To combat mortgage and foreclosure fraud, we first need to understand the nature of the fraud. There are the small-potato schemes -- the loan modification-aid scams, or the scams of fraudsters busting into foreclosed properties and renting them out. Yes, people get burned this way, but going after these frauds is like prosecuting the drug dealer on the corner, if you will.
The true nature of the fraud -- the kingpin level, so to speak -- is found in the current nature and structure of the financial / mortgage / foreclosure system itself. And that level of investigation is what the FBI carefully tip-toed around discussing at Wednesday's Mortgage Fraud Summit that took place in Ontario, Ca.
California is one of the epicenters of mortgage trouble. According to the FBI, 24% of properties in the US are now underwater. Of those properties, 40% sit in California or Florida. San Bernardino County has one of the highest rates of foreclosures in the nation -- one in 114 homes is in foreclosure. To help homeowners battling to save their homes, two grassroots groups -- nonprofit Rhema Economic Research and Development and the Grassroots Assembly for Mortgage Fraud Victims -- brought in an impressive array of authors and panelists.
What became clear from the presentations and discussion is that the FBI now seems more concerned by the fraud at the bottom of the chain instead of spending their energies and resources investigating the control fraud becoming evident throughout the entire system.
The FBI, to its credit, warned about the "epidemic of mortgage fraud" way back in 2004. At the time, they were accused of being Chicken Little.
Where has that vigor gone? Sharon Ormsby -- chief of all financial / white collar crimes for the FBI -- came all the way to California to tell the crowd that robo-signing and foreclosure mills are mere "issues of concern."
Instead, Ormsby lapsed into Bureau-speak. Yes, Operation Stolen Dreams -- a mortgage fraud takedown earlier this year -- recovered $11 million and led to over 330 convictions, the largest white collar crime takedown in this country. Yes, they have more forensic accountants and are seizing more assets of the white collar criminals.
But she lost me and the audience: Where's the action on the institutions committing this systemic fraud so many are confronting right here, right now? What are all the task forces and cross-department working groups doing to help those about to lose their homes because of it?
"Is BofA being investigated now?" an audience member asked Ormsby. ... Silence.
Ormsby was rescued by Joan Hobbs from HUD's Office of the Inspector General who jumped up to chirp there were "a lot of investigations going on now on Countrywide files." She described an audit ongoing in Chicago and said they are about to open up a nationwide audit on Countrywide loans. BofA, she said, has agreed to be financially responsible.
Any criminal investigations? Any kingpin bankers about to be thrown in jail? No mention.
When asked about the culpability of the CEOs presiding over and reaping billions from this fraud-filled system, Ormsby simply fired back "Where's the proof?"
The audience audibly winced.
We had just heard heavy-hitting speakers William K. Black and Nomi Prins go into great detail about where the fraud occurs and how the Ponzi scheme works. Black is a criminologist, law and economics professor and was the bank regulator who brought down Charles Keating Jr. in the Savings and Loan investigations in the 80s. Prins is an ex managing director at Goldman Sachs and Bear Stearns. They know what they're talking about.
From the audience, story after story surfaced of banks giving homeowners the run around, missing or fraudulent documentation, delay tactics, purposeful misrepresentation of process, refusal to communicate or provide statements, wrongful fees and altered interest rates, altered agreements, fraudulent second mortgages that the homeowner never took out... and all this from a room with only a few dozen people -- a small sampling of what looks to be vast systemic malfunction.
To help homeowners, the Grassroots Assembly organization described the launch of a website homeowners can use to help check their own documents for fraud. CheckTheLoanDocs.com will provide templates to help homeowners interpret and organize loan documents and guide them to next steps if any discrepancies are discovered.
But where's an Eliott Ness when you need one?
Has the fraud come from the top? That's been the consistent conclusion of various State Attorney General investigations.
Where is the fraud? William K. Black -- beamed in via Skype -- explained the recipe for these control frauds. "Control fraud" is a concept developed by Black to describe frauds in which the people who control seemingly legitimate organizations can commit fraud with impunity.
First, their primary weapon is accounting. The goal in the mortgage area is to create fictional accounting income that maximizes real executive bonuses, which are based on fictional accounting income. The recipe to do that -- which became the standard recipe, Black said -- is this:
- Lender grows extremely rapidly
- Make really bad loans to people who often won't be able to repay them -- make these loans at predatory rates
- Have extreme leverage: a great deal of debt compared to company equity
- Have only trivial loss reserves, so when the day of reckoning occurs, there are no reserves to pay for the losses -- those losses will go to the taxpayers and the creditors
If you follow this recipe, as Nobel prize-winner George Akerlof said in 1993, "it's a sure thing" -- you are mathematically guaranteed to report record profits.
Prins described what she called the inverted pyramid of profits erected on the backs of these sub-prime loans.
