In September, 2004, the FBI held a press conference to warn about the growing problem of mortgage fraud. “It has the potential to be an epidemic,” warned Chris Strecker, assistant director of the FBI’s criminal division. “We think we can prevent a problem that could have as much impact as the S&L crisis.” What might have seemed like an overstated publicity stunt at a time when the booming property market seemed healthy turned out to be far too modest. Exactly four years later, the US mortgage market brought the global financial system to the brink of collapse. Aggressively fighting mortgage fraud would not have stopped the housing bubble from inflating and bursting, but cutting down the volume of worthless debt could have reduced the pain.
As the waves of foreclosures mounted in the wake of the financial crisis, the federal government wanted to take a hard stand against financial crime. In May 2009, as the extent of the rot in the US housing market became clear, President Obama signed the Fraud Enforcement and Recovery Act, which expanded the federal government’s ability to prosecute fraud in previously unregulated sectors of the mortgage industry. It also authorized hundreds of millions of dollars for the Department of Justice to fight complex financial fraud.
At a press conference in October 2012, the Attorney General declared the initiative a success. His statement claimed that DOJ had charged 530 people with mortgage fraud-related crimes in cases that involved more than 73,000 homeowners and total losses estimated at over $1 billion.
But an internal audit of DOJ’s mortgage fraud efforts released by the Department’s Inspector General in March 2014 showed how little was actually done to combat mortgage fraud. The audit concludes that neither Congress nor DOJ treated mortgage fraud as a high priority, despite their public statements. It even found that the numbers quoted by the Attorney General in 2012 were wildly exaggerated. DOJ’s criminal investigations only snared 107 defendants in cases related to just $95 million in homeowner losses, 91% less than the Attorney General had publicly claimed. Worse, DOJ continued to cite the inflated numbers in press releases for 10 months after learning they were false.
Congressional inaction might help explain why DOJ’s real results didn’t live up to its aspirational numbers. Financial fraud investigations are complex and difficult to prove; that means expensive. In 2009, Congress “authorized” $165 million per year to fight fraud, but when budget time came around, it only appropriated 17% of that funding. In 2010, various DOJ agencies received a total of $34.8 million, with the bulk going to the FBI. In 2011, the FBI’s $20.2 million was it. It is impossible to bring complex fraud cases without teams of investigators, accountants, and attorneys, but the DOJ Criminal Division in Washington only received enough money for 5 new hires to investigate financial fraud.
But this is a problem of priorities, not just funding. Despite the additional funding and public the FBI Criminal Investigative Division ranked complex financial crime as the lowest of six criminal threat categories and mortgage fraud as last among three subcategories. At the FBI field offices that auditors visited, mortgage fraud was listed as a low priority or not listed as a priority at all. These offices included New York, always a center of financial crime, and troubled housing markets such as Miami and Los Angeles. These results echo a 2005 audit, which found that reassigning hundreds of FBI agents from criminal investigation to counter-terrorism work had hurt the government’s ability to deter white collar crimes such as bank fraud and mortgage fraud.
In their defense, FBI officials argue that the end of the housing boom and the tightening of lending standards have cut down the rate of fraudulent mortgage purchases, with classic schemes involving straw buyers on the wane.
However the threat has not disappeared; it has just morphed along with the times. More than 50,000 homes fell into foreclosure for the first time during January of this year and total household debt is increasing again for the first time since the crisis, according to RealtyTrac and the Federal Reserve Bank of New York. Borrowers struggling with high debt are ripe targets for malicious debt consolidation, loan modification, and foreclosure rescue schemes, which promise to save homeowners from their creditors in exchange for an up-front fee. Of course, many of these companies do nothing to help.
The FBI reported that for the first time in many years, these foreclosure rescue schemes have surpassed mortgage origination fraud as the housing industry’s greatest criminal threat, but the audit found that few of these cases have been fully investigated. These scams typically represent smaller overall financial losses that fail to meet federal prosecutors’ thresholds. In response, FBI agents said they put these cases into “unaddressed work files,” while waiting for the dollar losses and fraudulent activity to mount.
While shutting down foreclosure rescue scams may not grab headlines with big numbers, these frauds prey on some of the most vulnerable Americans, pushing them deeper into debt and causing untold psychological damage as foreclosures proceed unabated. If prosecutorial thresholds are encouraging the FBI to let these fraudsters continue to steal from desperate homeowners, the DOJ should abandon them.
And if the Department wants to go after some fish big enough to excite the press, perhaps it should reopen investigations into the big mortgage servicing companies. Despite the 5 biggest mortgage servicing banks signing a $25 billion national settlement and promising to fix systemic foreclosure abuses in 2012, evidence continues to emerge that they still wrongly foreclose on homeowners, refuse to allow customers to submit missing paperwork, fabricate loan documents in foreclosure proceedings, and deny loan modifications to deserving borrowers. In October, the New York State Attorney General filed a lawsuit accusing Bank of America and Wells Fargo of failing to live up to these customer-service promises. Where is the Department of Justice?