Today mortgage information provider CoreLogic released its “Annual Fraud Report” documenting a rise in consumer mortgage fraud. The report highlights that recently convicted former Trump campaign manager isn’t the only one who submitted false applications to secure mortgage loans. As in the case of Manafort, mortgage fraud is a federal offense and the penalties can be stiff, including incarceration.
Even though the economy has improved, the rise in home prices and corresponding amount of income needed to qualify for a loan has increased. Although it is a risk management issue the numbers note approximately 1 in 109 applications have some type of fraud. The report reflects the fraud index has increased for the past seven quarters.
Two fraud issues that are top of mind for risk managers right now are false credit disputes and income misrepresentation.
The mortgage or housing crisis erupted across the nation in 2008 and crippled the U.S. economy. Institutions, companies, cities, communities and individuals were not spared its devastation. Even though recovery was a painful process and total restoration is a fleeting hope for many, it was felt those responsible, especially the well-known companies and their corporate leadership would eventually be held responsible for their involvement.
Shockingly, of all those who may have been involved in the nuances of mortgage lending and whose decisions resulted in historic loses, only one bank was indicted by the federal government. Abacus Federal Savings and Loan headquartered in New York was dealt the wrath of selling fraudulent loans to the Federal National Mortgage Association (FANNIE MAE).
Too Big to Fail
You remember the panic, the desperation and the commentary from our political leadership? Most had never heard the phrase, “too big to fail!” They would quickly learn it was akin to one of the great Chick Hearn phrases in announcing a basketball game, “no harm, no foul.” That basically meant that even though a foul may have been committed by the opposing player, it was not deemed worthy of declaring a foul or infraction.
Instead, countless banks and mortgage originators were fined billions by various regulators, however there was no criminal prosecution as was the case with Abacus. Even today there are many raw nerves, emotions and opinions when the topic of the mortgage crisis is discussed. The how and why of Abacus being targeted raises more questions than it answers. In 2016 a film about the plight of Abacus and impending trial was released. Frontline, which specializes in showing documentaries on the public broadcasting network platform released the television version on September 12, 2017.
This spread the danger of risky mortgage loans, systematizing the housing market’s risks throughout the global financial system.23 These developments occurred in an environment characterized by minimal government oversight and regulation and depended on a perpetually low-interest rate environment where housing prices continued to rise and refinancing remained a viable option to continue borrowing. When the housing market stalled and interest rates began to rise in the mid-2000s, the wheels came off, leading to the 2008 financial crisis.
Low hanging fruit
Abacus was eventually vindicated as the government was not able to prove their case. Whatever your thoughts are about the crisis or your familiarity of the case, you ponder and ask what was so unique about Abacus that the government thought them to be “the poster of criminal intent and deemed a responsible party?” There were so many well-known companies that were involved in the crisis. As a matter of fact, each day lenders were imploding right before our eyes. No doubt, they represented low hanging fruit that even a rookie prosecutor could attempt to give the public some sense of relief through indictments.. Yet, absent those who managed to survive and keep the doors open, their core penalty as mentioned was having regulatory fines levied against them. From their perspective, dealing with a fine was much better than going out of business or worse, having to spend time in jail or prison.
Abacus goes down in history by being the only bank or mortgage lender to suffer the fate of being indicated and having to go through a full trial.