Street gang added mortgage fraud to its roster of activities

According to a post at the L.A. Now blog of the L.A. Times, 24 members of a street gang have been indicted for mortgage fraud in San Diego. From the post:

Two dozen people have been charged with racketeering in a fraudulent mortgage scheme allegedly run by a street gang member, according to an indictment unsealed in San Diego federal court today.

The group allegedly profited from loans arranged for amounts in excess of the price of the housing, among other tactics. The homes quickly went into foreclosure, according to the indictment.

The alleged mastermind was Darnell Bell, 38, a member of the Lincoln Park street gang long known to law enforcement for violence and drug sales. Bell, already serving a jail sentence for distribution of cocaine, was arraigned in federal court today on a racketeering indictment.

From 2005 to 2008, the scheme involved the sale of 220 homes and mortgages worth more than $100 million issued by 70 lenders, U.S. Atty. Karen Hewitt said at a news conference.

Keith Slotter, FBI special agent in charge of the San Diego office, said the case showed that street-gang members had gone "from dealing dope on the street ... to delving into this much more sophisticated crime."...

Bell used his status as a gang member to recruit phony buyers and to "maintain discipline" among the co-conspirators, the indictment said. FBI and IRS agents today arrested Bell's 23 co-conspirators, Hewitt said.

The 24 are charged with racketeering, which could lead to much tougher sentences than other real estate fraud cases. "That's never been done before in a real estate fraud case," Slotter said.

The homes were mostly in the cities of Spring Valley and La Mesa and the San Diego neighborhood of Encanto. According to the indictment, Bell and others would look for properties that had been on the market for months.

Among the co-defendants are people in the real estate, title insurance, appraisal and notary public businesses.

I've been saying for months now that one way to prevent future mortgage fraud is to see a constant stream of perp walks for TV cameras. Just an idea!

House Republicans float own housing plan

House Republicans floated their own plan to help boost the housing market with the use of tax credits while also cracking down more on mortgage fraud (which is still very much a problem). From a Washington Post story:

Under the proposal, borrowers refinancing their mortgage would be eligible for $5,000 to help cover closing costs or to reduce their principal balance. The plan also revives a $15,000 home buyer tax credit proposal that Republicans pushed last year. This time, the proposal would require the borrower to have at least a 5 percent down payment. Both programs would expire in July 2010...

The Republican proposal also calls for providing additional resources to law enforcement agencies, including the FBI, to investigate and prosecute mortgage fraud. According to a recent study by the Mortgage Asset Research Institute, mortgage fraud jumped by 26 percent last year compared with 2007 even though fewer loans were issued nationally.

Republicans have not attached a price tag to their proposal and it is unclear whether they could gather enough support from Democrats to move the measure ahead.

SEC focusing on potential fraud by home builders

After being widely derided for being asleep at the switch while folks like Bernard Madoff gradually stole tens of billions of dollars from unwitting clients, the SEC is now targeting subprime lenders, hedge funds and home builders. Imagine what kind of mixer that group would throw! From a BuilderOnline.com story:

The U.S. Securities and Exchange Commission (SEC), which has been roundly chided for not uncovering several high-profile investment fraud schemes, is getting more aggressive.

It now has launched a series of investigations focusing on subprime lenders, hedge funds, and home builders.“The SEC is fully committed to addressing the [economic] crisis,” Elisse Walter, a SEC commissioner, told the House Financial Services committee last Friday. “To finding out what went wrong, punishing any wrongdoers, and returning as much money as possible to injured investors.”...

It appears that builders are being targeted for investigation partly because they (or their subsidiaries) are among the companies that, according to Walter, “provided retail mortgages to consumers.” However, Walter also noted that any investigation of builders might also entail “possible financial fraud, such as improper quarterly earnings management or improper recognition of revenue on model home sales and leasebacks, as well as improper related-party transactions.”

I think those last items are smoke screens. This is about potential mortgage fraud perpetuated by home builders -- a train that left the station long ago.

The issue of mortgage fraud vs. AIG bonuses

Back in the mid 1990s, I worked for a short time at SunAmerica, which was absorbed by AIG in 1999, and remember working for a rather detailed executive who is now an EVP at AIG. He had this rather peculiar habit of insisting that each piece of paper, whether it was a fax, snail mail, email, report or any other variety of correspondence be placed in a colored plastic folder. Should an errant piece of paper find its way into the wrong folder, there'd be hell to pay! So of course I've been wondering through this AIG meltdown, "Why didn't he or someone else apply this obsession with minutiae to, you know, the products they sold such as credit default swaps?"

