By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from New Economic Perspectives
The Obama administration’s continuation of the Bush administration’s refusal to prosecute the elite banksters (or even the vastly lower status CEOs of the fraudulent mortgage bank) that drove the crisis has made it clear that the rule of law no longer applies to wide ranges of life and that crony capitalism will continue to reign.
One of the difficulties we have is that because the last two administrations have fanatical devotees of the cult of the Virgin Crisis – the myth that the ongoing crisis was the first in modern times conceived without sin (control fraud) – that it is exceptionally difficult to know what their creed is.
DOJ has refused to prosecute any elite banker for mortgage loan origination fraud. The rare prosecutions it has brought against senior officials of fraudulent loan originator (a large, but obscure regional mortgage bank: Taylor Bean) did not prosecute the officials for their fraudulent origination (or sale) of loans. They Taylor Bean officials were only prosecuted for their fraud against the TARP program – and only because Neil Barofsky (SIGTARP) made the criminal referral about that fraud and pushed relentlessly to force the Department of Justice to prosecute. 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. No senior DOJ or FBI official, of course, is stupid enough to state openly why we no longer prosecute even the CEOs of long-bankrupt mortgage banks that led these accounting control frauds. The U.S. Attorney for Sacramento, one of the epicenters of accounting control fraud, was foolish enough to attempt to explain why he did not investigated or prosecute the banksters:
Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said.
Wagner’s inability to keep his pronouns straight even when they were in the same sentence – “they” refers to the CEO, “themselves” refers to the bank the CEO is looting – was so embarrassing that he did not even try to respond to his critics. With no indictments of the bank CEOs for loan origination fraud and no statements by senior DOJ leaders about why they refuse to prosecute the leaders of the accounting control frauds that drove our last three major crises we are forced to guess at what went wrong at the FBI and DOJ.
This is the first in a series of columns that use the FBI’s 2010 Mortgage Fraud Report to make intelligent inferences about why the prosecutors have ceased prosecuting control frauds directed by senior financial leaders. To find that report on the FBI web site one searches for “mortgage fraud” and reads the following:
These scams hit us right where we live.
From foreclosure frauds to subprime shenanigans, mortgage fraud is a growing crime threat that is hurting homeowners, businesses, and the national economy. We have developed new ways to detect and combat mortgage fraud, including collecting and analyzing data to spot emerging trends and patterns. And we are using the full array of investigative techniques to find and stop criminals before the fact, rather than after the damage has been done.”
The first clause is schizophrenic. “Foreclosure fraud” is a massive anti-purchaser control fraud directed by the senior leadership of fraudulent banks. “Subprime” refers to one of the primary forms of “ammunition” used by the accounting control frauds whose fraudulent mortgage loan originations drove the financial crisis. But the FBI calls this form of fraud, which caused catastrophic losses mere “shenanigans.”
Definition of SHENANIGAN
: a devious trick used especially for an underhand purpose
a: tricky or questionable practices or conduct —usually used in plural
b: high-spirited or mischievous activity —usually used in plural
Examples of SHENANIGAN
1. students engaging in youthful shenanigans on the last day of school
2. an act of vandalism that went way beyond the usual shenanigans at summer camp
The trivialization of even elite white-collar crime is a problem that Henry Pontell and I have warned against, e.g.., White-Collar Criminology and the Occupy Wall Street Movement in The Criminologist, Vol. 37 #1. Henry N. Pontell and William K. Black. American Society of Criminology (January/February 2012)
As this series of columns will demonstrate, one of the consistent facts that emerges from the FBI’s 2010 Mortgage Fraud Report; albeit through consistent omission, is that the FBI implicitly assumes that this is our first Virgin financial crisis of the modern era. Even the concept of control fraud at financial institutions no longer exists at the FBI.
A related key truth also arises through consistent omission in the same FBI report – the banking regulatory agencies continue to play no role the FBI considers worthy of mention in identifying, reporting, and fighting mortgage fraud. Both omissions begin to become clear in the 2010 FBI report’s introduction.
2010 Mortgage Fraud Report: Year in Review
The purpose of this study is to provide insight into the breadth and depth of mortgage fraud crimes perpetrated against the United States and its citizens during 2010. This report updates the 2009 Mortgage Fraud Report and addresses current mortgage fraud projections, issues, and the identification of mortgage fraud “hot spots.” 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).
This report is based on FBI; federal, state, and local law enforcement; mortgage industry; and open-source reporting. Information was also provided by other government agencies, including the U.S. Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), the Federal Housing Administration (FHA), the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Industry reporting was obtained from LexisNexis, Mortgage Asset Research Institute (MARI), RealtyTrac, Inc., Mortgage Bankers Association (MBA), Interthinx, and CoreLogic. Some industry reporting was acquired through open sources.
