If Mortgage Fraud Occurred, Why Don’t We Prosecute the Offenders?

During the subprime boom, lenders were using “stated-income” loans, which meant the borrower could state their income but no income verification was used. Basically, this type of loan allowed for the borrower to inflate their income and no one would know the difference. Doing so allowed for the buyer to “qualify” for a larger mortgage.

Here’s the deal:

Overstating your income (lying) on a loan constitutes fraud. Fraud is punishable by law.

I haven’t found any hard numbers on how many stated income loans were used or how many of the stated income loans were overstated. But, it shouldn’t have been that hard to figure out. If you say you make $16,000 a month and in reality only make $3,600 per month (an example in the book), it wouldn’t take long for that overstatement to come to light. All one would have to do is find the paperwork and then compare that to tax returns. And, this could be done by those who are helping people stay in their homes.

Unfortunately, prosecuting the fraudsters would most likely be an expensive process.

I’m not against helping those who LEGITIMATELY need help. I just don’t like the idea of helping those who might have committed fraud.

Just think, this entire crisis probably could have been averted had lenders insisted on income verification!

20 thoughts on “If Mortgage Fraud Occurred, Why Don’t We Prosecute the Offenders?”

  1. JLP: You are not going to like me for saying this, but the term 'liar loan' has been on the books since 1992. These 'no documentation' loans are rife with fraud, but who are you going to prosecute? The borrowers, the mortgage brokers, wall street execs, rating agencies? All of them knew what was going on.

    So, you can't prosecute because we don't have enough jails.

    As for who to help? If anyone, it would be the person who didn't use his house as a piggy bank or investment hedge in the stock market — those are the only ones deserving of help (if they even need it).

  2. Good point. I remember that term being used but the book I'm reading makes it sound as though the use of those loans increased during the subprime crisis.

  3. I'm with you on it.

    If you look at the documents, it obviously says that if you lied anywhere on these documents intentionally then the law can come after you for fraud. But nobody is doing a damn thing! If someone did then there will be a mob of other people blaming the banks for not doing their due diligence.

    Add in the fact that the US is basically bankrupt, does the government really want to spend money on persecuting these types of criminals?

  4. We had the mortgage bubble because banks (lenders) were no longer responsible for collecting on the loans they were writing. There was no fear that consumers wouldn't repay the lender because the lender had already sold that loan to a third party. How can debt -to-capital ratios mean anything if those loans were shoved off the books? LOL is right, we don't have enough jails.

  5. I'm sure there is a loan application out there that says something like:

    Name: Joe
    Occupation: Plumber
    Income: $250k

    It would be a nice website to see a collection of some of the most obvious 'liar loans'. Hopefully whatever agency is responsible for regulating mortgage loans will start doing a better job (is there even an agency?).

  6. "Just think, this entire crisis probably could have been averted had lenders insisted on income verification!"

    They would've been accused of racism, or red-lining, or violating the Community Reinvestment Act, or some other pseudo-Civil Rights violation by ACORN or somebody, and the Feds would've come down on them like a ton of bricks.

  7. Jason,

    Maybe so but I think it was more a worry of their customers going somewhere else to get a mortgage. In other words, the brokers/bankers didn't want to lose out on the business. It was greed that caused this crisis (greed always seems to be the common thread in all these booms and busts).

  8. This article has some numbers in it: http://www.slate.com/id/2189576/

    There are probably a couple of reasons why there are no (or few) prosecutions:
    1. It takes time and money to build a case and take it to court, so while there was probably massive fraud, it's not cost-effective to prosecute each individual homeowner.
    2. And based on http://washingtonindependent.com/1472/how-fraud-f… , it may not be the homeowner who lied.

    Based on those two points, it may be more cost-effective to prosecute a mortgage broker or lender. Rather than prosecute a homeowner for several hundred thousand in fraud, if a prosecutor had evidence that a broker or lender had done the lying, then the prosecutor would have a single case that involved huindreds of millions of dollars of fraud.

