The WSJ, however, tries to make it appear that the ever-so-honest managers are paragons of virtue who first create compensation systems that create overwhelming incentives that produce endemic loan origination fraud by loan officers -- and then strive mightily to limit the resultant endemic fraud that they caused.
"While loan officers may be trying to boost the number of home loans they give out, their superiors and risk officers are charged with ensuring the quality of those loans."
Here is a novel idea (that was once an exceptionally effective reality): why not pay loan officers in a manner that leads them to "ensur[e] the quality of those loans?" Honest lenders make money by "ensuring the quality of those loans." Banks lose money when loan officers are compensated in a manner that "ensur[es] the [bad] quality of those loans." Banking is not a game in which you create incentives for your own people to loot the bank -- and then tell "their superiors and risk officers" to try to stop the looting that you have encouraged.
For sheer incoherence, this passage in the WSJ article is tough to beat.
"Banks turned to [appraisal-management companies] AMCs to help maintain a distance between loan officers and appraisers. That distance is intended to eliminate pressure on the appraiser to hit a certain price. But some in the industry say AMCs are now applying pressure in a bid to keep the lenders' business."
The first sentence claims that "banks" were hiring AMCs in an effort to try to prevent the bank's corrupt loan officers from extorting appraisers to inflate appraisals. "Banks," of course, are incapable of having any true intent. The article actually means to claim that the banks are run by honest CEOs who are making strident efforts to ensure that their corrupt loan officers do not extort appraisers to engage in appraisal fraud. Given that premise, the obvious question is the one I raised above -- why do those same CEOs create the perverse incentives that corrupt the loan officers and create their overwhelming incentive to extort appraisers to commit appraisal fraud if the CEO is dedicated to preventing appraisal fraud? There is also an obvious way for bank CEOs to end promptly the coercion of appraisers by the bank's corrupt loan officers -- fire the corrupt loan officers and the appraisers who succumb to their extortion.
The second sentence adds to the incoherence. It states that the AMCs are now extorting appraisers to inflate appraisals. The article reports that "some" claim that the reason that the AMCs are extorting appraisers to inflate the appraisals is that the AMC's are being extorted by the "lenders." This should, of course, lead the author to explain what that word refers to. In context, it seems to admit the truth -- that the extortion is led by the officers that control corporate policy, i.e., the bank CEOs. So much for the WSJ's claim that the banks' controlling officers are the good guys betrayed by the fraud mice.
The cherry on this incoherent sundae is provided by the Mortgage Bankers Association (MBA) -- the trade association of the "perps."
"'The lender is held accountable--they need the appraisal to be accurate and to defend it years down the road,' said Michael Fratantoni, chief economist at the Mortgage Bankers Association. He cited the agreed-upon purchase price as among the best measures of a home's value.
Except, the "lender" was not held "accountable" for the endemic appraisal fraud that was a major cause of the financial crisis and the Great Recession. More importantly, the officers that control "the lender" were made wealthy by leading the three fraud epidemics that drove the financial crisis but were never held accountable. They did not even have their fraud proceeds clawed back.
The "agreed-upon purchase prices" is "among the best measures of a home's value" -- except where there is accounting control fraud. Appraisal fraud is an example of accounting control fraud in which the "agree-upon purchase price" is often dramatically inflated and is "among the [worst] measures of a home's value."
The funniest line in the title is "Regulators are Wary." The Clinton and Bush administration anti-regulators were the recipients of the appraisers' petition. They took no meaningful action to block the Gresham's dynamic and the resultant epidemic of appraisal fraud. The Obama administration anti-regulators and anti-prosecutors have not prosecuted or sanctioned any senior banker for his role in leading the epidemic of appraisal fraud. The anti-regulators are so far from "wary," and have been for so many years, that picturing them as vigilant rather than oblivious is very funny. An extremely careful reader of the article would realize that the article does not report that the supposedly "wary" regulators actually did anything that would be effective in stopping endemic appraisal fraud. The only thing the article describes the "wary" regulators as doing is this:
"The Office of the Comptroller of the Currency is reviewing the mortgages banks are doling out, concerned that some of them are based on inflated values".
The OCC found cases in which bank staff didn't have enough training, Mr. Benhart said. In some cases, for example, they didn't have experience with the type of property or the area, he said. It also found banks that didn't thoroughly check reports or provide oversight of AMCs."
No bank officer was sanctioned administratively by the regulators, sued by them, or prosecuted. No enforcement action is described as being taken by the OCC against any bank. The OCC is not described as adopting any rule. The OCC is not described as having made a single criminal referral. If this is what the WSJ thinks describes a "wary" regulator's response to a fraud epidemic then they are delusional. I have explained in prior articles that the head of the OCC is an anti-regulator who has expressly refused to make ending control frauds led by bank CEOs a regulatory priority. Note that the OCC not only failed to use the word "fraud" to describe appraisal fraud, it also attributed the endemic appraisal fraud to preposterous explanations such as insufficient staff "training" and "oversight."
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