The Best Way to Rob a Bank is to Own One & FBI knows

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Heeft werkelijk iedereen zitten slapen?
En kennelijk kunnen banken ook geen risico bepalen van de leningen in hun
boeken, ze hebben geen documentatie daarvan

Geen verder commentaar, volledig overbodig!

Groet / Cees

http://edition.cnn.com/2004/LAW/09/17/mortgage.fraud/
FBI warns of mortgage fraud 'epidemic' - Seeks to head off 'next S&L crisis'
>From Terry Frieden CNN Washington Bureau
Friday, September 17, 2004 Posted: 2144 GMT (0544 HKT)

WASHINGTON (CNN) -- Rampant fraud in the mortgage industry has increased
so sharply that the FBI warned Friday of an "epidemic" of financial crimes
which, if not curtailed, could become "the next S&L crisis."

Assistant FBI Director Chris Swecker said the booming mortgage market,
fueled by low interest rates and soaring home values, has attracted
unscrupulous professionals and criminal groups whose fraudulent activities
could cause multibillion-dollar losses to financial institutions.

"It has the potential to be an epidemic," said Swecker, who heads the
Criminal Division at FBI headquarters in Washington. "We think we can
prevent a problem that could have as much impact as the S&L crisis," he
said.

In the 1980s, many Savings and Loans failed because of poor management,
risky loans and investments, and in some cases, fraud. Taxpayers were left
with a $132 billion tab to cover federal guarantees to S&L customers.

The FBI has dispatched undercover teams across the country in an urgent
investigation into dealings by suspect mortgage brokers, appraisers,
short-term investors, and loan officers, Swecker, flanked by FBI
executives and Justice Department prosecutors, revealed.

In one operation, six individuals were arrested Thursday in Charlotte,
charged with bank fraud for their roles in a multimillion-dollar mortgage
fraud, officials said. The two-year investigation found fraudulent loans
that exposed financial institutions and mortgage companies to $130 million
in potential losses, they said.

Also Thursday, federal agents in Jacksonville arrested two people and
executed seven search warrants in connection with an alleged scheme
designed to defraud banks of $22 million, officials said.

The number of open FBI mortgage fraud investigations has increased more
than five-fold in the past three years, from 102 probes in 2001 to 533 as
of June 30 this year, the FBI said. The potential losses are staggering,
and many financial institutions are cooperating with investigators.

Officials noted mortgage industry sources have reported more than 12,000
cases of suspicious activity in the past nine months, three times the
number reported in all of 2001.

While the FBI described mortgage-related fraud as a nationwide problem, it
said the levels of illegal activity are worse in some locations than in
others.

States identified as the top 10 "hot spots" for mortgage fraud are
Georgia, South Carolina, Florida, Michigan, Illinois, Missouri,
California, Nevada, Utah and Colorado.

"It's bad in Georgia, the Atlanta area," said John Gillies, chief of the
FBI's Financial Institutions Fraud Unit. "It was bad in the Charlotte
area, but we've had a lot of undercover activity there that's helped push
the problem into South Carolina."

Josh Hochberg, head of the Justice Department's Fraud Section, said some
organized ethnic groups are becoming involved in mortgage fraud schemes,
but he declined to identify the groups.

Officials said mortgage fraud is one prominent aspect of a wider problem
of fraud aimed at financial institutions. The FBI said action has been
taken against 205 individuals in the past month in what it described as
the "largest nationwide enforcement operation in FBI history directed at
organized groups and individuals engaged in financial institution fraud."

In addition to mortgage fraud, "Operation Continued Action" also targeted
loan fraud, check kiting, and identity theft as major problems.

In one check-kiting scheme in Binghamton, New York, the operator of a
recycling business wrote in excess of $1 billion in worthless checks over
a 14-month period, officials said. Not all of the checks were cashed.

The FBI said last week the businessman, Adam Weitsman, was sentenced to
one year in prison and forfeited $1 million in assets.

http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html?

