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.
Holder is guilty of obstruction of justice and no I don’t need no stinkin trial to prove it.
And … we know that Holder’s orders came from Obama.
So … my advice is to vote against all incumbents in 2016. Don’t decide based on party affiliation.
With respect, the system may well be rotten through to the very core: unsalvageable. Voting at all may just perpetuate an illegitimate system. Instead, why not join me next November in my “Moon a Voting Booth” protest. Afterwards, assuming we’re not all arrested for indecent exposure, we can get together for coffee and/or tea and discuss what our needs are and how we can go about getting them fulfilled, collectively.
Personally, I’ve grown weary of our rotating dictatorship, punctuated by brief spurts of psuedo-democracy. I’d rather spend my energy building a new machine, rather than waste any more time trying to patch-up this old beater. Maybe it’s just me…
How ’bout everyone shows up to be write-ins for the Monster Raving Mooner Party?
Yeah. Always show up to protest-vote.
The media still report how many people vote for “no hoper” third parties and protest candidates. It sends a signal to other people that they’re not alone.
Always show up to protest vote. I can’t count how many times I’ve written my own name in, in recent years.
Let’s start building, my friend The Skunk movement will smash the tyrannical duopoly of the corporatist parties! Avanti ragazzi!!
To many are worried the string gets pulled and poof… naked jail showers for deposed emperor’s and courtesans.
skippy… Cough Lambert – “I’m manning the controls” – Too soon!
skippy — I don’t think they’re quite worried enough.
Excellent, methodical laying out of the soup to nuts of this unending fraud. One thing I never hear mentioned, howeve,r is the role local foreclosure mills and courts have in rubberstamping illegal foreclosures…when, if ever, will this be addressed? 100% of the FC in my county have fraudulent, if any, paperwork. The servicer just puts the stolen house in their name and keeps it, renting it out or letting it crumble – the alleged plaintiffs I suspect never even know they sued and won.
“you could go on and on…” indeed.
It still boggles my mind to contemplate the scope of criminality involved in systematically defrauding literally thousands of county recorders over nearly a decade, violating clear and established deed/recording laws, and depriving the counties of billions in fees through an administration system created specifically with the criminal intent of doing just that.
As far as an intentional widespread conspiracy with criminal aforethought and sustained criminality, it makes LIBOR look like an office better pool.
argh. “betting” pool.
I don’t think most people understand the enormity of the corruption we are looking at here. Americans routinely call countries like Ukraine, Russia, the Phillipines and so on as filled with corruption while, at the same time, not understanding how deep corruption goes in our own society. Now, I have a less jaundiced view of corruption since once it is institutionalized and everyone knows the score (I lived in Italy at one time) it all seems to work. But criminality on the scale we see in the USA today is unprecedented in scale. The level of theft and fraud and security law violations in the Banking and investment sector dwarfed any prior crime wave in U.S. history and, in fact, was a world-class crime akin to the theft of state property by oligarchs under Yeltsin. There were worse economic crimes in history but not many.
My point is this–we live in society that is as corrupt as any other society, at least at the top–and that corruption is trickling down into everyday society, more gradually but inexorably. This sort of thing is deeply troublesome for a society based on a moral puritanism–Americans are not Italians who have lived with corruption for millenia. If you trust, for example, the leadership class or any political party or corporations you are not just irrational but a moral idiot.
This is why, despite the fact I am a social democrat, I believe the right may be right in assaulting the federal government–it is, at this point, too corrupt to act in the national interest and this corruption is so virulent and deep there is no hope of changing anything. The best we can do is to avoid the obvious method the state uses to unite society, namely, war.
The difference is most corruption elsewhere is spread up and down the society. Everyone gets a taste, everyone participates one way or the other, Gresham dynamic takes hold, third world status ensues…
But where we are here now in the USA is corruption is only at the top, there’s still laws for everyone else. We are Wile E Coyote running in thin air of a ethics & law-based system that is now mostly myth. But I think we are doing our best to entropy into the Italian model.
The right is correct that government is thoroughly corrupt. But they are diametrically incorrect in their proscriptions: more corporate power, less regulation, less campaign rules, less voting rights, less transparency….. in complaining about government corruption, the GOP is Inspector Renault.
Hear, hear. Trovato l’america!
