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Criminal Fraud in Mortgage Finance Will Only End with Prosecutions

(photo: Steve Rhodes)

Wells Fargo continues to claim no problems with their foreclosure procedures, directly contradicting one of their own Vice Presidents of loan documentation, who admitted to signing 500 foreclosure affidavits a day and not verifying the information on any of them. Wells also claimed that they properly transferred ownership in the securitization process, despite managing a $1.3 billion dollar repurchase reserve which wouldn’t be needed if their claims are true. Bank of America vowed to fight repurchase requests from major institutional investors and the Federal Reserve Bank of New York, and said their underwriting and securitization processes were sound, despite admitting in court that the same mortgage was double- and triple-pledged into different mortgage pools, sold over and over again.

There’s simply no reason to trust the banks when they contradict court documents and statements. It may be that the NY Fed repurchase case amounts to not much more than a bump in the road – Yves Smith makes a compelling case for that. But that’s just one case, with more expected to follow. And underlying all of this is the clear evidence of criminal fraud, which Bill Black keeps hammering.

The things I think are critical and badly underreported are:

1. The astonishing amount of mortgage fraud (literally, millions of cases annually) and how it hyperinflated the bubble and led to the Great Recession.

2. The fact that these mortgage frauds were overwhelmingly due to consciously fraudulent lending practices in which the CEOs of seemingly legitimate entities used accounting tricks as their “weapon of choice” to report higher profits and get bigger bonuses. (George A. Akerlof and Paul R. Romer got it right in the title to their 1993 article: Looting: The Economic Underworld of Bankruptcy for Profit.)

3. The disgraceful lack of prosecutions which has resulted from regulators virtually ending the practice of making criminal referrals and the pathetic March 2007 “partnership” that the FBI entered into with the Mortgage Bankers Association (the trade association of the “perps”) that led the FBI and the Department of Justice to (implicitly) define out of existence fraud by the lenders (and to conceive of them as the “victim” — which they are, but only of their controlling officers). Bush administration attorney general Michael Mukasey in June 2008 notoriously refused to create a national task force against mortgage fraud based on his claim that mortgage fraud was analogous to “white collar street crime.” […] [cont’d.]

5. The massive foreclosure fraud we are seeing now as another “echo” epidemic. To optimize their accounting control fraud, lenders gutted underwriting. That led to “fraud in the inducement” (vis a vis borrowers), endemic documentation problems, and an extraordinary numbers of defaults. The process required tens of thousands of real estate financing personnel to commit fraud on a daily basis as their core function. Some of these people are unemployed, but many are in the industry and are presently engaged in loan servicing. Now that their job is to foreclose on properties, there is no reason to expect that they would suddenly become honest, and they haven’t.

Some people are following up on this in the media (I guess Eliot Spitzer qualifies now). Most aren’t. But you can bet that the institutional investors are well aware of all of this – and given some of today’s developments, law enforcement seems engaged, too. Stephen Gandel asks the right question: will bankers go to jail for this?

Given our third-world legal system, I’m not so sure. If robo-signers go to jail for meeting their job description that’s as much of a whitewash as Lynndie England bearing the brunt of the punishment for torture. The investigation must follow the evidence and go up the chain of command. Ultimately, that’s the only way this will ever stop.

CommunityThe Bullpen

Criminal Fraud in Mortgage Finance Will Only End With Prosecutions

Wells Fargo continues to claim no problems with their foreclosure procedures, directly contradicting one of their own Vice Presidents of loan documentation, who admitted to signing 500 foreclosure affidavits a day and not verifying the information on any of them. Wells also claimed that they properly transferred ownership in the securitization process, despite managing a $1.3 billion dollar repurchase reserve which wouldn’t be needed if their claims are true. Bank of America vowed to fight repurchase requests from major institutional investors and the Federal Reserve Bank of New York, and said their underwriting and securitization processes were sound, despite admitting in court that the same mortgage was double- and triple-pledged into different mortgage pools, sold over and over again.

There’s simply no reason to trust the banks when they contradict court documents and statements. It may be that the NY Fed repurchase case amounts to not much more than a bump in the road – Yves Smith makes a compelling case for that. But that’s just one case, with more expected to follow. And underlying all of this is the clear evidence of criminal fraud, which Bill Black keeps hammering.

The things I think are critical and badly underreported are:

1. The astonishing amount of mortgage fraud (literally, millions of cases annually) and how it hyperinflated the bubble and led to the Great Recession.

2. The fact that these mortgage frauds were overwhelmingly due to consciously fraudulent lending practices in which the CEOs of seemingly legitimate entities used accounting tricks as their “weapon of choice” to report higher profits and get bigger bonuses. (George A. Akerlof and Paul R. Romer got it right in the title to their 1993 article: Looting: The Economic Underworld of Bankruptcy for Profit.)

3. The disgraceful lack of prosecutions which has resulted from regulators virtually ending the practice of making criminal referrals and the pathetic March 2007 “partnership” that the FBI entered into with the Mortgage Bankers Association (the trade association of the “perps”) that led the FBI and the Department of Justice to (implicitly) define out of existence fraud by the lenders (and to conceive of them as the “victim” — which they are, but only of their controlling officers). Bush administration attorney general Michael Mukasey in June 2008 notoriously refused to create a national task force against mortgage fraud based on his claim that mortgage fraud was analogous to “white collar street crime.” […]

5. The massive foreclosure fraud we are seeing now as another “echo” epidemic. To optimize their accounting control fraud, lenders gutted underwriting. That led to “fraud in the inducement” (vis a vis borrowers), endemic documentation problems, and an extraordinary numbers of defaults. The process required tens of thousands of real estate financing personnel to commit fraud on a daily basis as their core function. Some of these people are unemployed, but many are in the industry and are presently engaged in loan servicing. Now that their job is to foreclose on properties, there is no reason to expect that they would suddenly become honest, and they haven’t.

Some people are following up on this in the media (I guess Eliot Spitzer qualifies now). Most aren’t. But you can bet that the institutional investors are well aware of all of this – and given some of today’s developments, law enforcement seems engaged, too. Stephen Gandel asks the right question: will bankers go to jail for this?

Given our third-world legal system, I’m not so sure. If robo-signers go to jail for meeting their job description that’s as much of a whitewash as Lynndie England bearing the brunt of the punishment for torture. The investigation must follow the evidence and go up the chain of command. Ultimately, that’s the only way this will ever stop.

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David Dayen

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