Mortgage fraud indictments result from media investigation

Mortgage fraud was rampant during the housing boom. Regulators were asleep at the wheel during all of this. But now we are getting some indictments as WFAA News 8 in Dallas reports (hat tip Housing Wire). This television station did the dirty work for regulators and uncovered massive amounts of mortgage fraud.

Byron Harris reports:

News 8 started looking into questionable real estate transactions back in 2006 after learning about investors who were "flipping" houses.

Prosecutors say the group used phony buyers, questionable documents and inflated appraisals to sell houses — including properties in the Hills Creek neighborhood of McKinney — for more than what they were worth.

In 2002, one house on Hills Creek Drive was valued at $315,000; by January 2006, it sold for $625,000.

Prosecutors said the value of other modest homes was increased to as much as $715,000. When the properties sold, prosecutors allege that the profits went to the man at the top in the form of "disbursements."…

Appraiser Steve Nichols helped News 8 analyze the paperwork that pinpointed questionable appraisals by Josh Melton, who is now charged in the crime.

"It’s my belief you have to have professionals who are able to identify fraud in their own industry and being willing to report it," Nichols said.

The U.S. Attorney expects suspects to begin turning themselves in to a federal judge next week; trials will follow.

Each suspect faces a maximum sentence of at least 20 years.

The video is embedded below.


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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