And yet in the DC Examiner, the editorial page opines that mortgage fraud is such a growing cancer on the national stage that going after AIG bonuses is really nothing more than a political sideshow. From the editorial:

Many cancers become untreatable once they metastasize - spread throughout the human body. Something not unlike that appears to be happening in the mortgage industry even as President Barack Obama is off chasing AIG executive bonuses he deems as excessive.

To see what is wrong with this picture, one need look no further than the latest data from the Mortgage Bankers Association on mortgage delinquencies, covering the fourth quarter of 2008. Nationally, a little more than 92 percent of all mortgage loans were current, while 6.30 percent were seriously delinquent (i.e. more than 90 days past due). For sub-prime mortgages, which make up 11 percent of all mortgages, however, the overall delinquency percentage is 23.11 percent, and 33 percent for those with adjustable rates (ARMs). California’s ARM delinquency percentage is 39 percent and Florida’s a staggering 47 percent.

In other words, one of every four sub-primes is seriously delinquent nationwide, as is one of every three ARMs. It’s much worse in the two states thought to be havens for speculators. National delinquency rates like that simply cannot happen without extensive speculation and mortgage fraud, especially loan officers and applicants using false income, debt and other data.

Considering the pivotal role played by toxic bank assets made up in part by securitized packages of sub-prime mortgages in freezing up the financial sector, one might expect Obama to make a high national priority of identifying mortgage fraud perpetrators and prosecuting them to the fullest extent of the law.

Otherwise, it will be impossible to prevent such fraud from continuing and even expanding – metastasizing – throughout the mortgage finance industry. But when The Examiner asked the White House press office if the president plans a national anti-fraud program, we were referred to the Justice Department. There, a spokesman said he was unaware of such a program, though individual U.S. prosecutors might be launching their own efforts. The FBI has an anti-mortgage fraud effort, but the G-men clearly could use some help....

Click here to read the rest.

Why is mortgage fraud still a problem?

Over the weekend I received an email from an editor of the opinion page of the Washington, D.C. Examiner (a conservative publication) asking me about the impact of mortgage fraud on our economy. This was my response (from which he has asked to quote):

A few things come to mind about mortgage fraud:

1. Yes, I do think there was pervasive fraud at all levels of the mortgage process, from agents getting kick-backs from affiliated lenders to appraisers who couldn't get work unless they played along.

I also think there was fraud for construction loans, as I know some rather compliant consulting firms out there who would manufacture just about any story (which you can easily do with data if you know what you're doing) to assist builders and developers either get approval from corporate offices for projects or to include with loan applications to lenders. On further inspection, however, the conclusions were made out of thin air and based on 'rules of thumb' that simply didn't exist.

Believe me, when I dared to proclaim in the L.A. Times in July 2007 that sometimes builders didn't really do their homework and just hoped for the best, I'm sure I lost potential clients in the building industry. But I was also the type to tell clients, "Sorry, bud, this ain't gonna fly!"

2. I also think the fraud continues, and I have very grave concerns that we're not learning any lessons in this country. For example, I had read a story in Business Week that the same companies which sold sub-prime loans to the uninitiated have simply re-worked their business models to sell FHA loans. Well, guess what? FHA loans are also now going sour at a higher rate than anticipated, and could eventually need their own bail-out.

3. Not only that, but some appraisers who actually lost their licenses due to fraud are now back working for 'appraisal management companies' that are supposed to act as an objective liaison between lenders and agents. Only it doesn't quite work that way: agents can simply say, "assign me x appraiser" through this intermediary, and we're back to business as usual.

I don't think we're going to fix the mortgage fraud problem until we see a some perp walks and major scofflaws going to prison. Otherwise I guarantee you we'll just see more of the same, and in that environment, why doesn't everyone just quit their jobs and become appraisers and mortgage brokers?

Lest anything think that response was too harsh, here's a summary from an AP story on mortgage fraud via the L.A. Times:

The mortgage industry, applying far more scrutiny after a tidal wave of defaults, reported a record number of mortgage fraud incidents last year, with Rhode Island making its first appearance as the nation's top fraud hot spot.

The number of mortgage fraud reports among loans made last year grew 26 percent from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.

The increase came as lenders dramatically tightened their standards, making it more difficult for borrowers to qualify for home loans without large down payments, solid credit and proof of their incomes...

