This is the second installment in a two-part response to subprime lending architect Andrew Kahr's American Banker column entitled "Spread the Word: Lying to Banks is Illegal." Read Part 1 here.
Why would the fraudulent nonprime lenders and brokers rely on financially unsophisticated borrowers to not only lie -- but lie astutely? Why would working class borrowers know the amount of income they would have to falsely claim so that the loan would appear to meet the magic debt-to-income ratios that would get the loan approved and allow it to be sold at a premium? Why would the borrowers know that they could rely on the brokers and lenders to not verify income and to wink at claims that hairdressers made $100,000 annually? It strains all credulity to think that millions of working class Americans managed to defraud financially sophisticated lenders.
It is even more absurd to believe that honest lenders, finding themselves the victims of an epidemic of mortgage fraud by these clever working class Americans, responded by (1) massively expanding the number of liar's loans they made, (2) spreading them to subprime borrowers with severe credit defects, (3) made defaults on the loans, and the loss upon default, far greater by layering risk and inflating appraisals, and (4) slashed their allowances for losses (ALLL) to trivial levels to ensure that the inevitable fraud losses would cause catastrophic losses.
Investigations, to date, have confirmed this logic. The fraudulent nonprime lenders and brokers typically initiated, directed, and sometimes even directly created the lies on the liar's loans. The testimony of Thomas J. Miller (Miller, 2007), Attorney General of Iowa, at a 2007 Federal Reserve Board hearing began by describing the Gresham's dynamic that the interaction of accounting control fraud and modern executive compensation produces:
Over the last several years, the subprime market has created a race to the bottom in which unethical actors have been handsomely rewarded for their misdeeds and ethical actors have lost market share.... The market incentives rewarded irresponsible lending and made it more difficult for responsible lenders to compete. Strong regulations will create an even playing field in which ethical actors are no longer punished. (p. 3)
Despite the well documented performance struggles of 2006 vintage loans, originators continued to use products with the same characteristics in 2007. (note 2)[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. A review of 100 stated income loans by one lender found that a shocking 90% of the applications overstated income by 5% or more and almost 60% overstated income by more than 50%. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer. (p. 10)
A small sample review of nonprime loan files by Fitch, the smallest of the three large rating agencies, adds support for the view that fraud became endemic in nonprime mortgage lending. Fitch's analysts conducted an independent analysis of these files with the benefit of the full origination and servicing files.
The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file.[F]raud was not only present, but, in most cases, could have been identified with adequate underwriting, quality control and fraud prevention tools prior to the loan funding. Fitch believes that this targeted sampling of files was sufficient to determine that inadequate underwriting controls and, therefore, fraud is a factor in the defaults and losses on recent vintage pools. (Pendley, Costello, & Kelsch, 2007, p. 4)
Fitch did not investigate these loans. It simply reviewed the loan files and servicing files to identify frauds obvious on the face of the documents. They were able to identify likely frauds "in almost every file." Any honest, mildly competent review of the loan files by the loan brokers and lenders would have prevented these loans from being closed. The logical conclusion is that the lenders and brokers encouraged fraudulent loans.
Michael W. Hudson's new book, The Monster, reports on the results of numerous interviews with nonprime lenders. (He focused on Ameriquest.) Hudson reports that fraudulent nonprime lender personnel were compensated through perverse bonus programs that successfully encouraged them to do whatever it took to get liar's loans approved. That included forging the borrower's signature and changing information provided by the borrower to inflate income. He notes that:
One former loan officer and branch manager testified that inflating property appraisals served the "dual purpose of both making sure the loan was approved by the home office as well as making the loan more attractive to sell to investors" (p. 156).
Hudson also explains the tactics that loan officers use to intimidate borrowers to ensure that they did not read the false disclosures that the officers had fabricated (p. 157).
Recent studies by criminologists show the leading role that lenders and loan brokers took in creating fraudulent loan applications. Tomson H. Nguyen and Henry N. Pontell recently published an article reporting the results of their interviews with lender personnel and loan brokers. (I published the responsive policy essay on their article.)
The lender personnel overwhelmingly justified their actions by claiming that they were helping the borrower obtain the financing essential to permit them to become homeowners. They took the lead in creating the fraudulent values in the application because they knew the desired values. They perceived the lenders as not caring about the accuracy of the loan applications. There's no real fraud from their perspective because everyone - the lender, the broker, and the borrower - knows that the numbers are fictions.
