In a recent mortgage fraud report, the Federal Bureau of Investigation suggests there remains great concern for unlawful activity in this sector of the economy that requires diligent attention and pursuit.
The report includes the following findings:
• 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.
• Prevalent mortgage fraud schemes reported by law enforcement and industry in fiscal year 2010 included loan origination, foreclosure rescue, real estate investment, equity skimming, short sale, illegal property flipping, title/escrow/settlement, commercial loan and builder bailout schemes. Home equity line of credit, reverse mortgage fraud and fraud involving loan modifications are still a concern for law enforcement and industry.
The history leading up to this mortgage crisis stretches back nearly two decades.
In 1994, President Clinton's Housing and Urban Development Secretary Henry Cisneros established the National Homeownership Strategy program. This policy fostered creative financing of housing for lower-income individuals and families, including smaller down payments and reduced monthly expenditures.
Former Sen, Phil Gramm, R-Texas, suggested the Clinton administration encouraged Fannie Mae, Freddie Mac and commercial banks to increase mortgage lending to this demographic, thereby increasing systemic economic and financial risk. By 2008, when Fannie and Freddie collapsed, they were required to devote 56 percent of their mortgage purchases to affordable-housing loans and nearly half of all outstanding mortgages were high risk by this time, Gramm wrote in an article for The Wall Street Journal.
By the end of the Clinton presidency, Gramm co-authored the Gramm–Leach–Bliley Act, also known as the Financial Services Modernization Act of 1999, which effectively repealed the Glass-Steagall Act. This legislation permitted commercial banks to engage in more risky investment banking endeavors. The following year, Clinton deregulated the derivative market, which incentivized undercapitalized trading of high-risk mortgage-backed derivatives. These products metastasized like a cancer throughout the economy.
Unfortunately, the Bush administration perpetuated these policies, which ultimately led to the crash of 2008.
In 2010, House Financial Services Chairman Barney Frank, D-Mass., indicated he made a serious mistake in allowing Fannie and Freddie to purchase risky mortgage loans issued to unqualified candidates. He has since recommended subsidizing rental housing for these individuals instead. The legislative and executive branch created an ill-conceived public policy landscape over two decades, which was then misappropriated by consumers and businesses.
The FBI can help prosecute these cases, but the regulators are essential, since they understand the industry best, according to William Black, a former official with the Office of Thrift Supervision who helped coordinate criminal investigations during the savings and loan crisis in the late 1980s and early 1990s.
Despite recent high-profile indictments at SAC Capital Advisors and JPMorgan Chase, the institutions and individuals associated with the mortgage crisis remain largely unscathed. Without serious adjudication of these matters, repetition is more likely.
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