U.S. Mortgage Fraud Remains at Epidemic Levels

Despite the Wall Street crash and bailout, U.S. mortgage fraud remains at epidemic levels. The math tells the story. The U.S. Treasury Department, under the authority of the Bank Security Act, collects "suspicious activity reports" (SARs), which the financial industry is required to file. In 2000, the Treasury received 3,500 of these reports of fraudulent mortgages. It received 18,000 SARs in 2004, 21,000 in 2006, 46,000 in 2007 and more than 63,000 in 2008.

On May 21, 2009, Robert S. Mueller III, director of the FBI, testified before the House Judiciary Committee that the mortgage industry had filed more than 33,000 SARS in the first 7 months of fiscal year 2009, representing about $22 billion of potential mortgage fraud. When the final numbers for fiscal year 2009 are released, the total will be at least as high as during the pre-crash period.

The sheer magnitude of this crime wave has overwhelmed FBI capacities. In part, this reflects the shift earlier this decade of more than 2,400 agents to anti-terrorism work and the failure of the Bush administration and Congress to provide adequate monies to hire replacements. In fiscal year 2007, the FBI had only 120 agents assigned to mortgage fraud. That number increased to 180 agents in FY 2008 and 250 today.

This situation will not be changing in the near future. The FBI will not have the additional necessary assets to investigate much more of this fraud because the Obama administration has requested of Congress only enough additional funds to hire 50 new special agents and 91 professional support staff.

One immediate action the administration and the existing regulatory agencies can take, and under current reduced funding levels, is to administratively rid the financial industry of the people who created the current crisis. A legal and long-used means exists - impose a lifetime ban on working in the securities and financial industry.

The experience of former financial star Henry Blodget illustrates how. Blodget was a high visible financial analyst at Oppenheimer & Co. and then at Merrill Lynch during the 1990s. After the bust of the dotcom bubble, the Securities and Exchange Commission and other law enforcement agencies examined copies of his emails, revealing that his real assessments were other than what he published for clients. The SEC charged him with securities fraud. Although he settled without admitting or denying the allegations, the SEC barred him for life from working in the securities industry. Hundreds of other people in the money industry need sidelining along with Blodgett.

Among those who merit a lifetime ban are the CEOs of those institutions that failed because of their sub-par mortgage activities. So too are the directors of those corporations.

In American corporations, the buck stops with its board. A member of a private corporate board of directors has major duties: provide continuity; select, appoint and, if need be, fire a chief executive; govern the organization by broad policies; acquire resources needed for operation; and account to the public for the products and services and the expenditures of funds.

One of a board's principal responsibilities is to provide for fiscal accountability and accept responsibility for all conditions and policies aligned with new or experimental programs. Under the self-regulation ethos that existed during the years leading up to the present financial crisis, the CEOs and board members were particularly responsible for the actions of the institutions they headed. And, with this responsibility should come accountability.

Nothing can better send a message to the world that the United States is serious about restoring the soundness and integrity of its money industry than by banning from it the prominent people who deceived the nation and the world, and sending some to prison for a long, long time.

 

Comments

[DosGatos2]

Perhaps banks should not be publicly traded. The ever-increasing need for profits and larger CEO bonuses means corporations have to suck their customers dry by whatever means necessary, including fraud. This is true of credit cards too when the bank is publicly traded. No one on the BOD is ever going to "no, don't do that because its wrong, usurious or fraudulent", the more likely answer is ""go figure out a way to make it legal or at least seem legal so we can make more money".

Mortgage lending and credit cards used to be a downright stodgy business. We have totally forgotten that banking is a public service, and banks are chartered by the feds or a state to perform the public service of lending money and expanding/­contractin­g the money supply. Somewhere along the line however, the servant became the master.

Nice to see the SEC getting back to enforcing the securities laws though!!

[DuganS1]

Privately owned companies operate for profit just like publicly owned companies do. Are you suggesting that government should take over the banking industry? The mortgage lending and credit card business doesn't operate merely as a public service. Those businesses operate to make money. This is a capitalist country.

[DosGatos2]

Banksters would rather no one remembered that banks are a public service as it would be inconsistent with their arrogance and self-importance, and dilute their ability to defraud people to make money.

Banks should operate as a public service, but "government takeover" is not a necessity unless the bank goes under. And, privately owned, government-run or publicly traded are not the only possible banking models.

Credit unions are member-owned for-profit entities. CUs are pretty plain vanilla (which is all we need them to be) and their presidents don't make huge salaries and bonuses. There are no marble floors or $35,000 antique credenzas. A CU's functions are limited by law, so there is no investment banking arm taking inordinate risks with member money. In addition, CUs generally have lower rates on mortgages, car loans and credit cards than the big banks and try to return more money in the form of interest to members.

The publicly-traded big banks want Americans to think we need them. Their so-called "financial innovation"--I call it fraud and usury--is what nearly brought this country to its knees.

I have no objection to people being allowed to make a boatload of money, but they ought to be producing something of value. Banksters push money around and take wealth, they do not create it.

Not every for-profit entity has to have growth at any expense and a big skyscraper in NYC as a goal.

[Pat Choate - Huffpost Blogger]

DuganS1

I am arguing that the banking and investment (speculative) functions should be structurally separated, as was done in the Banking Act of 1933. Regulate banks and require them to maintain depositor insurance. Allow speculators in the investment industry succeed or fail. But do not allow speculators, as today, to use the deposits in the banks for their gambles.

Pat Choate