Mortgage fraud perpetrators include licensed/registered and non-licensed/registered mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives.”
Note ten omissions and one dangerous inclusion in the introduction to FBI Mortgage Fraud Report for 2010. First, this is the most recent FBI Mortgage Fraud report. While the FBI felt the need to get updated analysis of mortgage fraud in 2009 and 2010 it has not updated the report since that time even as the statute of limitations is running out for many of the frauds.
Second, 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 Fed had the unique statutory authority under HOEPA (1994) to ban all “liar’s loans” – one of the twin epidemics of accounting control fraud by loan originators that drove the crisis. We know that the Fed collected data on these endemically fraudulent liar’s loans because they cited the data in 2008 when they finally, under Congressional pressure, used HOEPA to ban liar’s loans. We also know from the Financial Crisis Inquiry Commission (FCIC) report that the Fed’s staff collected data on enormous number of liar’s loans being made by affiliates of the Nation’s largest banks. The Fed’s supervisors used the data to warn the Fed’s senior leadership years before the crisis about the need to use HOEPA to stop a growing disaster. Alan Greenspan and his successor Ben Bernanke refused to stop the endemically fraudulent loans and Greenspan attacked the staff for daring to criticize the largest banks (which reprised his shameful performance when his supervisors criticized the large banks for aiding and abetting Enron’s accounting control fraud and anti-public (tax) fraud) (FCIC 2011: 20). The next page of the report explains that the OCC examiners raised similar flags about liar’s loans based on their examination findings. The OTS examined three of the most notorious “liar’s” loan lenders (Countrywide, Washington Mutual (WaMu), and IndyMac). Countrywide and WaMu were also infamous for their widespread appraisal fraud. The OTS had copious data on mortgage fraud origination by many of the largest lenders that it had a duty to regulate.
Third, 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.
Fourth, 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 2010 FBI report on mortgage fraud, however, does not mention the death of criminal prosecutions by the regulatory agencies. The FBI report does not explain why criminal referrals from the regulators are essential to the FBI’s success because a bank will rarely make a criminal referral against its CEO. 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.
Fifth, 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. I have written a great deal recently about the honest appraisers’ efforts to warn the Nation about the epidemic of appraisal fraud driven by the leaders of the accounting control frauds.
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. My prior articles have explained that several years before the FBI wrote its 2010 report on mortgage fraud the appraisers had also provided data demonstrating the endemic nature of appraisal fraud and an investigation by New York Attorney General Cuomo had confirmed the accuracy of the appraisers’ warning about the fraudulent lenders blacklisting honest appraisers.
Sixth, 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.
Seventh, the FBI sought no input from the professional association of mortgage brokers founded to try to restore integrity to that profession. My prior columns have quoted at length from the honest loan brokers’ testimony before the Fed warning of the endemically fraudulent nature of liar’s loans and explaining the destructive interaction of that form of fraud and appraisal fraud.
Eighth, 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. Despite all this, the FBI report on mortgage fraud ignores appraisal and mortgage origination fraud directed by the lenders’ controlling officers.
Ninth, the FBI ignores the OTS’s successful crackdown on liar’s loans in 1990-1991 that was based on the inherently fraudulent nature of liar’s loans. No honest mortgage lender would make wide-scale liar’s loans. The FBI ignored the criminal referrals that OTS had made two decades earlier that explained why liar’s loans optimized accounting control fraud.
Tenth, the FBI’s list of “mortgage fraud perpetrators” gives a free pass to the real frauds and fingers the little people for prosecution. The FBI’s list excludes all the officials who actually led the endemic appraisal and “liar’s” loan frauds. The list only covers the minnows.
The inclusion in the list of private sector entities that provided information to the FBI on mortgage fraud of the Mortgage Bankers Association (MBA) (and Fannie and Freddie) helps explain the FBI and DOJ’s failure to recognize control frauds. In the absence of the regulators’ expertise and the regulators “detailing” skilled examiners to serve as the FBI’s internal experts on complex cases, the FBI turned to the MBA for expertise. It formed a “partnership” with the MBA that continues to this day even though the MBA is the trade association of the “perps” and Fannie and Freddie were accounting control frauds. In the next column I will explain how the MBA steered the FBI to a purported “definition” of mortgage fraud that implicitly defined accounting control fraud out of existence. The MBA’s subtle sabotage of the FBI ensured that the FBI would not successfully “reinvent the wheel” and figure out how we had learned to identify and prosecute the twin accounting control fraud schemes during the S&L debacle.