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Mortgage Fraud

by Benjamin B. Wagner,
U.S. Attorney for the Eastern District of California

Benjamin B. Wagner, U.S. Attorney for the Eastern District of CaliforniaMortgage fraud has been a significant contributor to the nation's financial woes, wreaking havoc from residential neighborhoods to global financial centers. It has contributed to a dramatic increase in home foreclosures, leaving clusters of empty and shuttered neighborhoods in many states. It has triggered a steep decline in home prices, devaluing many families' primary asset. Mortgage fraud has also destabilized our financial services sector and securities markets by reducing the value of mortgage-backed securities, causing enormous investor losses, driving some financial institutions out of business, and weakening others. The resulting credit squeeze has been harmful to homeowners and businesses across the country. Local governments and schools, heavily dependent on property tax revenues, have also been negatively impacted.

In the early years of this decade, a booming real estate market, combined with a relaxation of underwriting standards, created an ideal environment for fraud to flourish. With real estate prices rising rapidly, lenders were able to ease their underwriting standards since increasing home values would normally cover the mortgage in the event of a default, regardless of the creditworthiness of the buyer. Moreover, a booming secondary market for mortgages meant that mortgage lenders increasingly passed the risk of loss on to others, minimizing their incentive to probe mortgage applications for fraud. A host of professionals—real estate agents, appraisers, closing agents, attorneys, title insurance agents, and mortgage brokers—are expected to ensure the legality and soundness of real estate transactions. During our recent real estate boom, however, many of the financial incentives provided to these professionals were solely directed at ensuring that real estate transactions closed, regardless of whether the mortgage loans were prudently made.

The lure of easy money was an open invitation to those propelled by greed, whether savvy fraudsters, ethically- challenged real estate professionals, or corrupt mortgage lenders, and they took advantage of the opportunities presented. Across the nation, and especially in rapidly expanding suburban areas, many homes sold at inflated prices, supported by questionable appraisals. The loans funding the sales were often obtained with false loan applications supported by forged financial documents, or sometimes, no documents at all. The borrower was often a "straw buyer" who had no intention of actually living in the home, but rather merely allowed a con artist to use their name and good credit to purchase a home that would be foreclosed upon soon after the con artist made off with the excess loan proceeds.

By 2007, real estate values began to fall and mortgage lenders began experiencing large losses due to fraud, reducing their ability to fund new mortgage loans. Securities backed by fraudulently obtained mortgages lost value. Foreclosures left houses empty and ill-kept, while their artificially inflated prices kept new buyers from buying them. Neighbors, who had seen their real estate tax bills increase steeply due to the inflated sales prices of the fraudulently mortgaged homes, found themselves surrounded by empty, decaying houses that invited crime. In sum, the financial and human costs of the mortgage fraud crisis have been enormous. While many governmental and nongovernmental entities will play a role in facilitating the recovery from this crisis, the task of rooting out criminals in the mortgage industry and restoring confidence in a real estate market that is a bedrock of our nation's prosperity falls to us and our colleagues in law enforcement.

On November 17, 2009, by executive order, President Obama created the Financial Fraud Enforcement Task Force (FFETF). Chaired by the Attorney General, FFETF brings together high- ranking officials from all affected federal agencies, as well as our state, local, and tribal law enforcement partners, to address issues relating to mortgage fraud and many other serious financial crimes. FFETF is leading an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. It is marshaling the government's criminal, civil, and administrative resources to address financial frauds, recover stolen funds for victims, address discrimination in lending, and enhance inter-governmental cooperation. It is also promoting training, data collection, and information sharing. One of the crucial components of the FFETF is the Mortgage Fraud Working Group, which is engaged in coordinating a national strategy to combat mortgage fraud.

The nation's United States Attorneys are the centerpiece of that strategy. We are using all of the tools at our disposal. Criminal prosecutions are being supplemented by civil enforcement and injunction actions. We are cooperating with regulatory agencies that have authority to pursue administrative remedies. We are working closely with our state and local partners, leveraging our investigative and prosecutorial resources through state, federal, and local mortgage fraud task forces and working groups. We are raising public awareness, increasing law enforcement training, and working with industry associations and nonprofit groups to detect and prevent mortgage-related fraud schemes.

Bringing those who have committed mortgage fraud to justice will help restore confidence in our real estate and securities markets, deter future acts of fraud, and restore victims to the greatest extent possible. Thank you for being part of this important effort.