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Boiler Rooms and Foreclosure Mills: A Brief History of America's Mortgage Industry

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The news about the nation's foreclosure scandal has been coming fast and furious, fueled by tales of backdated documents, false affidavits and "rocket dockets" that push families into the street.

A former employee with one of the nation's largest lenders testifies that he signed off on 400 foreclosure documents a day without reading them or verifying the information in them was correct.

Ex-employees of a law firm that serves as a "foreclosure mill" for major lenders describe a workplace where speed -- not accuracy or justice -- trumps all. "Somebody would get a 76-day foreclosure," one recalled, "and then someone else would say, 'Oh, I can beat that!'"

Shocking stuff. But surprising? Not for anyone who's been tracking the recent history of the mortgage machine. Just about every corner of America's mortgage industry has been blemished by significant levels of fraud over the past decade.

Forged Signatures, Fake W-2 Forms

On the front end of the process, for example, many mortgage pros used "boiler-room" salesmanship to peddle loans to borrowers who didn't understand what they were getting and couldn't afford their loans in the long run. To make these deals go through, some workers forged borrowers' signatures on key disclosure documents, pressured real estate appraisers to inflate home values, and created fake W-2 tax forms that exaggerated loan applicants' earnings.

At Ameriquest Mortgage, one of the companies I focus on in my new book about the subprime mortgage debacle, The Monster, this sort of cut-and-paste document production was so common employees joked that the work was being done in "The Lab" or the "Art Department."

Here's a snippet from the book, from a passage about Stephen Kuhn, a young Ameriquest salesman who eventually became distraught about the things he had to do to earn his living:

The pressure to produce began to get to Kuhn. After he became a branch manager, he saw a bigger picture of how Ameriquest was treating its customers. Many nights, he had to drink a twelve-pack of beer to get to sleep. He asked for a demotion. He wanted to go back to being a salesman.

Even that didn't work for him. He felt trapped. To hang on to his job, he had to put borrowers in deals that sank them deeper into ruin. One of his customers was a veterinarian who was having tax problems. The IRS was threatening to close down his business. Kuhn arranged a loan for the veterinarian that "had no benefit whatsoever. It was a terrible loan." Another customer was a small businessman, the owner of a Chinese restaurant. Kuhn put the man into a stated-income loan that raised his payments by $200 a month, even though he was struggling to keep up on his existing mortgage. "He was desperate," Kuhn said. "So I was told to take advantage of him." Kuhn said a supervisor ordered him to cut and paste documents to make the loan go through, telling him, "It's a three-hundred-thousand-dollar loan. Get it done." The borrower was facing foreclosure on his existing mortgage, so Kuhn forged his mortgage history so it looked like he'd never been late on his mortgage.

By the summer of 2003 Kuhn couldn't take it anymore. He told his manager he was having trouble dealing with things, because he thought Ameriquest's rates, fees, and business ethics were terrible. Soon after, on a day when Kuhn was out sick, his manager left him a cell phone message telling him it would be in everyone's best interest if Kuhn and Ameriquest parted ways. Kuhn called back and asked why he was being fired. The only answer the manager would give him, Kuhn said, was, "I think you know."

Kuhn was far from alone, at Ameriquest and other lenders around the country.

As the Center for Public Integrity documented in its 2009 investigation, "Economic Meltdown: The Subprime 25," many of the largest financial institutions in America were key players in the subprime market -- and many of them had to make payments to settle claims of widespread lending abuses.

Little was done to stop the bad practices when they were happening. Former Federal Reserve Chairman Alan Greenspan would later explain to CBS' 60 Minutes: "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn't really get it until very late in 2005 and 2006." The Fed took no action even when it became aware of the problems, he said, because "it's very difficult for banking regulators to deal with that."

With federal officials pushing a soft approach to policing the mortgage market, it was left to the states to do what they could to try and rein in the worst practices. A coalition of state authorities dug into Ameriquest's tactics, eventually forcing the company to agree to a $325 million loan-fraud settlement.

States Again Take the Lead
Now that a fresh scandal has emerged in the mortgage industry, the states are once again taking the lead in confronting the problem. At least seven states are investigating questionable foreclosures.

On Wednesday, Ohio Attorney General Richard Cordray sued Ally Financial Inc. and its GMAC Mortgage division, claiming that workers at the company had signed and filed false court documents in an effort to "increase its profits at the expense Ohio consumers and Ohio's system of justice." Cordray called the alleged misconduct the "tip of an iceberg of industrywide abuse of the foreclosure process."

Now the question becomes: How forcefully will federal officials intervene? Key members of Congress are pushing U.S. Attorney General Eric Holder and current Fed Chair Ben Bernanke to investigate. Holder said at press conference Wednesday that "we are aware of the charges that have surfaced in the newspapers in the last couple of days, and we are looking at them."

The White House announced Thursday afternoon that President Obama would not sign a bill that some consumer advocates worry would make it harder for homeowners to fight fraudulent foreclosures. The legislation would generally require state and federal courts to recognize notarizations made by a notary public in any state -- and require courts to recognize electronic notarizations.

Congress and other powers in Washington failed to get the facts and act the first time around -- when lenders were engaged in a frenzy of predatory lending. The foreclosure scandal is a second chance for lawmakers and bureaucrats to prove that they can ferret out the truth and take action.

Michael Hudson is a staff writer with a nonprofit journalism organization, the Center for Public Integrity, and author of The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis (Times Books, October 2010).