Friday, Dec. 12, 2008

Flooded in Fraud

Mortgage cheating by lenders, brokers has prosecutors busy

SACRAMENTO -- Investigations into the collapse of financial titans such as Lehman Bros., Bear Stearns and Washington Mutual have attracted most of the attention in the ongoing unraveling of the nation's mortgage-backed security mess.

Lost in the headlines are prosecutions proceeding quietly on the local level against smaller players.

In dozens of jurisdictions around the country, federal prosecutors are charging hundreds of people with originating the bad loans that helped derail the world's financial markets.

Prosecutors are finding buyers who created fake identities to take out home loans, brokers who paid kickbacks to ensure fraudulent mortgages were approved, and lenders who took bribes and forged documents.

They are the people who fraudulently overstated property values and borrowers' incomes, who used illegal means to secure loans that homeowners ultimately couldn't afford, though they had plenty of encouragement from Wall Street.

That fraud helped artificially inflate home values that have since come crashing to earth. Foreclosures are dragging down property values in neighborhoods across the nation. Lenders, in response, have shut the door on almost anyone without platinum credit, and raised a variety of fees to make up for huge losses.

The fraud is continuing in new ways as desperate homeowners try to unload mortgages they can't afford and builders shed surplus properties.

"Let's not lose sight of the fact that there is immense criminal fraud involved in this financial crisis," said U.S. Attorney McGregor Scott, whose district spans California's vast Central Valley and is among those most affected by the housing bust. "It's a profound ripple effect that affects everyone."

The U.S. Justice Department has formed more than 40 mortgage fraud task forces nationwide as prosecutors and investigators contend with a flood of mortgage-related criminal cases. The FBI reports that its mortgage-fraud caseload has more than doubled in three years to about 1,600 investigations that have cost lenders at least $4 billion. About 200 FBI agents are assigned to the cases, up from 120 a year ago.

Nationally, federal prosecutors charged 226 people with mortgage fraud between July and the end of October, the latest figures available, said U.S. Department of Justice spokeswoman Laura Sweeney. As part of a national mortgage-fraud crackdown between March and June, 406 people were charged.

In Scott's California district, prosecutors have filed charges related to housing scams against 53 people in 15 ongoing prosecutions. They have 15 more active investigations against 68 individuals.

They estimate hundreds of millions of dollars have been paid out by banks and other lenders because of mortgage fraud in the Central California district, which stretches from just north of Los Angeles to the Oregon border.

"We're running out of bodies to handle these cases," said Scott, who is calling on Congress to approve more money for investigators and prosecutors. "We're just being overwhelmed."

Spokesmen for the FBI and Justice Department said there are no plans to ask Congress for more money. They could not say how much the hundreds of agents and prosecutors are spending to investigate mortgage fraud nationwide.

"We continue to reprioritize as necessary," Justice spokesman Ian McCaleb said in an e-mail. "Currently, we have shifted significant resources toward investigating mortgage fraud."

Paul Leonard, director of the California office of the Center for Responsible Lending, welcomed investigators' attempts to keep up with newer forms of foreclosure and builder fraud. However, wrongdoing remains so widespread that "I think those agencies have to pick their spots," he said.