A Year After the Meltdown: Mortgage Fraud and Lessons Learned

October 2009

IN THIS ISSUE

— A New Era of Responsibility? Gauging Efforts to Fight Mortgage Fraud
— Progress or Success? Sizing Up Reform Efforts
— In the next issue

GREETINGS!

Welcome to the October edition of our newsletter! In this issue, we’ll examine ongoing efforts to combat mortgage fraud one year after the financial markets collapsed, and analyze what lessons have been learned by regulators and financial institutions in its wake.

A NEW ERA OF RESPONSIBILITY? GAUGING EFFORTS TO FIGHT MORTGAGE FRAUD

On September 15, 2008, Lehman Brothers sought bankruptcy protection, a move that would later be credited with shocking the global financial system to the brink of collapse. The underlying cause of Lehman Brothers’ failure, as with the problems at other institutions, was its unprecedented exposure to, and subsequent losses from, the subprime mortgage lending market. President Barack Obama seized on the one year anniversary of the collapse to chide, perhaps too politely, the investment banking community and warn them not to rev up their old machinations. But were they listening, and can Obama really stand up to them?

“We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis,” Obama said. “There are some in the financial industry who are misreading this moment,” he continued. “Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them. They do so not just at their own peril, but at our nation’s.”

To that end, Treasury Secretary Timothy Geithner was joined by Attorneys General from several states in vowing to fight the types of mortgage fraud which precipitated the crisis. Geithner noted that the Federal Trade Commission has filed 22 actions related to mortgage fraud or loan modification scams since the crisis began.

PROGRESS OR SUCCESS? SIZING UP REFORM EFFORTS

The FTC has been part of a multi-agency program to combat false or misleading advertising regarding mortgage programs, including several referrals to the Justice Department for prosecution.

Yet reports of mortgage fraud rose 36 percent from 2007 to 2008, according to the Federal Bureau of Investigation, suggesting that much enforcement work remains to be done. As desperate homeowners sought to cling to their way of life from the boom years, scam artists made them easy prey. “These combined factors uncovered and fueled a rampant mortgage fraud climate fraught with opportunistic participants desperate to maintain or increase their current standard of living,” the Bureau said in its report.

Administration efforts to create independent councils to monitor and supervise financial firms have also met with stuff resistance from the banking and financial services industry, despite the passage of a $490 million bill in May 2009 which included creation of an independent review panel to review causes of the crisis whose results will be released next year, as well as increased numbers of prosecutors and investigators trained to spot such fraud. Banking industry clout is in full force against these efforts: Commercial banks spent more than $37 million making donations to political campaigns in the 2008 campaign season, while securities and investment companies spent more than $653 million lobbying elected officials from 1998-2009, according to the Center For Responsive Politics. As the Obama administration pushes forward against this backdrop to implement promised reforms, banks and investment companies will need to utilize resources like fraud examiners and compliance investigators to better anticipate concerns in what will likely be a more tightly regulated marketplace.

IN THE NEXT ISSUE

In the November issue, we’ll look at how the imitations regarding Social Security Numbers can contribute to identity theft, and what is being done to curtail these trends.