Mr. Kahr's suggested remedy - to an epidemic of mortgage fraud numbering in the millions - is:
What is the best way to make defaulters aware of their potential criminal liability if they lie? Send all of them a brochure from a reputable, independent organization laying out the law and giving a few examples.
Been there, done that, the poster's already on the bank's wall. The FBI entered into what it terms a "partnership" with the Mortgage Bankers Association (MBA) to respond to the epidemic of mortgage fraud.
The MBA web page lists the accomplishment of this partnership: a poster warning borrowers that the FBI investigates mortgage fraud by borrowers.
The poster, of course, does not warn borrowers about mortgage fraud by lenders. The MBA is a trade association for mortgage lenders. We know that lenders never commit mortgage fraud because the MBA tells us so. The FBI formed its "partnership" to respond to the epidemic of mortgage fraud with the trade association of the "perps." Naturally, the MBA created a purported definition of "mortgage fraud" in which the lender is always the victim. Lenders cannot be accounting control frauds. The MBA's actions are all perfectly understandable. What is beyond comprehension is that the FBI simply parrots this "definition" of "mortgage fraud" and does not even consider the possibility that the senior officers controlling the nonprime lenders led the frauds.
I raised the difficulty of topping unintentional self-parody because of Mr. Kahr's background. Mr. Kahr is concerned that working-class Americans have victimized the nonprime lenders that made the liar's loans. Mr. Kahr has reason to know that the power goes entirely in the opposite direction. As he noted, he pioneered subprime lending on via credit cards when he created the entity that became known as Providian. The government alleged that Providian engaged in widespread deception in order to enrich itself at its' customers' expense. On May 5, 2002, Mr. Zuckerman, the San Francisco Chronicle's economics writer described the Kahr memoranda that the government used to great effect in one of the cases.
"In a memorandum to senior executives of Providian Financial Corp., the giant San Francisco credit card company, founder Andrew Kahr stressed the guiding principle that had made the firm one of the nation's most profitable consumer-finance operations.In lending to the kinds of high-risk customers Providian specialized in, Kahr wrote, the "problem is to squeeze out enough revenue and get customers to sit still for the squeeze."
Underlying Kahr's philosophy was the realization that many of Providian's high-risk customers were desperate for credit and easily taken advantage of, a point he drove home in a March 1999 memo to Executive Vice President David Alvarez, who had day-to-day responsibility for Providian's credit card business:
"Making people pay for access to credit is a lucrative business wherever it is practiced. . . . Is any bit of food too small to grab when you're starving and when there is nothing else in sight? The trick is charging a lot, repeatedly, for small doses of incremental credit."
L. Randall Wray: Anatomy of Mortgage Fraud, Part II: The Mother of All Frauds
http://www.rayservers.com/images/ModernMoneyMechanics.pdf
I see a five-plus year gap in which law enforcement agencies formed "partnerships" with crooks. I read other articles on this forum where Mary Schapiro, over at the SEC, makes her mouth move and suggests blandly that maybe her agency will get around to enforcing the law of the land someday.
What you are saying, sir, is a thing that is already perfectly-well known. The laws of our land are outrageously being broken every single day of the week, every single day of the year, and nobody actually does anything except to carefully tally-up and weigh the boxes of loot as they are being hauled away.
The question is "why?" And I will tell you why.
Article 2. Section 4. Word 25. "Bribery."
And toss in Word 24 too, because it goes with it: "Treason."
These are harsh words, blunt words, but also excellent words. They are words that the authors of this system of Government considered to be more urgent than the Bill of Rights, all of which was added ex post facto.
It is a documented fact, not to be denied, that every Member of Congress pulls down more than $1 million per person per day in bribes, and has always done so. There is your problem. There is no other.
I also checked out his profile on LindedIn - and saw that he is currently a partner in Credit Builders LLC. I am wondering if this company is the same one that was investigated for selling a service to add borrowers with low credit scores to someone elses credit card as an authorized signer? This would have the effect of boosting someone's credit score if the credit card was under the name of someone with good credit.
Ironic, that I found an article in American Bankers about it. Here is the info:
Article: Two Fla. Score-Boosting Firms Under Investigation.(Credit Builders LLC and RCA Credit Services LLC ) Article from:American Banker Article date:November 15, 2007
Author: Jalili, H. Michael Copyright COPYRIGHT 2009 SourceMedia, Inc.
http://www.ifstone.org/
The Official Website of I.F. Stone
F & F
MARK KARLIN
"In Jail for Being in Debt." [Minneapolis Star Tribune] The article paints the dire picture of being poor and suddenly being arrested in your home: "You committed no crime, but an officer is knocking on your door. More Minnesotans are surprised to find themselves being locked up over debts."