"At the bottom of the pyramid is the homeowner. That's only a teeny, teeny portion, of the entire mortgage crisis. An immense amount of profits were made on the back of that tiny little point. Because after the loan is made, it's sold, and it's packaged, and it's repackaged, and it's traded, and it's resold.
"All the way up this pyramid, at every single layer, the biggest banks are making money -- they're taking a cut. Banks make fees for the home sale, banks make fees on the interest, banks resell that loan to another bank, or to another company. They package it into something that we've come to know as a toxic asset. Pieces of that package are sold to investors, or to pension funds in Iceland, or to asset managers in England. They're trading those pieces back and forth -- repackaging the same loan. Packages of loans were used as collateral for other loans -- until that home is really invisible in this scheme. One house might be backing 30 different securities -- one house.
"If you follow that money, you get to mega bonuses on Wall Street ...
"So what's happening at the bottom of the pyramid, to a bank, is almost irrelevant. Because by the time this one loan -- this home -- gets diffused into this upside down pyramid the banks have made so much money that they're not even concerned whether or not the loan is repaid. Yet many of these homes are being foreclosed upon.
"Each transaction, though, has a promise inside of it that this little loan is going to pay its interest, and that interest is going to get spread along all of the layers. That's really the fraud of the whole system ... because when any of those interest payments stop, when anyone is defaulting on a loan, a lot of the money has already been made. That's why banks don't have an incentive to work with people to renegotiate those loans or help with ways of reducing the principle. Because they don't care -- they've made all of this money. There's no incentive to go back to the beginning of that chain of money and recreate. There's no financial incentive, forget moral incentive."
Black also described the abundant evidence of fraud in step after step of the mortgage and foreclosure process as lenders followed the recipe for guaranteed record profits:
One of the key fraud devises, Black said, is to massively inflate appraisals. Polls show that 90% of appraisers in a single year were subjected to acts of intimidation to inflate appraisals -- that intimidation came almost exclusively from lenders. Then NY Attorney General, now Governor, Andrew Cuomo found that Washington Mutual had a blacklist of appraisers -- but you got on the blacklist if you refused to inflate appraisals. If the appraisers were honest, they didn't get the job.
Knowingly Pushing Bad Loans:
Incentive structures for loan brokers were based on how many bad loans you were making and for which you could charge a really high premium interest rate. Lenders gave loans to people they knew at the time of the approval would not be able to repay them.
False Financial Statements and Applications:
The mortgage industry's own anti-fraud specialists issued a report in 2006 saying that loan brokers were overwhelmingly preparing false financial statements and false financial applications. Fraud was occurring 80% of the time.
Liars Loans Continued:
After the report came out, the industry didn't change what they were doing. Exactly the opposite -- liars loans grew massively. By the end of 2006, 49% of all new loans in the US were liars loans, in which the bank would not check the accuracy of statements.
Lenders frequently did not keep key records as a matter of business because they didn't want to make it easy for prosecutors to demonstrate the fraud. They didn't want to have in their records documents to show they knew the loan was being made to someone who couldn't pay. It also costs money to do proper paperwork and they didn't want to spend it.
What happens, then, Black asked, when the lender needs to foreclose? When loans are willfully made to those who won't be able to pay, a great deal of foreclosures are inevitable. But the necessary documents are missing, because lenders didn't want evidence lying around. Or with all the reselling and repackaging, the trail has been lost. So to foreclose, the documents need to be recreated. An epidemic of false affidavits has appeared as a result. The practice is so widespread that "document mills" now exist that can fabricate an entire mortgage file for $95.
There's more. Black didn't mention the fraudulent AAA ratings given by the ratings agencies to toxic assets so bad loan packages could be sold to pension funds.
As William Black put it:
"[Lenders] start creating false statements, false affidavits. That means a false statement under penalty of perjury. That means a felony. That means tens of thousands of cases every month of Bank of America and other entities like it committing felonies."
Correct me if I'm wrong, but I think that any likelihood that tens of thousands of felonies are being committed every month by major banking institutions via false affidavits should damn well get the issue off the FBI's "concern" pile and onto the "immediate action" burner.
According to Black, so far the Office of the Comptroller of Currency and the Office of Thrift Supervision -- both are bureaus within the Department of Treasury -- have made zero criminal referrals against the lenders that specialize in making these fraudulent loans.
Perhaps the FBI is conducting kingpin-level criminal investigations that Ormsby was obliged to be silent about. Certainly nothing was mentioned here.
Maybe the FBI needs a few whistle blowers to fire them some evidence. Ormsby did leave that door open, saying that the FBI relies on information from the public.
Ormsby also hinted at a potential avenue for citizen action: She is obligated to act on issues brought to her by a member of Congress. So homeowners and others who care about clearing the control fraud from this system can apply pressure to those in Congress likely to be receptive and tell them to give Ormsby a call: put mortgage and foreclosure control fraud on the FBI's front burner.
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