Mortgage Fraud

Why did the FBI pursue so few cases or mortgage fraud during the recent period in which it was so rampant? From Jeff Manning of The Oregonian, "Quest For easy Money Magnified Oregon Real Estate Collapse":

Mortgage fraud emerged as the trademark crime of the boom. Unscrupulous brokers worked through straw buyers to obtain bank loans, pocketing thousands of dollars for themselves from the loan proceeds while the "buyer" often never made a single payment.

But the ever-rising tide of escalating real estate prices hid the problem.

"The underlying premise was that real estate values would always go up," said Karin Immergut, U.S. attorney in Portland. "If they got into trouble, they could always sell it. If the bank had to repossess it, they could put it on the market and make money.

"Now, we're seeing the whole house of cards crumble."

Indeed, just like New York financier Bernard Madoff's alleged $50 billion Ponzi scheme, the real estate bubble has popped. Individual investors, some of whom went into hock to grab a piece of the real estate gold, now face foreclosure and financial ruin.

The feds were well aware of the mortgage industry issues before the house fell down.

Chris Swecker, former assistant director of the FBI in Washington, D.C., warned in the boom year 2004 of widespread fraud in the industry. Swecker, now retired, predicted bogus home loans could cause multibillion-dollar losses to financial institutions.

Swecker's prescient warnings were wrong in only aspect: He vastly underestimated the losses and the impact on the broader economy.

But the feds didn't intervene in a more forceful way in part because much of the FBI's resources were diverted to combat terrorism. Besides, rising real estate prices kept losses to a relatively low level -- at least until 2006 and 2007.

Federal sentencing guidelines are based on provable financial losses. Absent a large tangible loss, perpetrators are unlikely to get much of a sentence beyond probation, which gave prosecutors little motive to push mortgage or real estate cases.

The author goes on to investigate three cases in detail; it's a good read. Via The Portland Housing Blog.

Comments

[The Modesto Kid]

Absent a large tangible loss, perpetrators are unlikely to get much of a sentence beyond probation

This also seems like it means, even if the FBI had pursued mortgage fraud aggressively, it would not have had much impact on what was going down -- if the scenario is "Don't get caught, get rich; get caught, receive a slap on the wrist and keep the money", there would not be much of a deterrent effect regardless of how many people were getting caught.

[PG]

There was this kind of overt fraud, but there also was the problem of insane over-estimates, not even connected to bubble prices, of what a house was worth. There was no reason for a lender to be serious and rational about appraisals, because he always could just repackage the loan and sell it to someone else.

[dsquared]

Nahhhhhhh. Crashes always bring the fraudsters out the woodwork but they're always an interesting sideshow rather than the main event. Honest people doing things they thought were sensible, those are the buggers you've got to watch out for. JK Galbraith wrote a book about this called "The Economics of Innocent Fraud" (and then sold the bloody thing for £11.99 for an 80 page hardback, just to drive the point home).

[mortgages]

It’s just one of the latest schemes and frauds we’re [teh FBI] seeing these days across the financial services industry, our senior criminal investigators said during a briefing Tuesday with the news media in Washington.