EpidemicSeeks to Head off
Next Financial CrisisSeptember 17, 2004
Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an
epidemicof financial crimes which, if not curtailed, could become
the next 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 Savings & Loan 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 Savings and Loans 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."
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."
Since 2004, F.B.I. officials have warned that mortgage fraud posed a looming threat, and the bureau has repeatedly asked the Bush administration for more money to replenish the ranks of agents handling nonterrorism investigations, according to records and interviews. But each year, the requests have been denied, with no new agents approved for financial crimes, as policy makers focused on counterterrorism. According to previously undisclosed internal F.B.I. data, the cutbacks have been particularly severe in staffing for investigations into white-collar crimes like mortgage fraud, with a loss of 625 agents, or 36 percent of its 2001 levels. So depleted are the ranks of the F.B.I.’s white-collar investigators that executives in the private sector say they have had difficulty attracting the bureau’s attention in cases involving possible frauds of millions of dollars. Justice Department data, which include cases from other agencies, like the Secret Service and Postal Service, illustrate the impact. Prosecutions of frauds against financial institutions dropped 48 percent from 2000 to 2007, insurance fraud cases plummeted 75 percent, and securities fraud cases dropped 17 percent. Statistics from a research group at Syracuse University, the Transactional Records Access Clearinghouse, using somewhat different methodology and looking only at the F.B.I., show an even steeper decline of nearly 50 percent in overall white-collar crime prosecutions in the same period. Over all, the number of criminal cases that the F.B.I. has brought to federal prosecutors – including a wide range of crimes like drug trafficking and violent crime – dropped 26 percent in the last seven years, going from 11,029 cases to 8,187, Justice Department data showed. Some F.B.I. officials worry privately that the trillion-dollar federal bailout of the financial industry may itself become a problem because it contains inadequate controls to deter fraud. Interviews and internal records show that F.B.I. officials realized the growing danger posed by financial fraud in the housing market beginning in 2003 and 2004 but were rebuffed by the Justice Department and the budget office in their efforts to acquire more resources. “The administration’s top priority since the 9/11 attacks has been counterterrorism,” Peter Carr, a Justice Department spokesman, told The Times. “In part, that’s reflected by a significant investment of resources at the F.B.I. to answer the call from Congress and the American public to become a domestic intelligence agency in addition to a law enforcement agency.”Interviews and internal records show that F.B.I. officials realized the growing danger posed by financial fraud in the housing market beginning in 2003 and 2004 but were rebuffed by the Justice Department and the budget office in their efforts to acquire more resources. “The administration’s top priority since the 9/11 attacks has been counterterrorism,” Peter Carr, a Justice Department spokesman, told The Times. “In part, that’s reflected by a significant investment of resources at the F.B.I. to answer the call from Congress and the American public to become a domestic intelligence agency in addition to a law enforcement agency.”New York’s top prosecutor plans to sue two mortgage titans, Bank of America and Wells Fargo, over claims that they breached the terms of a multibillion-dollar settlement intended to end foreclosure abuses. On Monday, Eric T. Schneiderman, New York’s attorney general and top prosecutor, said that the lenders violated the terms of the National Mortgage Settlement, a sweeping $26 billion pact brokered last year between five of the nation’s biggest banks and 49 state attorneys general. The agreement came during a national outcry over potentially widespread foreclosure abuses like shoddy paperwork, erroneous fees and wrongful evictions.
F.B.I. Struggles to Handle Wave of Financial Fraud Cases
Wells Fargo and Bank of America have flagrantly violated those obligations, putting hundreds of homeowners across New York at greater risk of foreclosure,Mr. Schneiderman said. Since October 2012, Mr. Schneiderman’s office has documented 210 separate violations involving Wells Fargo and 129 involving Bank of America.
The move by Mr. Schneiderman is the first time that an attorney general has readied a lawsuit against one of the five participating banks on charges related to the settlement, which was aimed at halting the housing market’s downward slump and doling out relief to homeowners in foreclosure. More attorneys general could follow Mr. Schneiderman’s lead. Last week, Martha Coakley, the Massachusetts attorney general, also sent a letter to Joseph A. Smith, the settlement monitor, outlining
recurring issueswith mortgage servicers, according to a copy of the letter reviewed by The New York Times. Among the problems she cited were
erroneous communications,and servicing requirements that were
often ignored.Ms. Coakley could pursue a lawsuit but hopes that the monitor will intervene to correct the problems, according to her office.
The settlement emerged from an investigation into mortgage servicing by all 50 state attorneys general that began in 2010 after revelations emerged that banks had churned through foreclosures using robosigned documents, legal paperwork that was seldom reviewed for accuracy. After the deal was reached in February 2012, Mr. Schneiderman’s office began receiving a deluge of complaints from housing counselors across the state. The counselors, Mr. Schneiderman’s office said, reported that homeowners were still wading through a bureaucratic quagmire. Mr. Schneiderman set the potential penalty in motion on Friday when he sent a letter to the settlement monitoring committee, outlining his plans to penalize the banks.
I am writing to inform you about a persistent pattern of noncompliance,Mr. Schneiderman wrote, according to the letter. The committee has 21 days to decide whether to initiate a lawsuit, or whether Mr. Schneiderman will pursue the action alone.
Bank of America and Wells Fargo said on Monday that they would take steps to handle the issues raised.