William K. Black - Assoc. Professor, Univ. of Missouri, Kansas City; Sr.
regulator during S&L debacle

As a white-collar criminologist and former financial regulator much of my
research studies what causes financial markets to become profoundly
dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud
since September 2004. It also reports that lenders initiated 80% of these
frauds.1 When the person that controls a seemingly legitimate business or
government agency uses it as a "weapon" to defraud we categorize it as a
"control fraud" ("The Organization as 'Weapon' in White Collar Crime."
Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black
2005). Financial control frauds' "weapon of choice" is accounting. Control
frauds cause greater financial losses than all other forms of property
crime -- combined. Control fraud epidemics can arise when financial
deregulation and desupervision and perverse compensation systems create a
"criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman
1997.)

The FBI correctly identified the epidemic of mortgage control fraud at
such an early point that the financial crisis could have been averted had
the Bush administration acted with even minimal competence. To understand
the crisis we have to focus on how the mortgage fraud epidemic produced
widespread accounting fraud.
Don't ask; don't tell: book profits, "earn" bonuses and closet your losses

The first document everyone should read is by S&P, the largest of the
rating agencies. The context of the document is that a professional credit
rater has told his superiors that he needs to examine the mortgage loan
files to evaluate the risk of a complex financial derivative whose risk
and market value depend on the credit quality of the nonprime mortgages
"underlying" the derivative. A senior manager sends a blistering reply
(http://oversight.house.gov/story.asp?ID=2250) with this forceful
punctuation:

    Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most
investors don't have it and can't provide it. [W]e MUST produce a
credit estimate. It is your responsibility to provide those credit
estimates and your responsibility to devise some method for doing so.

Fraud is the principal credit risk of nonprime mortgage lending. It is
impossible to detect fraud without reviewing a sample of the loan files.
Paper loan files are bulky, so they are photographed and the images are
stored on computer tapes. Unfortunately, "most investors" (the large
commercial and investment banks that purchased nonprime loans and pooled
them to create financial derivatives) did not review the loan files before
purchasing nonprime loans and did not even require the lender to provide
loan tapes.

The rating agencies never reviewed samples of loan files before giving AAA
ratings to nonprime mortgage financial derivatives. The "AAA" rating is
supposed to indicate that there is virtually no credit risk -- the risk is
equivalent to U.S. government bonds, which finance refers to as
"risk-free." We know that the rating agencies attained their lucrative
profits because they gave AAA ratings to nonprime financial derivatives
exposed to staggering default risk. A graph of their profits in this era
rises like a stairway to heaven
[http://oversight.house.gov/documents/20081022112135.pdf]. We also know
that turning a blind eye to the mortgage fraud epidemic was the only way
the rating agencies could hope to attain those profits. If they had
reviewed even small samples of nonprime loans they would have had only two
choices: (1) rating them as toxic waste, which would have made it
impossible to sell the nonprime financial derivatives or (2) documenting
that they were committing, and aiding and abetting, accounting control
fraud.

Worse, the S&P document demonstrates that the investment and commercial
banks that purchased nonprime loans, pooled them to create financial
derivatives, and sold them to others engaged in the same willful
blindness. They did not review samples of loan files because doing so
would have exposed the toxic nature of the assets they were buying and
selling. The entire business was premised on a massive lie -- that
fraudulent, toxic nonprime mortgage loans were virtually risk-free. The
lie was so blatant that the banks even pooled loans that were known in the
trade as "liar's loans" and obtained AAA ratings despite FBI warnings that
mortgage fraud was "epidemic." The supposedly most financially
sophisticated entities in the world -- in the core of their expertise,
evaluating credit risk -- did not undertake the most basic and essential
step to evaluate the most dangerous credit risk. They did not review the
loan files. In the short and intermediate-term this optimized their
accounting fraud but it was also certain to destroy the corporation if it
purchased or retained significant nonprime paper.
Stress this: stress tests are useless against the nonprime problems