Interesting topic you just opened, Banger. Like Yeltsin’s Russia, the US was also being crushed under mountains of graft and corruption which were part of the detritus of prosecuting the Cold War. We had to keep our economy “going” long enough to win it. When Russia capitulated it threw us into overdrive – everyone trying to find a new investment in a frenzy and then trying to get out first, and all the IBGYBG “securities” which came as our big finale.
Politics is not able to admit the situation because it was created by the old politics which is still hanging around pretending to be effective. When Bill Black demands that we prosecute the banksters (and I admire Bill Black wow), I think No. We should change the system, the entire banking system, because without deliberation and planning we will accomplish nothing. We’ll just throw several thousand perps in jail and the vacuum they leave behind will be filled by even smarter criminals.
So when the subject is securities fraud we area talking the heart of the system as it was practiced under capitalism-financialism for 40 years. And it gradually but relentlessly got more blatant, etc. That is not to say that we should not try to now get real. It is discouraging because we are still in denial, but we can do it.
Even Chris Whalen this last week has been complaining about how because of lax regulation the entire financial system went to hell. He says Detroit is a shadow of its former self and should have been downsized accordingly in a timely manner instead of taking out loans and speculating on rate swaps. He considers all of those financial products to be the equivalent of securities fraud – not just the securitization fraud of MBS trusts. The system is rotten to the core and we all need to change it. It would be nice if we could roll back the last ten years of illicit profits to the fraudsters, basically all the credit they shoveled to the rest of us knowing full well that without growth in the coming economy there would be no way in hell to pay it back. But anyway, here we are.
susan the other writes
Surely the magic wand for changing the entire banking system would be charged and not depleted by prosecuting financial criminals under existing law.
susan the other writes
I suspect that white collar criminals are highly susceptible to deterrence. The real criminogenic vacuum is the absence of prosecution.
Yes Winston, all true. We could start there. It would be better than nothing. But putting the banksters in prison would seem like mission accomplished I’m sure, and it would take the steam out of really fixing the disparities in the system that allowed all this to happen in the first place. 40 years of the great American Free Market has done a lot of damage, and continues to do more. I’m thinking about making the Fed part of the Treasury; turning banks into utilities and strictly controlling them; having and protecting good social programs like social security and single payer insurance; the cost of college on the house; good tax breaks for small business; good trade regulations; a guaranteed job and a living wage; and no more welfare for big corporations. We’ve got a lot of work to do to fix all the things done by 40 years of a fake free market economy, riddled with securities fraud, etc. Putting fraudsters in jail is just a small part of what we need to do.
AGREE to all of what you’ve said – count me in.
Even the tolerance of many Italians has reached its limit: http://www.repubblica.it/politica/2014/01/30/news/impeachment_napolitano-77264514/
The banks created MERS in part to defraud county clerks across the country. Yet these same counties continue to offer the services of their county sheriff to these same banks to evict homeowners – for as little as $25 and sometimes at the point of a gun.
The DOJ and the FBI have unlimited resources and some of best talent, yet can find no high level executives to prosecute.
Thank you for your outstanding work, David (and Yves). Unfortunately, I think we are spitting into the wind.
Meanwhile, infomercial huckster Kevin Trudeau was just sentenced to 10 years in prison.
Apparently, they do have the ability and resources to put some swindlers in jail.
This is what passes for journalism in teh belly of the beast. Printing press releases from the mafioso PR dept.
“..banks-found-to-have-finished-homeowner..” how fitting for Wells Fargo!! Known crimes against humanity include: exhibit A) falsely foreclosing on a Hermosa Beach, CA man who died of a heart attack during the court fight, there was a typo in the condo unit# targeted and exhibit B) a Newbury Park, CA man committed suicide while awaiting eviction after trying and failing to get help via the government sponsored loan modification program.
Why, oh why, can’t we have more intelligent news coverage of this issue. The NYT story contained this stupidity:
“As an initial matter, just figuring out what the numbers are can be difficult. Mortgage fraud is not a separate crime but a subset of federal offenses like bank fraud, mail fraud and wire fraud. So prosecutions involving mortgages may not show up easily in government records.”
Well, if mortgage fraud were a priority at DOJ it would have figured out how to tack all related cases. Their pleading IT failure (as you point out in section 2) is proof that DOJ either grossly mismanaged this program or that it was never given priority.