The housing fraud shockwaves that broke the U.S. banking system and had a ripple effect worldwide are going unchecked because it is part of the unofficial policy of U.S. regulators.
While the housing fraud happened in 2008, it looks like the current practice is to let white-collar fraud go unpunished, except in extreme cases that get media attention.
According to Professor William Black, Associate Professor of Economics and Law at the University of Missouri, in Kansas City, U.S. legal and financial market regulators have adopted an “immunity doctrine” that is allowing senior mortgage and banking officials to go unpunished, despite the thousands of cases of mortgage fraud identified by the FBI.
In a interview, Black noted that there has not been a single senior official of the major non-prime financial lending and mortgage players that has been prosecuted or convicted, despite the massive illegalities.
According to Black, the FBI noted an “epidemic of fraud” in the mortgage industry. This fraud started as “liar’s loans” made by lenders and borrows, according to Black and they had nothing to do with the Community Reinvestment Act of 1977, which has been cited as being a main contributor to lax bank and mortgage lending habits. The “liar’s loans” were initiated solely by the lenders themselves, he stressed.
In describing the process, Black said “when you have no underwriting, you will have massive adverse selection and then negative expected values of lending, or in plain English, lost money.”
This process is rewarded because it creates huge profits and due to the excessive executive compensation structure that allows executives to extract bonuses on these false profits, the mortgage fraud process feeds upon itself. While mortgage fraud was not well-known by average citizens, it was well-known inside the banking and mortgage industries, Black said.
When the amount of mortgage fraud and record profits increased, Bank of America went to Countrywide mortgage and asked them to service their fraudulent loans. 6 years. This was the same arrangement done by Washington Mutual (WAMU), the nation’s largest savings and loan, and CitiCorp, which both purchased Ameriquest. This purchase was made even though Ameriquest was being sued by 49 states’ attorney’s generals and the FTC for fraud and predatory lending practices.
The Fraud Virus
The nature of mortgage fraud is that it leads to the accompanying servicing fraud because the underlying mortgage and home ownership-related documents do not exist. These fraudulent activities happened 10,000 times per month, which are felonies that have been committed without any prosecutions, according to Black. Black said the lack of prosecution of those engaged in mortgage fraud is part of “the unofficial policy of the U.S. government.”
Even today, regulators, including the U.S. Comptroller of the Currency, are now “rushing” to prevent any prosecutions by the states’ attorneys generals, who probably will not be able to pursue any criminal actions against these executives because they lack the resources.
This “unofficial policy” exists because it will be “extremely embarrassing” to U.S. regulators to bring pursue fraud. This policy lets the elite criminals go free because the entire banking sector is so fragile, Black said.
The policy is “significantly insane” and will only make the next banking and financial crisis come quicker and deeper than before. Why? Because mortgage fraud is profitable and migrates from one sector of the financial marketplace to another (mortgage origination, to servicing to collections.)
As bad as the situation is today, Black said any change will have to come from the people themselves, not federal officials. “Elite frauds go free if they are in banking because the whole sector is too fragile,” Black said. “And that is significantly insane, It will produce the next crisis and make the next crisis come sooner and it will be far, far worse,” Black said. “These frauds will continue and they remain an incredible threat to the system.”
Source: “There’s Another Crisis Coming as Long as Banks Remain Above the Law: Bill Black,” by Peter Gorenstein, Daily Ticker, April 20, 2011.