Through March we have provided relief for more than 10,000 New York homeowners through the National Mortgage Settlement, totaling more than $1 billion,said Richard G. Simon, a spokesman for Bank of America. He noted that
Attorney General Schneiderman has referenced 129 customer servicing problems which we take seriously and will work quickly to address.Wells Fargo, which has helped 70,000 homeowners through the settlement, is “committed to full compliance with the National Mortgage Settlement and its associated standards,” according to Vickee J. Adams, a Wells Fargo spokeswoman. She added that “it is unfortunate that the New York attorney general has chosen this route rather than engage in a constructive dialogue through the established dispute resolution process.”
Michael Farnsworth, who fell behind on his mortgage after a spinal injury prevented him from working, is among the New York residents claiming that their mortgage paperwork was not handled properly. After submitting a loan modification application to Wells Fargo on Feb. 22, Mr. Farnsworth said he returned home on March 6 to find a note affixed to his farmhouse in Corfu, N.Y. The note was ominous, he said: Mr. Farnsworth had 48 hours to resubmit many documents, including tax returns, or his loan modification would be scuttled. Under the mortgage settlement, though, Wells Fargo was required to notify Mr. Farnsworth about missing documents five days after he submitted a loan application and to then give him 30 days to submit any missing documentation.
Wells Fargo declined to comment on Mr. Farnsworth’s case, citing customer privacy, but said that the bank
is doing everything we can to assist customers so that they can stay in their homes if possible.The servicing standards were intended in part to address delays that can torpedo efforts to save a home. Before the settlement, housing counselors said that homeowners were ensnared in a bureaucratic maze when seeking foreclosure relief. Some borrowers were asked for the same document multiple times, while others were shuttled from one representative to another. As their applications for relief languished, housing counselors said, borrowers accrued fresh costs, like late fees and property taxes, that aggravated their distress.
The price of this paperwork delay can be thousands of dollars for homeowners,Vera Cedano, a foreclosure defense lawyer with Western New York Law Center.
It can mean the difference between saving a losing a home.Deonarine Nareen, a 52-year-old restaurant employee in Queens, had fallen behind on his mortgage as he petitioned Wells Fargo for a loan modification, according to court records. Since Wells Fargo began foreclosure proceedings against him in 2010, Mr. Nareen said he had tried to win a reduced monthly mortgage payment, but had been asked for documents numerous times. In the latest chapter, Mr. Nareen said he applied for a loan modification on Feb. 19, so he was surprised when he received a brand new application for a loan modification from Wells Fargo in March.
The automatic budget cuts known as sequestration will have the “net effect” of cutting 2,285 FBI employees, including 775 agents, FBI Director Robert Mueller said in a letter to a key senator last month. He added that sequestration “will cause current financial crimes investigations to slow as workload is spread among a reduced workforce. In some instances, such delays could affect the timely interviews of witnesses and collection of evidence “Left unchecked, fraud and malfeasance in the financial, securities, and related industries could hurt the integrity of U.S. markets.” The letter to Senate Appropriations Chairwoman Barbara Mikulski (D-Md.), obtained by the Huffington Post, said the effective cuts would come through furloughs and a hiring freeze. “By the end of the fiscal year, this translates to approximately 7,000 FBI employees not working each day,” Mueller wrote. Individual employees will see a 12 percent pay cut between May to September, he wrote. While the true effect of the automatic budget cuts that went into effect on March 1 are yet to be determined – Congress may end up granting agencies more authority to move around funds to priority areas – Mueller in his Feb. 1 letter emphasized the peril to high-profile initiatives to beef up the nation’s cybersecurity defenses and investigate financial crime.
Director Federal Bureau of Investigation Robert Mueller Statement Financial and Mortgage Fraud Senate Appropriations Committee, Subcommittee on Commerce, Justice, Science, and Related Agencies FBI Budget Request Fiscal Year 2014 May 16, 2013The number of FBI special agents investigating mortgage fraud cases has also increased from 120 in FY 2007 to 260 special agents in FY 2012. The multi-agency task force and working group model serves as a force-multiplier, providing an array of interagency resources and expertise to identify the source of the fraud, as well as finding the most effective way to prosecute each case, particularly in active markets where fraud is widespread. The FBI and its law enforcement partners also continue to uncover major frauds, insider trading activity, and Ponzi schemes. At the end of FY 2012, the FBI had almost 2,500 active corporate and securities fraud investigations, representing a 35 percent increase since FY 2008. Over the past three years, as a result of the FBI’s efforts, the Department of Justice has obtained over $20 billion in recoveries, fines, and restitutions in such programs, and during FY 2012, the FBI obtained over 600 convictions, just shy of the historic high obtained in FY 2011. The FBI is pursuing those who commit fraud at every level and is working to ensure that those who played a role in the recent financial crisis are brought to justice. In FY 2014, the FBI is requesting a program increase totaling $15 million and 44 positions (40 special agents and four forensic accountants) to further address financial and mortgage fraud at all levels of organizations—both senior executives and lower level employees. These resources will increase the FBI’s ability to combat corporate fraud, securities and commodities fraud, and mortgage fraud, and they will enable the FBI to adapt as new fraud schemes emerge. From foreclosure frauds to sub-prime scams, mortgage fraud is a serious problem. The FBI continues to develop new approaches and techniques for detecting, investigating, and combating mortgage-related fraud. Through the use of joint agency task forces and working groups, the FBI and its partners work to pinpoint the most egregious offenders and identify emerging trends before they flourish. In FY 2012, these efforts translated into roughly 2,265 pending mortgage fraud investigations—compared to approximately 700 investigations in FY 2005. Over 70 percent of FBI’s pending investigations involve losses of more than $1 million. In addition, in FY 2012, the FBI received over 70,000 suspicious activity reports.