FBI's Mortgage Fraud Report as Prepared by the Financial Crimes Intelligence Unit

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The objective of this study is to provide FBI program managers and the general public with relevant data to better understand the threat posed by mortgage fraud. The report was requested by the Financial Crimes Section, Criminal Investigative Division (CID), and prepared by the Financial Crimes Intelligence Unit (FCIU), Directorate of Intelligence (DI).

DOJ has refused to prosecute any elite banker for mortgage loan origination fraud. With zero prosecutions of the massively fraudulent home lenders that drove the crisis to we are left with no information on why committing hundreds of thousands of frauds via the twin epidemics of loan origination fraud (inflating appraisals and making endemically fraudulent “liar’s” loans) is no longer a crime that the FBI investigates and DOJ prosecutes.

The long list of federal entities that provided “information” about “mortgage fraud” did not include the Federal Reserve, the FDIC, the OCC, and OTS – the four banking regulatory agencies that should have been the leading source of information on mortgage fraud. They had the duty to regulate the control frauds that drove the crisis.

The FBI does not mention the SEC though it was the supervisor and examiner of the Nation’s largest investment banks. Those investment banks were among the largest originators and purchasers of fraudulent liar’s loans. The SEC should have had reams of data and expertise on liar’s loans, appraisal fraud, and many other control frauds that generated vast amounts of mortgage fraud. Like the banking regulatory agencies, the SEC should have been an invaluable source of expertise on mortgage fraud in addition to being among the most important data providers.

The banking regulatory agencies and the SEC must not have made any criminal referrals the FBI considered worthy of note. Criminal referrals are the “road map” that the experts in banking fraud schemes (the banking regulators and the SEC) provide to the FBI to make it possible for them to mount an effective investigation. The FBI mortgage fraud report does not indicate that it received any criminal referrals from the federal banking and securities regulators. The OTS, during the vastly smaller and far less fraudulent S&L debacle made over 30,000 criminal referrals. How did OTS go from over 30,000 criminal referrals in a far smaller crisis/fraud scheme to zero criminal referrals in this crisis? That question should have been of paramount importance to the FBI. The destruction of the criminal referral process, which denied the FBI its vital expertise about the industry, was critical to the FBI’s inability to recognize widespread accounting control fraud.

The FBI does not list the honest appraisers as a source of information on mortgage fraud. That represents an extraordinary failure, and one that was as inexcusable as it was disastrous.

From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] “blacklisting honest appraisers” and instead assigning business only to appraisers who would hit the desired price targets (FCIC 2010:18).

The appraisers began warning the FBI in 2000 – before the Enron-era accounting control fraud crisis blew up. The appraisers’ petition was the perfect information the FBI needed – it demonstrated that the leaders of the lenders and their agents were running control frauds. Only the lender and its agents can cause widespread appraisal fraud. No honest lender would ever inflate an appraisal, but an accounting control fraud would find such a strategy optimal. New York Attorney General Cuomo had confirmed the accuracy of the appraisers’ warning about the fraudulent lenders blacklisting honest appraisers.

The FBI sought no input from white-collar criminologists – the specialists in this field with the most relevant expertise. One hopes that when the FBI investigates the theft of nuclear materials they consult physicists.

The FBI sought no input from the professional association of mortgage brokers founded to try to restore integrity to that profession.

The FBI specifically notes that it received information from MARI because of its anti-fraud expertise. The FBI neglects to note, however, that MARI had warned the entire mortgage industry (and the FBI) that the incidence of fraud in liar’s loans was 90 percent. By 2006, roughly 40% of all loans originated that year were liar’s loans and the number of liar’s loans grew by over 500% from 2003-2006. After MARI’s warning to the industry in early 2006 about liar’s loans the industry massively increased the number of liar’s loans it made. The only way for lenders to sell endemically fraudulent liar’s loans was through fraud, so the FBI knew that liar’s loans had to propagate fraud throughout the secondary market and mortgage derivatives.

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Published In: Business Organization Updates, Consumer Protection Updates, Criminal Law Updates, Finance & Banking Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Barry Fagan, Law Offices of Barry S Fagan | Attorney Advertising

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