  9. JLP: There Are No Lenders. You have the quaint idea that there was something called a "bank" that lent out its depositors' money to fund mortgages, after carefully qualifying buyers and doing extensive diligence on the value of the real estate in question.

    In the glorious new world cooked up by Barney Frank, Chris Dodd, and Fannie Mae, that antiquated concept went away, to be replaced by "originators" who marketed loans to all and sundry. They did just enough information-gathering to get a magic number on the loan so it could be scored. Whether this information made any sense or not was irrelevant; only the "score" mattered. Once the loan was sold to Fannie Mae, it was split up into dozens of pieces, packaged, and sold again into a vast pool of badness sorted by "score".

    The idea may have even worked, if the "scoring" had any basis in reality. The problem was, it didn't.

    As for prosecuting people, since everyone in the chain had some interest in being deceived, it's hard to know where to start. And most of the loan originators went bankrupt, in many cases because many of them didn't realize they were in a massively crooked business and dove into the "can't lose" real-estate market they helped to bubble up.

    Some – and probably most – of these brokers honestly thought they were helping people achieve their dreams of home ownership. If the money was great, that was wonderful too.

  10. Of course many individuals and companies encouraged this, or benefited from it – but the fact remains that person who signed the false statement commited fraud.

    If it is not practical to prosecute, it should at least be possible to withhold assistance of any sort from these borrowers. They do not deserve to stay in the homes that they bought under false pretenses. And they definitely don't deserve to do so with my tax dollars.

  11. Many weren't even fraud because there were no income requirements; the property was the security. There have been some prosecutions, several hundred loan agents and brokers but it was far too widespread to make it worthwhile to pursue now. How much good money do you want to throw after bad? The time to do it was around 2003 when it could have had value not just cost. That would have interfered with someone's reelection though and more especially campaign contributions.

  12. you're a real law-and-order type. but i do think the real criminals ran Countrywide and AIG. 80% of the no-doc loans were lender-initiated. i think i had 2 no-doc loans. they can make sense at the right LTV. which logically leads to appraisals. can't you find some fraudsters there? and those who sold these dubious loans with the Moody's AAA rating… any fraudsters there? And those who bought them without due dilligence, contrary to promises otherwise. Fraudsters all the way down. Keep digging!

  13. John,

    Believe me…we have talked about all of the guilty parties at one time or another on this blog. Unfortunately, you are basing your opinion on one post.

  14. A few other points:

    1. Numerous no-doc loans were made to illegal immigrants. This was considered to be a feature, not a bug. Nearly all of these defaulted.

    2. Other no-doc loans were made to owners of small "all cash" businesses who somehow drove Mercedes Benzes while reporting a couple of grand in profits each year (ie, they cheated massively). It was far from unknown for the owners of these businesses to themselves be illegal immigrants. These actually turned out fairly well as these guys aren't noted for overpaying or buying "too much house".

    3. Yet more were made to people like me who had consulting jobs with irregular income (the LTV in mine was about 40%, but I still couldn't get a "doc loan" because I didn't have a W2 job). These are also decent loans unless the person overbought.

  15. Heres one for you. I got a loan based on what i showed i made which wasnt much. At first they said to me..oh you have good credit and we found a company that will give you 6% fixed on 30 years…Mind you they also knew i had to be out of my house and into the new house within 3 months. The closing got pushed back as it usually does and low and behold 2 days to the real closing and i get a call. Well we lost your paperwork and so you will have to resubmit it. So i did and wow this is not suprising…Well we cant get you that fixed rate at that percent the only thing we can get you is an ARM and 2 mortagues at that.
    This my friends is fraud.

  16. I would have said no but then where would my kids sleep and eat? How do i register them for school and what school seeing as you have to have a physical address!!! What about my business how would i run a business with no place to have it at? They took advantage knowing i HAD to have a place within the time limit. I did however refinance at the end of the following year but i couldnt get a good rate because they knew any fixed rate was better than an ARM!!!! so i got a high fixed rate! That my friends is fraud

Comments are closed.