What the lenders' CEOs were doing was deliberately creating a "Gresham's" dynamic in which bad ethics drives good ethics out of the markets and professions. Any competent training course for AUSAs would emphasize the danger of such a Gresham's dynamic, explain how to identify the dynamic, and demonstrate how to use its existence as a means of prosecuting the lender's senior officers.
The "smoking gun" article discusses appraisal fraud -- and assumes without analysis that it must come from the borrower. The borrower, of course, rarely has the economic leverage to inflate an appraisal. The lender's CEO, however, has the absolute ability to create a powerful Gresham's dynamic and suborn appraisers to produce widespread inflated appraisals.
DOJ Gets Borrowed Down Payments Wrong
The "smoking gun" article assumes, without any critical analysis, that borrowers are responsible for defrauding lenders by borrowing the down payment. The reality is that by far the most common form of down payment fraud was committed by the controlling officers of the banks. A recent study by conservative finance specialists documented the frequency of these frauds led by lenders' personnel.
Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market
Tomasz Piskorski, Seru & Witkin (February 2013).
"At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed, peaking in 2006. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans.
A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be largely unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region.
Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries up to $160 billion.
These misrepresentations are not instances of the classic asymmetric information problem in which the buyers know less than the seller. Rather, we contend that they are instances where, in the process of contractual disclosure by the sellers, buyers received false information on the characteristics of assets.
[A] lender financing a second lien loan had to be aware of the presence of such higher liens.
Our review of [FirstAmerican] mortgage deeds records " indicates that both first-lien and closely situated second-lien mortgages on a given property were commonly financed by the same lending institution.
[M]ore than 15% of loans with closed-end second liens incorrectly reported no presence of such liens. The propensity of banks to sell loans that misrepresented asset quality increased as the housing market boomed, peaking in 2006.
Importantly, a significant degree of misrepresentation exists across all reputable intermediaries in our sample."
The import of the last four quoted paragraphs is that even the most elite loan originators frequently committed fraud in the origination process by falsifying the documentation to make it appear that there was no second-lien and then made false "reps and warranties" to fraudulently sell the fraudulently originated loans to the secondary market. Recall that the $160 billion buyback is solely on the basis of two of the far less damaging frauds. It does not include the buybacks that would be required under the three vastly more damaging fraud epidemics.
DOJ Adopts the MBA's Faux Definition of "Mortgage Fraud"
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
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