This is an article published today which I felt was important enough to reprint here along with the response comment I made.
There is much more to this so called “mortgage meltdown” that has not even begun to surface. As you will see in my comment, this is no longer, and probably never was, a mortgage meltdown, it was and is, in fact, a Main Street – Wall Street banking debacle. A Banking Crisis.
Here is the article:
In a recent Los Angeles Times article about the FBI’s role in the run-up to the current housing crisis, staff writer Richard Schmitt wrote:
Today, the damage from the global mortgage meltdown has more than matched that of the savings-and-loan bailouts of the 1980s and early 1990s. By some estimates, it has made that costly debacle look like chump change. But it’s also clear that the FBI failed to avert a problem it had accurately forecast.
The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.
As you can see from their response, the FBI didn’t take too kindly to Schmitt’s assessment:
Letter to the Editor Regarding the Mortgage Crisis
Your 8/25 story on the mortgage crisis (”FBI saw threat of mortgage crisis,” L.A. Times, August 25, 2008) implied that if the FBI had made more arrests for mortgage fraud, the crisis could have been averted. To even suggest that is a cry for a lesson in both civics and basic economics.
The story’s premise was built around a 2004 quote from an FBI official who said he was confident the FBI could prevent fraud from becoming a massive problem. In context, Assistant Director Chris Swecker meant he believed the FBI could stay focused on mortgage fraud to prevent fraud from becoming the major driver that would cause a collapse of credit in the housing market. We believe by a good measure, the Bureau did that.
The FBI’s Criminal Division has arrested 1000 suspects and targeted 180 criminal enterprises since 2004. We targeted those lenders and buyers involved in multiple frauds or cases where the profits went to drug crews, gangs or organized crime. More investigations are ongoing. But the FBI is a law enforcement and intelligence agency, we are not banking regulators.
In the end, most economists have attributed the crisis to very aggressive lending practices and too little risk management throughout the financial services industry. As far as mortgage fraud was concerned, the FBI had the right intelligence and provided the right warnings to the industry, but fraud alone does not appear to be the straw that broke the mortgage camel’s back.
In the boom and bust of the mortgage business, to suggest that making more arrests would have averted the mortgage crisis is to confuse the root cause with the side-effects. It is not a fair or realistic assessment.
Kenneth Kaiser, Assistant Director
Criminal Investigative Division
Federal Bureau of Investigation
If you missed the Los Angeles Times article that Assistant Director Kaiser refers to above, here it is in its entirety:
FBI saw threat of mortgage crisisA top official warned of widening loan fraud in 2004, but the agency focused its resources elsewhere.
By Richard B. Schmitt, Los Angeles Times Staff WriterAugust 25, 2008.
Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.
“It has the potential to be an epidemic,” Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. “We think we can prevent a problem that could have as much impact as the S&L crisis,” he said.
Today, the damage from the global mortgage meltdown has more than matched that of the savings-and-loan bailouts of the 1980s and early 1990s. By some estimates, it has made that costly debacle look like chump change. But it’s also clear that the FBI failed to avert a problem it had accurately forecast.
Banks and brokerages have written down more than $300 billion of mortgage-backed securities and other risky investments in the last year or so as homeowner defaults leaped and weakness in the real estate market spread.
In California alone, lenders have foreclosed on $100 billion worth of homes over the last two years and are foreclosing at a rate of 1,300 houses every business day, according to a recent report from ForeclosureRadar.com.
Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn’t just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.
Now that the problems are out in the open, the government’s response strikes some veteran regulators as too little, too late.Swecker, who retired from the FBI in 2006, declined to comment for this article.
But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.They ended up with fewer resources, rather than more.
In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and ’90s, said Anthony Adamski, who oversaw financial crime investigations for the FBI at the time.
The FBI says it now has about 200 agents working on mortgage fraud, but critics say the agency might have averted much of the problem had it heeded its own warning.
“The FBI correctly diagnosed that mortgage fraud was epidemic, but it did not come close to meeting its announced goal,” said William K. Black, who was a federal regulator during the S&L crisis and now teaches economics and law at the University of Missouri-Kansas City.
