with alleged magical curative powers” salesperson, I don’t know what would make you take things seriously.
Of course, this is one obnoxious lawyer’s totally biased opinion, but one based on many many distressing calls to my office every day. And, yes, my firm loves taking cases against loan modification companies who have violated laws. This field is quickly becoming one of the fastest growing sections for our mortgage law firm.
- Paul J. Molinaro, Esq.
Thank you Barney Frank, thank you Citibank. With a resumption of the uptick rule, and Citi providing some good old fashioned guidance, we may be seeing light at the end of the tunnel.
Next step? Lock in a low mortgage rate. Make the banks compete, do not give away your business! Want multiple quotes? Who doesn’t.
http://loanlane.com/make_lenders_compete.php
Remember, be safe! And let go DOW 7,000!
Ain’t it great when folks troll for shifty bidness by parking their ads in antithetical places?
I’ Edward Hernandez is so shocked of people taking advantage of others with modifications, If I had the power to get all this people under control and busted i would.
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