What commentators have missed is that the big banks often do not have the
vital nonprime loan files now. That means that neither they nor the
Treasury know their asset quality. It also means that Geithner's "stress
tests" can't "test" assets when they don't have the essential information
to "stress." No files means the vital data are unavailable, which means no
meaningful stress tests are possible of the nonprime assets that are
causing the greatest losses.
The results were disconcerting

A rating agency (Fitch) first reviewed a small sample of nonprime loan
files after the secondary market in nonprime loan paper collapsed and
nonprime lending virtually ceased. The second document everyone should
read is Fitch's report on what they found.

    Fitch's analysts conducted an independent analysis of these files with
the benefit of the full origination and servicing files. The result of
the analysis was disconcerting at best, as there was the appearance of
fraud or misrepresentation in almost every file.

    Fraud was not only present, but, in most cases, could have been
identified with adequate underwriting, quality control and fraud
prevention tools prior to the loan funding. Fitch believes that this
targeted sampling of files was sufficient to determine that inadequate
underwriting controls and, therefore, fraud is a factor in the
defaults and losses on recent vintage pools.

Fitch also explained
[http://big.assets.huffingtonpost.com/FraudReport8Nov07Fitch.pdf] why
these forms of mortgage fraud cause severe losses.

    For example, for an origination program that relies on owner occupancy
to offset other risk factors, a borrower fraudulently stating its
intent to occupy will dramatically alter the probability of the loan
defaulting. When this scenario happens with a borrower who purchased
the property as a short-term investment, based on the anticipation
that the value would increase, the layering of risk is greatly
multiplied. If the same borrower also misrepresented his income, and
cannot afford to pay the loan unless he successfully sells the
property, the loan will almost certainly default and result in a loss,
as there is no type of loss mitigation, including modification, which
can rectify these issues.

The widespread claim that nonprime loan originators that sold their loans
caused the crisis because they "had no skin in the game" ignores the
fundamental causes. The ultra sophisticated buyers knew the originators
had no skin in the game. Neoclassical economics and finance predicts that
because they know that the nonprime originators have perverse incentives
to sell them toxic loans they will take particular care in their due
diligence to detect and block any such sales. They assuredly would never
buy assets that the trade openly labeled as fraudulent, after receiving
FBI warnings of a fraud epidemic, without the taking exceptional due
diligence precautions. The rating agencies' concerns for their reputations
would make them even more cautious. Real markets, however, became perverse
-- "due diligence" and "private market discipline" became oxymoronic.
These two documents are enough to begin to understand:

* the FBI accurately described mortgage fraud as "epidemic"

* nonprime lenders are overwhelmingly responsible for the epidemic

* the fraud was so endemic that it would have been easy to spot if anyone
looked

* the lenders, the banks that created nonprime derivatives, the rating
agencies, and the buyers all operated on a "don't ask; don't tell" policy

* willful blindness was essential to originate, sell, pool and resell the
loans

* willful blindness was the pretext for not posting loss reserves

* both forms of blindness made high (fictional) profits certain when the
bubble was expanding rapidly and massive (real) losses certain when it
collapsed

* the worse the nonprime loan quality the higher the fees and interest
rates, and the faster the growth in nonprime lending and pooling the
greater the immediate fictional profits and (eventual) real losses

* the greater the destruction of wealth, the greater the (fictional)
profits, bonuses, and stock appreciation

* many of the big banks are deeply insolvent due to severe credit losses

* those big banks and Treasury don't know how insolvent they are because
they didn't even have the loan files

* a "stress test" can't remedy the banks' problem -- they do not have the
loan files

1 "Mortgage Fraud: Strengthening Federal and State Mortgage Fraud
Prevention Efforts" (2007). Tenth Periodic Case Report to the Mortgage
Bankers Association, produced by MARI.

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