“It used everyday procedures and woefully inadequate resources to deal with an epidemic,” he said. “The approach was certain to bring symbolic prosecutions and strategic defeat.”
The mortgage debacle has laid bare a system marked by dubious practices at every stage of the process. Lenders often made loans to borrowers who had limited ability to repay them but little desire to pass up the dream of homeownership. Many loans lacked basic documentation, such as information about borrowers’ incomes.
Still, mortgage companies could hardly sell them fast enough, packaging the loans as investment securities and peddling them to eager buyers on Wall Street.
The FBI defends its handling of the crisis, with officials contending that as home prices were rising several years ago, the trouble brewing in the mortgage market — and the potential crimes behind it — was not immediately apparent.
Officials said they began approaching mortgage companies and others in an attempt to raise awareness about the growing fraud problem. But the lenders had little incentive to cooperate because they were continuing to make money. Black says that in many cases, they were part of the fraud.
“Nobody wanted to listen,” Sharon Ormsby, the chief of the FBI’s financial crimes section, said in an interview. “We were dealing with the issue as best we could back then.”
Over the last three years, the FBI and other agencies have brought dozens of mortgage-fraud cases. The bureau has rooted out foreclosure rescue schemes in which homeowners are tricked into signing over the deeds to their homes to operators who buried the properties even deeper in debt. Agents have disrupted cases of identity theft in which criminals open — and exhaust — home equity lines of credit and leave homeowners stuck with the bill.Many of the cases have been relatively small, however, with about half the investigations involving losses of less than $1 million — the size of two or three loans.
But the tepid response also reflects a broad realignment of law-enforcement priorities at the Justice Department in which mortgage fraud and other white-collar crimes have been subordinated to other Bush administration priorities.
That has reflected, in part, the ramp-up in national security and terrorism investigations after the Sept. 11 attacks. But the administration has also put more support behind efforts against illegal immigration and child pornography.
In a way, the mortgage debacle could not have come onto the FBI radar screen at a worse time. Just as Swecker was making his doomsday forecast, the FBI, under pressure from Congress and the White House, was creating a crime-fighting brain drain, transferring hundreds of agents from its criminal investigations unit into its anti-terrorism program. About 2,500 agents doing criminal work — 20% or so of the entire force — were affected.
Even as the number of new white-collar cases started declining, the Justice Department did pursue some high-profile corporate prosecutions, such as those arising from the collapse of Enron Corp. But some former prosecutors question the administration’s current commitment to pursuing complex, high-stakes cases.
“I think most sitting U.S. attorneys now staring at the subprime crisis find scant resources available to pursue sophisticated financial crimes,” said John C. Hueston, a Los Angeles lawyer who was a lead federal prosecutor in the trials of Enron executives Kenneth L. Lay and Jeffrey K. Skilling.
Absent a major shift in priorities and resources, he said, it is likely that the Justice Department and the FBI will continue on their current path of focusing on simple cases “that don’t go to the heart of the problem.”
The FBI says it has 21 open investigations into possible large-scale fraud related to the subprime meltdown. The Times reported last month that a federal grand jury in Los Angeles had subpoenaed records from three large California lenders: Countrywide Financial Corp. (now part of Bank of America Corp.), New Century Financial Corp. and IndyMac Federal Bank.
Among other possible targets, the FBI has said, are investment firms that sold billions in securities backed by shaky subprime mortgages and credit rating agencies that gave high marks to the now-worthless securities and failed to protect investors.
But it may be hard to jump-start such probes. Trying to prove that a major mortgage company intended to defraud buyers of its securities, for example, could take years of digging into records and testimony.
Moreover, some of those involved may have special legal protection: Credit rating firms have in other cases successfully asserted that their opinions about the values of securities are protected by the 1st Amendment.
“I am happy to have investigations going on, but these investigations should have taken place years ago,” said Blair A. Nicholas, a San Diego lawyer representing investors who lost money in the collapse of several subprime mortgage lenders. “They seem to always get involved after the horse has left the barn. It is always cleaning up the mess rather than being proactive.”
Could the crisis have been averted, or at least mitigated, if the FBI had intervened more forcefully?