"It's not a crime to owe money, and debtors' prisons were abolished in the United States in the 19th century. ... In Minnesota, with the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years, with 845 cases in 2009 [a Star Tribune analysis]
The debtor laws vary from state to state ... "In Illinois and southwest Indiana, some judges jail debtors for missing court-ordered debt payments. In extreme cases, people stay in jail until they raise a minimum payment. A Kenney, Ill., man was sentenced to 'indefinite incarceration' until he came up with $300 toward a lumber yard debt."
... Much of Charles Dickens' social consciousness is attributed to the imprisonment of his father for debt in the infamous Marshalsea jail in London.
Until recently, the abolition of abominable debtors' prisons in England was considered great social progress and a movement toward a more just society.
Now, the GOP is heralding a return to the wretched past ...
It's a dreadful, almost incomprehensible injustice that should have been locked up forever".
May 2004, the Federal Reserve ordered Citifinancial to pay a $70 million penalty for lending abuses which occurred in 2000 and 2001. The Fed asserted that Citifinancial made home equity loans without adequately determining the ability of borrowers to repay the loans.
FDIC vs FREMONT INVESTMENT & LOAN BREA, CALIFORNIA - Order CEASE & DESIST
(l) marketing and extending adjustable-rate mortgage (“ARM”) products to subprime borrowers in an unsafe and unsound manner that greatly increases the risk that borrowers will default on the loans or otherwise cause losses to the Bank, including ARM products with one or more of the following characteristics:
(i) qualifying borrowers for loans with low initial payments based on an introductory or “start” rate that will expire after an initial period, without an adequate analysis of the borrower’s ability to repay the debt at the fully-indexed rate;
(ii) approving borrowers without considering appropriate documentation and/or verification of their income;
The banks didn't make most of the bad loans. The mortgage brokers did. While the banks deliberately looked the other way.
The banks didn't plan to dump the bad percentage of the loans on the taxpayers. They planned to dump them on the bottom-tranche speculators, who would buy them for pennies on the dollar and make big gains if the loans were paid but take the loss without complaint if they weren't. But they knew that Fannie and Freddie might be left holding the bag for some of this stuff, and have to be bailed out by the taxpayers.
The buyers of the supposedly-safe tranches weren't planning to dump the losses on the taxpayer. They bought credit default swaps from AIG. But they knew AIG might have to get bailed out by the taxpayers.
AIG wasn't planning much of anything, as far as I can tell, beyond the current quarter's profit. They knew they would be bailed out if it came to that, so they didn't worry about it. But they expected it to be in the unimaginably distant future, if at all. Unfortunately, their idea of the unimaginably distant future was what most of us would consider very soon.
They needed the legal protection of bona-fide purchaser & Holder in Due Course to make sure they could repossess the properties if defaults occured. Watch as it unravels because they even screwed that up.
What was done? NOTHING.
What has happened to the criminal loan brokers, banks, and Wall Street firms who engineered this debacle, and profited greatly from this scam? NOTHING.
The S&L debacle of the 1980s pales in contrast to this current mortgage scam. What happened then? MORE THAN 1,000 PLAYERS IN THE S&L SCANDAL WENT TO PRISON.
To date, not one broker, banker, Wall Street official has been brought before the bar of justice.
The rich get richer. The middle class and the poor can scratch for loose coins.
Wake up, America.
If you've a list of "mortgage" perps I'd like to see it, as I'm sure would others.
Ironic.
Control fraud is when the Controlling Officers of a corporation are commiting fraud.
I remember one of my friends telling me about things Providian was doing to him. I kept telling him “That's illegal, They can't do that!” Apparently, they could and did.
When I bought a home 20 years ago, they stripped us to our financial shorts---for a loan less than twice our annual salaries.
Did IQ's in the banking industry DROP, when they were supporting loans that the borrowers couldn't POSSIBLY afford? Or were they simply dazzled by the fees and interest? Bankers know how to make sure you get a loan...so well that if you are not likely to get one, they are very up front about it. They also know how to nudge the borrower to list things in a way to assure they will get the loan...so forget that millions of borrowers just happened to get savvy enough to swindle them.