Edward Harrison on Rampant Mortgage Fraud

19 Mar

The second  section of the March 17 article from Credit WriteSowns’ Edward harrison got our attention today; not just because the first section dealt with local Texas news teams uncovering rampant fraud, but because in this seciton Harrison gets into the meat of what are the larger and more important ramifications of the entire Mortgage Crisis:

That severe economic crisis was identified as early as 2004 byt he FBI as the LIKELY result of the rampant fraud being promulgated by Lenders if it were not stopped.

That “Black knows that so much fraud goes unpunished because the majority of the fraud involves the lenders.”

Mortgage fraud indictments result from media investigation

Edward Harrison on 17 March 2010 at 2:03 pm

Just last month, Bill Black, a former S&L crisis regulator gave a speech on mortgage fraud and its central role in the housing bubble and bust. He asserts that lax regulation was at the very core of this epidemic of fraud. He starts in commenting that the FBI gave a prescient warning in September 2004 that fraud was rampant in the mortgage market. Black says:

[The FBI] didn’t simply warn there was an epidemic of mortgage fraud, they explicitly warned that it would produce an economic crisis if it were not dealt with. So what was done in response to a warning that clear?

Not a whole lot. As I explained in the last post, Black knows that so much fraud goes unpunished because the majority of the fraud involves the lenders. Since lenders control the documentation, none of this gets exposed unless the lenders file criminal referrals — or regulators intervene.

Note, Black says 80% of mortgage fraud losses occur when lender personnel are involved. Other statistics worthy of consideration which Black cites?

  • Of roughly 10,000 mortgage lenders, only 900 have ever filed a criminal referral in the relevant five year period.
  • Over 700 of those institutions filed fewer than five criminal referrals.
  • The twenty-five largest filers of criminal referrals filed over 90% of all referrals.
  • There has not been one single enforcement action in five years (I assume 2002-2007) despite regulated institutions failure to file the mandated criminal referrals.

Black concludes that even in the regulated sector of the mortgage complex where criminal referrals are mandated in the case of fraud, no one except these 25 institutions is reporting fraud.  What does that tell you?

It tells me that fraud is rampant and no one is regulating it. Logic would dictate that any regulator which sees evidence of an epidemic of fraud in non-prime lending and non-compliance with regulatory mandates to report fraud would concentrate a disproportionate number of investigators on non-prime lenders. That did not happen. So, clearly there was no regulation.

During the S&L crisis, Black notes that there were over 1000 priority criminal convictions of senior insiders connected to fraud. To date, of the specialty lenders who specialized in subprime, there have been zero convictions.  So you compare 1,000 during the S&L crisis to zero during this one despite the crisis being an order of magnitude larger. In fact, there have been zero indictments, according to Black. There have even been zero arrests he says.

This is the way the system worked under Bush and it is the way it continues to operate under Obama.

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