“Until there is a catastrophic loss, there is no incentive to investigate criminal conduct,” said Cynthia Monaco, a former federal prosecutor in New York. “Nor are there people coming forward with evidence” such as angry investors or whistle-blowing corporate employees, she said.
Even now, Monaco added, it is far from clear whether the damage — suffered by investors and homeowners alike — was the product of clear-cut fraud.
Ormsby says the FBI is more actively working with other federal investigative agencies in the hope they will pick up the slack. The Secret Service, for example, in a departure from its traditional missions of protecting presidents and heads of state and investigating counterfeiting, has assigned more than 100 agents to examine mortgage fraud, said spokesman Edwin Donovan.
The Justice Department is also starting to mobilize. The department offered what it described as a “basic seminar” on mortgage fraud cases to about 100 prosecutors last week at its national training academy in South Carolina.
Posted By: Ralph Roberts @ 10:49 am Filed under: Mortgage Fraud, FBI
MY RESPONSE/COMMENT as posted on Flippingfrenzy.
Crime and criminal prosecution today is a very selective process. The laws apply to some, usually the small fry, but not to all, typically Main Street and Wall Street.
Richard Schmitt said in his article:
"Among other possible targets, the FBI has said, are investment firms that sold billions in securities backed by shaky subprime mortgages and credit rating agencies that gave high marks to the now-worthless securities and failed to protect investors".Kenneth Kaiser of the FBI in his letter to the editor said the following:
“In the end, most economists have attributed the crisis to very aggressive lending practices and too little risk management throughout the financial services industry”.
These two comments begin to sum up the real cause of this meltdown. During the S&L crisis, the focus for fraud was aimed at the S&L's and their management. If you remember, it was their shoddy lending practices that caused the problem and nurtured the fraud by those they lent money to.
Today, this banking crisis - not a mortgage meltdown - is similar to the S&L debacle. It was the shoddy lending practices of the banks and Wall Street that nurtured the fraud.
It was the extreme high demand for mortgage notes to satisfy the demand for mortgage backed securities that fostered an era of no doc or limited doc loans, APPROVED BY AND FUNDED BY the banks and ultimately Wall Street.
Everyone must keep in mind that the banks after funding a loan for a mortgage broker or even their own loan officers then SOLD the loan to Wall Street. In other words, THEY GOT THEIR MONEY BACK with a profit. The banks had no risk, no exposure, no losses and certainly no reason not to loan anyone at all money.
Wall Street also had no risk, no exposure and no losses. THEY GOT THEIR MONEY BACK plus a profit from the world wide investors who purchased their securities induced to do so by FRAUDULENT ratings by the rating agencies.
Further more, what is little known is that both Wall Street and the banks were selling these mortgage notes "forward" meaning that the notes were sold even before the deal closed and the borrower signed on the bottom line.
In addition, I recently read, from a credible source, that banks such as Wells Fargo actually sold mortgage notes into the security packages that DID NOT EXIST. They actually forged a borrower’s signature on the mortgage and note knowing full well that the borrower never closed on that loan. And to add insult to injury they then initiated foreclosure proceedings against the person whose name they forged but never closed. This action now created a cloud on the title for the buyer who did close on the loan and created a problem for the lender who actually did finance that home for the buyer who closed. In other words, these forged notes defrauded the actual buyer, the actual lender and the investor who purchased shares in a security where the security -mortgage note and property-did NOT EXIST.
Do we hear or see investigations of this type. NO! Why? Because the BIG GUYS are immune from investigation and prosecution unlike the S&L days.
I have said this before, where was the SEC when it came to regulating these security sales? Maybe if the securities were monitored properly, fraud would have been limited and the FBI would not have even had to participate in so many cases.
By continuing to investigate the bottom of the pyramid, the actual perpetrators will never be brought to justice. Every crime has a crime boss who makes the crime possible. Who are the bosses in this banking crime?
Don't blame the FBI, put some blame on the SEC and perhaps on "higher ups" in our national government. Somebody up there knew what was happening and what the results would be. Profit and greed at its' highest levels and will go unpunished while an entire industry is wiped out with hundreds of thousands of innocent victims and a shattered national economy that may take years to recover. All for the benefit of a few.
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