By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
Hello, folks! As Yves is off explaining the world to Washington, I’m manning the controls for a couple days.
This allows me to ensure that NC has that whole Justice Department IG report on mortgage fraud covered. I know that Yves heaved the written equivalent of a sigh at the news, and she wasn’t wrong. Nothing tangible is likely to happen for the borrowers victimized by the abusive practices that DoJ willfully neglected to prosecute. And there’s surely a seat being kept warm at Covington & Burling for Eric Holder’s post-government career; this won’t hurt him a bit. Yesterday, Elizabeth Warren, Elijah Cummings and Maxine Waters requested a meeting with Holder over the report; I doubt he’s stressed about it.
But because I don’t feel the coverage so far has plumbed the depths of this corruption, and because it’s still happening, it’s not worth going silent just yet. It’s probably spitting into the wind, yes, but I’ve got the time and the spit, so I want to note a few things.
1. “Mortgage fraud” is a limiting term: There’s a yawning gap between “mortgage fraud,” in the context of how the IG presents it in this report, and the full breadth of fraud and deception at the heart of the crisis. Mortgage fraud, per the definition used by the FBI and the IG, is very specifically mortgage origination fraud, the misrepresentation used to get people into loans. That includes misrepresentation by borrowers, such as lying on a loan application, but also the actions of lenders falsely documenting income or wildly inflating appraisals. In later years, mortgage fraud came to include “foreclosure rescue” schemes, where illicit actors claim to be able to get loan modifications for borrowers for a fee, and then abscond with the money and do nothing for the borrowers.
You can clearly see that this focuses on a small corner of the much more widespread fraud that has gone on for over a decade now. And it inherently, by definition, leaves the biggest Wall Street actors out of the equation. When the DoJ, FBI, or this IG report talks about mortgage fraud, they’re not talking about:
•Securitization fraud, the knowing packaging of worthless loans into bonds to unsuspecting investors;
•Securitization fail, the improper conveyance of mortgages into trusts, breaking the chain of title on the loans;
•False Claims Act fraud, where servicers collect on FHA insurance or other government benefits with faulty loans;
•Tax fraud, through setting up REMICs and then not following the guidelines with mortgages and notes, yet still benefiting from the tax status;
•Servicer-driven fraud, like the mass misplacement of loan modification documents in order to push people into default, the bonuses given for foreclosures, dual tracking, improper fee pyramiding, imposition of fees not included in the mortgage documents, lost payments, people getting foreclosed on because they underpaid by ten cents, etc.;
•Forced-place insurance fraud, the kickback scheme to saddle borrowers with lapsed insurance with junk policies that cost several orders of magnitude more;
•Foreclosure fraud, the mass production of false documents to prove ownership over loans with a questionable paper trail;
•Robo-signing, the notarization of thousands of court statements a day by line workers who know nothing about the underlying loan information;
•Breaking and entering by “property preservation” specialists who illegally break into occupied homes and occasionally ransack them in the name of “keeping watch” over properties thought to be abandoned.
I could go on. Even housing discrimination, whereby minority borrowers were charged higher interest rates and non-prime loans (even when they qualified for prime), is not incorporated into this definition of “mortgage fraud” (DoJ has actually prosecuted a fair bit of this discrimination through the Civil Rights division, but nobody’s gone to jail for it IIRC). The litany above implicates mega-banks who sold the securities, servicers (until recently, typically the arms of mega-banks) who serviced the loans, trustee mega-banks who managed the deals, and so forth. Mortgage fraud under the DoJ definition implicates fast-money, fly-by-night lenders that imploded when the whole scheme went kablooey. More recently it involves foreclosure rescue scams, which the interview subjects say flat-out in the IG report don’t involve enough money for them to consider prosecution.
That’s not true of the various types of bank-driven frauds. And without corrupt securitization feeding the need for lots of loans, there would have been far less corrupt lenders, if any. But as Gretchen Morgenson pointed out, the IG report specifically excludes securities fraud from this overview. This is on page 2 of the report:
Some observers use the term “mortgage fraud” to include mortgage-backed securities fraud, which involves wrongdoing related to the packaging, selling, and valuing of residential and commercial mortgage-backed securities. However, the FBI considers this type of misconduct to be a form of securities fraud and not mortgage fraud; therefore, we did not include as part of the scope of this audit.
That’s an absurd justification. This was all part of the same overall scheme. Even if the DoJ did a “good” job on mortgage fraud as defined by this report, it wouldn’t have touched Wall Street, because the definition mostly comprises lying on loan applications. In a way, the FBI’s compartmentalizing here shows how the law enforcement apparatus was never going to get to the bottom of the scandal. They placed a false frame on it, one that inherently goes after the little guy and not the bigger players.
Of course, as we see, DoJ couldn’t even be bothered to get the small spade work done (which could have led them to the top). And if they wouldn’t prosecute small-time fraud, they weren’t going to prosecute anything.
2. DoJ’s own systems prevented accountability for their actions: One of the major themes, if not the major theme, of the report concerns how the DoJ’s case management system, known as LIONS (Legal Information Office Network System), was simply unequipped to track how many mortgage fraud cases the department handled. The interview subjects said this:
According to EOUSA officials, LIONS is a tool used to assist the USAOs in assessing staff caseloads and managing their offices. These EOUSA officials also stated that the LIONS system was not designed as a statistical system and therefore can be an imperfect tool for responding to specific, detailed inquiries seeking comprehensive, uniform nationwide data sought for purposes other than case management. Despite these limitations, EOUSA officials said that LIONS is frequently used to provide the data used for the Attorney General’s Annual Report, the United States Attorneys’ Annual Statistical Report, and numerous requests for statistical data from the Office of Management and Budget, Congress, and the public at large.