The recession has also increased pressure on shady mortgage lenders and brokers -- as well as borrowers -- to lie on loan applications, according to the fraud report. "There's a lot more desperation, with the economy being what it is," said Jennifer Butts, one of its co-authors.

More than 60 percent of mortgage fraud cases last year stemmed from falsified applications, while 28 percent came from tax returns or financial statements, and 22 percent came from appraisals, the study said.

One fast-growing scheme, the report said, is coming from "foreclosure prevention specialists" who offer to rescue distressed borrowers and sometimes trick the borrower to sign over the deed to their house. While some states have recently toughened penalties for such scams, but only a few state attorneys general are able to seek criminal charges and jail time...

As awareness of the mortgage fraud problem grows, law enforcement agencies are stepping up their efforts to combat it. The FBI created a Washington-based national mortgage fraud team in December and has more than 1,600 open mortgage fraud investigations, more than double the number of such cases just two years ago.

With so many ongoing cases, FBI investigators are not focusing on individual borrowers but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars.

Looking forward to seeing some perp walks!

60 Minutes covers the World Savings option ARM fiasco

Last night, 60 Minutes covered the story of a mortgage salesman named Paul Bishop with World Savings, who discusses some of the standard practices of the day at a company which heavily promoted toxic Option ARM loans and other no-doc alternatives. The damage so far? $37 billion and counting.

Three years before the housing market crash, Paul Bishop says he warned his superiors at World Savings - the nation's second largest savings and loan company - that many of the mortgages they were granting were misleading and predatory.

Watch CBS Videos Online

So why didn't he or anyone else step up in a public way? Because, at least in my own experience, when people have mortgages and car loans to pay and kids to feed, looking the other way becomes the most practical (and cowardly) way to keep a job. As someone who regularly speaks his mind, I can personally attest to the perils of losing clients who simply went elsewhere to find someone willing to play ball (and you can thank numerous bankruptcies of development deals for that short-sightedness).

So is this country ready to start listening to people willing to ignore petty politics in search of the truth? That certainly remains to be seen. Perhaps seeing some former executives of those companies engaging in fraud (i.e., mortgage companies, Wall Street companies, ratings agencies and certain consultants) doing the perp walk for a nice long prison sentence would get the ball rolling in that direction?

Mortgage fraud UP in 2008?

Just when we thought that the miscreants who were largely responsible for the housing bubble & bust were gone from the mortgage lending industry, a story in the New York Times cites a report that says mortgage fraud actually rose by 45% during the second quarter of 2008 over 2007 levels. Considering lenders rarely pursue people who lie about their financial situations and instead bury their losses in higher fees and interest rates, is it any wonder borrowers and their enablers still try? From the story:

MORTGAGE volume may have fallen last year, but not incidences of fraud. In fact, according to a recent report from the Mortgage Asset Research Institute in Reston, Va., occurrences of fraud among loan officers, brokers and other industry professionals actually outpaced 2007 levels by 45 percent in the second quarter of 2008, the most recent reporting period.

The Research Institute, a consulting firm, does not release specific figures, which it compiles from surveys of lenders that make most of the nation’s mortgages each year.

The report, released in early December, found that 36 percent of the fraudulent mortgage activity involved loan professionals’ misrepresenting borrowers’ incomes, while another 20 percent involved misrepresentations of borrowers’ employment.

Lenders did not specify how much of this activity was simply stretching of the truth by loan professionals on the applications, categorized as “fraud for property,” as opposed to “fraud for profit” schemes, in which bogus loans are taken out to defraud lenders of money. Fraud for property is far more common.
Click here for full story.

Government about to file charges against subprime lending fraud

While it lasted, working as a mortgage broker was a sure-fire way to make good money without the need for a license or even a high school diploma. Of course what went along with that was a great deal of fraud, and it looks like we're about to hear of various indictments being handed out to the scofflaws. From an AP story via MSNBC.com:

The top federal prosecutor in Los Angeles indicated Thursday that charges are coming soon from a sweeping investigation of banks and subprime lenders for their role in the U.S. mortgage crisis.

"I think we are going to see some fairly dramatic results in the near future," U.S. Attorney Thomas O'Brien told The Associated Press. "Mortgage fraud is an extremely important issue to me and to the people of this district."

A grand jury is investigating at least three mortgage lenders — Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc.

Thirty-four lawyers currently are looking at mortgage fraud and other white-collar crimes, now one of O'Brien's top priorities.

The government is pursuing a "surgical approach" in its investigations and hopes to streamline its prosecutions by seeking indictments with only three or four counts, instead of spending several years seeking additional charges.