Mortgage Fraud is So Much More Than Lies on a Mortgage Application

Mortgage fraud, especially the mortgage fraud that has wiped out the wealth of countless American families and stripped them of their homes and security, is so much more than the FBI would credit it to be.  We have pondered Professor Bill Black’s questions of why in the hell the FBI would join forces with the Mortgage Bankers ASsociation in defining fraud.  And here we have a report from the Department of Justice, also utilizing this myopic and anemic definition of fraud, a definition which purposefully exempts broad swaths of fraud for which Wall Street, and the financial industry would be (and have been and continue to be) culpable:

David Dayen wrote a piece on Yves Smith’s financial blog, Naked Capitalism today, in response to the “interesting” and wildly unimpressive report put out by the Inspector General on Mortgage Fraud recently.  This piece is a must-read in its entirety but he says,

“Mortgage fraud” is a limiting term: There’s a yawning gap between “mortgage fraud,” in the context of how the IG presents it in this report, and the full breadth of fraud and deception at the heart of the crisis. Mortgage fraud, per the definition used by the FBI and the IG, is very specifically mortgage origination fraud, the misrepresentation used to get people into loans. That includes misrepresentation by borrowers, such as lying on a loan application, but also the actions of lenders falsely documenting income or wildly inflating appraisals. In later years, mortgage fraud came to include “foreclosure rescue” schemes, where illicit actors claim to be able to get loan modifications for borrowers for a fee, and then abscond with the money and do nothing for the borrowers.

You can clearly see that this focuses on a small corner of the much more widespread fraud that has gone on for over a decade now. And it inherently, by definition, leaves the biggest Wall Street actors out of the equation. When the DoJ, FBI, or this IG report talks about mortgage fraud, they’re not talking about:

•Securitization fraud, the knowing packaging of worthless loans into bonds to unsuspecting investors;
•Securitization fail, the improper conveyance of mortgages into trusts, breaking the chain of title on the loans;
•False Claims Act fraud, where servicers collect on FHA insurance or other government benefits with faulty loans;
•Tax fraud, through setting up REMICs and then not following the guidelines with mortgages and notes, yet still benefiting from the tax status;
•Servicer-driven fraud, like the mass misplacement of loan modification documents in order to push people into default, the bonuses given for foreclosures, dual tracking, improper fee pyramiding, imposition of fees not included in the mortgage documents, lost payments, people getting foreclosed on because they underpaid by ten cents, etc.;
•Forced-place insurance fraud, the kickback scheme to saddle borrowers with lapsed insurance with junk policies that cost several orders of magnitude more;
•Foreclosure fraud, the mass production of false documents to prove ownership over loans with a questionable paper trail;
•Robo-signing, the notarization of thousands of court statements a day by line workers who know nothing about the underlying loan information;
•Breaking and entering by “property preservation” specialists who illegally break into occupied homes and occasionally ransack them in the name of “keeping watch” over properties thought to be abandoned.

I could go on. Even housing discrimination, whereby minority borrowers were charged higher interest rates and non-prime loans (even when they qualified for prime), is not incorporated into this definition of “mortgage fraud” (DoJ has actually prosecuted a fair bit of this discrimination through the Civil Rights division, but nobody’s gone to jail for it IIRC). The litany above implicates mega-banks who sold the securities, servicers (until recently, typically the arms of mega-banks) who serviced the loans, trustee mega-banks who managed the deals, and so forth. Mortgage fraud under the DoJ definition implicates fast-money, fly-by-night lenders that imploded when the whole scheme went kablooey. More recently it involves foreclosure rescue scams, which the interview subjects say flat-out in the IG report don’t involve enough money for them to consider prosecution.

That’s not true of the various types of bank-driven frauds. And without corrupt securitization feeding the need for lots of loans, there would have been far less corrupt lenders, if any. But as Gretchen Morgenson pointed out, the IG report specifically excludes securities fraud from this overview. This is on page 2 of the report:

Some observers use the term “mortgage fraud” to include mortgage-backed securities fraud, which involves wrongdoing related to the packaging, selling, and valuing of residential and commercial mortgage-backed securities. However, the FBI considers this type of misconduct to be a form of securities fraud and not mortgage fraud; therefore, we did not include as part of the scope of this audit.

That’s an absurd justification. This was all part of the same overall scheme. Even if the DoJ did a “good” job on mortgage fraud as defined by this report, it wouldn’t have touched Wall Street, because the definition mostly comprises lying on loan applications. In a way, the FBI’s compartmentalizing here shows how the law enforcement apparatus was never going to get to the bottom of the scandal. They placed a false frame on it, one that inherently goes after the little guy and not the bigger players.

Of course, as we see, DoJ couldn’t even be bothered to get the small spade work done (which could have led them to the top). And if they wouldn’t prosecute small-time fraud, they weren’t going to prosecute anything.

He goes on to explain how the DoJ doesn’t even collect proper metrics on its investigation of “mortgage fraud” and then discusses how DoJ explicitly deprioritized the prosecution of mortgage fraud, how it lied to Congress about its prosecutions, and how it took credit for Neil Barofsky’s (former Special Inspector General of the TARP and author of book reviewed here, Bailout) collar of Taylor Bean’s CEO, Lee Farkas, just about the only noteworthy prosecution of a bank executive in the wake of the mortgage tsunami.


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