Op-Ed: Anyone smell a stench? The FBI knew about the housing scams in 2004

Posted Aug 25, 2008 by Paul Wallis
Isn’t this just adorable? The FBI was seeing some dubious deals years before the housing bust and subprime meltdown. They reported it, and nothing much happened. Whatever was done, and that’s still being much debated, the crash wasn’t prevented.
Empty House
As the U.S. sees growing economic troubles including increases in the number of housing foreclosures, this part of a newly-built subdivision in Austell, Georgia sits empty or virtually unpopulated.
Photo by Chris Hogg,
It must be great to have a Federal law enforcement agency you can spend billions of taxpayers money to operate, and then do nothing with it when it tries to enforce the law. Nothing in terms of protecting the millions of Americans headed to financial purgatory, anyway.
The LA Times:
"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.
Today, the damage from the global mortgage meltdown has more than matched that of the savings-and-loan bailouts of the 1980s and early 1990s. By some estimates, it has made that costly debacle look like chump change. But it's also clear that the FBI failed to avert a problem it had accurately forecast.
… In California alone, lenders have foreclosed on $100 billion worth of homes over the last two years and are foreclosing at a rate of 1,300 houses every business day, according to a recent report from
This is being seen as a failure of regulation, but there’s a bit more to it than that. There’s reason to believe that warm and fuzzy approach further up the regulatory management tree was another major factor. Also relevant was national security, according to the LA Times article, although how the nation got any more secure out of the crash is a bit debatable.
Now that the problems are out in the open, the government's response strikes some veteran regulators as too little, too late.
Swecker, who retired from the FBI in 2006, declined to comment for this article.
But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.
They ended up with fewer resources, rather than more.
In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and '90s, said Anthony Adamski, who oversaw financial crime investigations for the FBI at the time.
The FBI says it now has about 200 agents working on mortgage fraud, but critics say the agency might have averted much of the problem had it heeded its own warning.
Let’s pause for a minute to consider the 1000 agents on the S&L situation, and a mere 200 on the mortgage crisis. How does that figure out? Any one of the writeoffs in recent months would cover most of the S&Ls.
The FBI’s attempts to alert the industry to the problems weren’t of interest to people making billions in a boom market. However, some basic fraud was also part of the mix. The distinction between lousy business practices and actual crime is blurry, but there is a line.
That line has well and truly been crossed by this cute little scam:
Over the last three years, the FBI and other agencies have brought dozens of mortgage-fraud cases. The bureau has rooted out foreclosure rescue schemes in which homeowners are tricked into signing over the deeds to their homes to operators who buried the properties even deeper in debt. Agents have disrupted cases of identity theft in which criminals open -- and exhaust -- home equity lines of credit and leave homeowners stuck with the bill.
Note: Three years. Not June 2007, when the fan got hit.
There were “mutterings” and “rumors” in the market about the housing market about 15 months ago, which steamed on regardless until it literally fell over and took everyone with it. Now we can guess where those mutterings and rumors were coming from.
Not exactly reporting on an epidemic level between 2004 and 2007 was the US financial media. These cases and their related scams couldn’t have escaped the attention of court reporters. Every single major news source has a legal reporting capacity. Anyone remember hearing any warnings about any of this?
Foreclosure rescue scams alone deserve to be headlines.
If a packet of corn flakes gets contaminated, the world knows about it. If a thriving business robbing mortgagees is operating in a multi trillion dollar industry, try finding out about it.
If they were reported, not much significance seems to have been given to them. There was no indication that the situation might be chronic. These were small loans, but if there was a pattern of abuse, nobody in the business world spotted it.
There are literally tens of thousands of advisory services on mortgages in the US, many from loan providers. If you have a lack of information on a particular subject affecting loans, who should be providing it? The net message from lenders was, and still is, Happiness Is A Home Loan.
Not, apparently, “Look Out Or You’ll Have To Borrow For Your Bone Marrow, Too.”
What a coincidence. Everything which is supposed to protect home buyers and investors just happened not to be working. How unusual.
The possibility of US regulators being able to regulate their way out of a paper bag is no longer debatable. Everybody knows they can’t.
Even if they could, despite lack of FBI resources, and conflicting priorities where there shouldn’t be any conflicts, the US Attorneys aren’t doing much better:
The FBI says it has 21 open investigations into possible large-scale fraud related to the subprime meltdown. The Times reported last month that a federal grand jury in Los Angeles had subpoenaed records from three large California lenders: Countrywide Financial Corp. (now part of Bank of America Corp.), New Century Financial Corp. and IndyMac Federal Bank.
But it may be hard to jump-start such probes. Trying to prove that a major mortgage company intended to defraud buyers of its securities, for example, could take years of digging into records and testimony.
Moreover, some of those involved may have special legal protection: Credit rating firms have in other cases successfully asserted that their opinions about the values of securities are protected by the First Amendment.
Yep, anyone with a day care education knows that opinions about the value of securities are synonyms for Freedom of Belief.
They also know that people can pay for services from professionals with no obligation for accuracy for those services.
So in America you can say anything is worth anything you feel like saying it’s worth, with or without a reason, and get paid for it?
Another interesting fact is that the First Amendment doesn’t refer to mortgage securities, jaywalking, or littering. Not even littering the market with worthless securities. It’s not about criminal law.
Securities advisors have no reason to get off the hook. They’re supposed to know what they’re talking about. That’s what they’re supposedly paid to do. Otherwise, who needs them? Do we have to have blogs everywhere warning people about securities, or will they kindly condescend to do their jobs?
Some brokers, notably stock brokers, make clients sign contracts to the effect that they’re not liable for their advice.
Reassuring as this probably is to people who make biros, the broader issue of exactly what this apparently useless collection of people is being paid for has yet to be resolved.
The FBI is also evidently suffering from Executive Regulation Management By Afterthought, that wonderful disease where everybody’s conspicuously brilliant and dynamic and gets to appear on TV after the event.
Added to which, the policy approach seems to be against Enron-levels of complexity, not the much more likely local scam factories. So the probability is that they’ll get a couple of large fish, while thousands of others don’t even get investigated because they’re busy with one or two cases.
Could the crisis have been averted, or at least mitigated, if the FBI had intervened more forcefully?
"Until there is a catastrophic loss, there is no incentive to investigate criminal conduct," said Cynthia Monaco, a former federal prosecutor in New York. "Nor are there people coming forward with evidence" such as angry investors or whistle-blowing corporate employees, she said.
Even now, Monaco added, it is far from clear whether the damage -- suffered by investors and homeowners alike -- was the product of clear-cut fraud.
Here’s a thought: If a product or service is misrepresented, intentionally or not, there’s a basis for grievance. In this case, the argument seems to be that neither sellers, lenders, securities agencies, or anyone but the buyer has any liability, and the mortgagees are being held fully liable.
If you sell food, you’re liable for the condition of that food. If you sell a car, same deal. Your opinion of the roadworthiness of the vehicle, or the hygiene of the food, doesn’t matter.
But if you sell someone a house, it’s not your problem?
The FBI and Justice Department are trying to upgrade their responses.
Given the stunningly senile performance so far, they’ll need some luck, too.
Meanwhile, break out the air freshener.
There's something stinking somewhere, even by the sewer like standards of the post housing meltdown era.