This is stunning. So US Attorneys have known for years that LIONS cannot provide statistical analysis for nationwide data. It’s an open secret that the system is a joke. But DoJ uses it to provide that statistical data anyway!
When Congress first started asking for very basic information about how many cases were in the pipeline, all the way back in July 2008, mortgage fraud cases weren’t even tracked separately in LIONS. They added a code, but even then, US Attorneys repeatedly told the IG that the data was unreliable, that they would frequently find misclassifications, that cases opened before July 2008 were often never re-coded, etc. The database does not even track the business title at whom the denoted mortgage fraud prosecution (i.e. were they a small fry or an executive). The LIONS database for civil enforcement cases STILL doesn’t have a code for mortgage fraud, nor does another system, USA-5, used to track what kinds of cases DoJ personnel have worked on. It all gets lumped in under “financial institutions fraud,” which can mean any number of things.
There’s practically no reliable method of evaluation, then, to determine whether DoJ has been diligent with respect to their narrow definition of mortgage fraud. And I can’t help but think that’s intentional. I see a lot of cautions about the limitations of LIONS and no effort to, well, find a system that does statistical analysis better. And that could of course help with information sharing, an important component of understanding and verifying a nationwide, interlocking set of frauds. Nobody wanted to put that kind of effort into it, so you have garbage in, garbage out.
Here’s the best part: in the DoJ response to the IG report (more on that later), they don’t even commit to adding the necessary fields to accurately compile mortgage fraud data:
The Department will continue to evaluate and reassess its existing data collection mechanisms for allowing the Department to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization. Indeed, EOUSA has already begun considering the addition of a LIONS field for “occupation” in financial fraud and mortgage fraud cases.
Begun considering! The foot-dragging is a giveaway that the Department is not interested in metrics, perhaps because of what they would show.
3. When did a priority become a non-priority? People who worked in US Attorney’s offices will tell you that there was a moment in time when mortgage fraud was actually a priority, or at least appeared to be. Teams of FBI agents and lower-level US Attorney personnel were formed. Cases were opened. Things were percolating. The facts of the IG report show that changed, and mortgage fraud moved further down the totem pole, with cases closed and emphasis placed elsewhere. The question that must be asked is whether mortgage fraud was never a priority at all – a PINO, or priority in name only – or if it was specifically downgraded, sometime after the financial collapse. This unsubstantiated report says there was a handshake deal in 2008 not to prosecute. I can’t vouch for it. But something happened. The IG provides the contours but doesn’t get to the bottom of the decision-making process.
4. Lying to Congress: The famous story coming out of this report regards the 10 months’ worth of repeated lying by DoJ about their prowess in prosecutions. We already knew much of this thanks to Bloomberg’s Jonathan Weil, but we didn’t know that DoJ had immediate awareness that the stats they gave at an October 2012 press conference (note the date, one month before the Presidential election) were flawed, and yet used the numbers anyway in press releases until August 2013 (when they then tried to change the numbers in the old releases retroactively).
The key question is whether they used those knowingly false numbers in testimony to Congress. We do know from p.20 of the report that then-Assistant AG of the Civil Division Tony West testified to Congress in 2011 that “mortgage fraud was a top priority of the Department,” but that’s not specific enough to be considered lying to Congress. Did anyone from DoJ use numbers about mortgage fraud prosecutions they knew to be false in Congressional testimony? That’s really important information, and Patrick Leahy or Darrell Issa or any other committee chairman who welcomed Eric Holder or DoJ officials from October 2012 to August 2013 should be asking it.
5. DoJ takes credit for someone else’s collar. Back to the DoJ’s response to the IG report, written by Deputy AG James Cole. While agreeing with the recommendations of the report, Cole tries bravely to defend the Department’s record in light of this complete torching by the IG. But he couldn’t come up with anything better to say about prosecutions of individual bank executives than this:
The Department has brought significant criminal and civil enforcement actions against company officials for conducting mortgage fraud resulting in significant losses. For example,in the criminal enforcement context, the Department secured a conviction in 2011 against Lee Bentley Farkas, the former chairman of a private mortgage lending company, Taylor, Bean & Whitaker, for Farkas’s role in a more than $2.9 billion fraud scheme that contributed to the failure of Colonial Bank, one of the 25 largest banks in the United States in 2009.
What a risible half-truth. Everyone who knows the Farkas story knows that this wasn’t DoJ’s collar. In fact, it was the work of that Obama Administration nemesis, Neil Barofsky, when he served as the Special Inspector General of TARP. The Farkas case began as a SIGTARP investigation, because Farkas convinced Colonial Bank to try to rip off $550 million in TARP funds. That’s what led to a scheme in place since 2002 to unravel. SIGTARP was the lead agency on the case until Barofsky left. He’s listed on DoJ’s press release about the indictment.
Technically, the US Attorney for the Eastern District of Virginia, Neil MacBride, finished the prosecution. But the fact that DoJ, in their alibi, takes credit for a case that was handed to them by an outside agency that did all the investigative work, shows how bare the cupboard truly is.
It’s important to point this stuff out systematically. Everyone should have an informed response to those who claim that financial prosecutions are just too hard, or that law enforcement made the proper effort. Especially because this is STILL going on. LIONS remains a crappy database. DoJ still can’t track cases well. Mortgage fraud continues to be an inherently limiting definition. Without knowing all this, that will never change.