(Cross posted and Benzinga.com)
This is the third column in my series discussing why the FBI and the Department of Justice (DOJ) have failed to investigate and prosecute successfully the largest and most destructive financial fraud epidemic in history. The series uses the FBI's 2010 Mortgage Fraud report to tease out how the FBI and DOJ suffered such a defeat.
The MBA conned the FBI into a "partnership" with the trade association of the "perps." In my prior column I showed the first product of the partnership -- a poster warning customers not to defraud banks but ignoring banks defrauding customers. This column discusses the more consequential and damaging product of the FBI/MBA partnership. The MBA presented a definition of "mortgage fraud" under which the bank is always the innocent victim and never a perpetrator. Because the FBI and DOJ did not draw on the banking regulators' expertise due to the death of criminal referrals by the agencies the FBI fell for the MBA con.
In the S&L debacle, less than 1/70 the magnitude of the control fraud we made over 30,000 criminal referrals to produce over 1,000 felony convictions in cases designated as "major" by the DOJ. In the current crisis OTS made zero criminal referrals. I explained this death of the criminal referral process by the banking regulators in my prior columns. A reader responded:
"Dearth. The word is dearth. As in a shortage or scarcity of something. Not only did you feel the need to use the exact same word multiple times within the first few paragraphs (I stopped reading after that) but you misspelled it EVERY TIME."
These Aren't the Droids We're Looking For: The MBA's Faux Definition of "Mortgage Fraud" Cons the FBI
The second product of the MBA and the FBI's Faustian bargain is a purported definition of "mortgage fraud." The FBI's March 8, 2007 press release announcing its "partnership" with the FBI contained the same fake definition as the FBI's 2010 mortgage fraud report quoted below. Note that the MBA con of the FBI was so successful that the FBI parrots the definition uncritically, year after year, as if it were revealed truth. Unlike Gaul, all mortgage fraud is divided into only two parts -- and the bank and its elite officers are always the victims.
Loan Origination Schemes
Mortgage loan origination fraud is divided into two categories: fraud for property/housing and fraud for profit. Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes, and participants are frequently paid for their participation.
Loan origination fraud schemes remain a constant fraud scheme. These schemes involve falsifying a borrower's financial information----such as income, assets, liabilities, employment, rent, and occupancy status----to qualify the buyer, who otherwise would be ineligible, for a mortgage loan. This is done by supplying fictitious bank statements, W-2 forms, and tax return documents to the borrower's favor. Perpetrators may also employ the use of stolen identities. Specific schemes used to falsify information include asset rental, backwards application, and credit enhancement schemes.
It was overwhelmingly lenders and their agents who caused appraisals to be inflated and who put the lies in liar's loans.
The two paragraphs I quoted from the FBI's 2010 mortgage fraud report make it clear that the FBI knows that the actions that the mortgage lenders' controlling officers caused the lenders and their agents (primarily the loan brokers) to commit the twin epidemics of mortgage origination fraud (appraisal and liar's loan frauds). It was these officers who "fired" both "barrels" of the fraudulent mortgage origination "shotgun" and produced millions of "gross misrepresentations concerning appraisals and loan documents"." The MBA's facially preposterous "definition" of "mortgage fraud" implicitly defines out of existence the type of fraud that drove our two recent financial crises (the Enron-era and S&L debacle accounting control frauds). Under the MBA definition the most damaging form of financial fraud ("accounting control fraud") -- one that a Nobel laureate in economics, leading white-collar criminologists, and effective financial regulators have identified as the primary driver of our crises -- has ceased to exist.
The MBA's definition is significantly insane. The honest appraisers -- and the MBA -- would have made it impossible for the FBI to believe in the MBA's fiction of the first Virgin crisis if the FBI had received the advantage of competent financial regulators' expertise.