Posts filed under “Legal”
An article in the weekend WSJ got me thinking about Real Estate related frauds of all kinds. Titled FBI Probes Unusual Incentives for Home Buyers, it looks at whether the homebuilder’s incentives, if not properly disclosed to a 3rd party mortgage underwriter, was a form of fraud:
"When home sales began to slow at the start of the downturn, home builders offered buyers incentives — instead of reducing prices — to stimulate demand. The incentives included cars, tuition and credit-card payments, and even cash.
A sign is posted in front of a bank-owned home that is for sale in Richmond, Calif.
Now, federal investigators are questioning whether some of those incentives misled lenders and caused them to write mortgages that were artificially inflated, contributing to today’s home-price crash"
Anyone who follows the real estate market long enough will eventually become familiar with various forms of fraud that at times lurks in the industry. Any industry where large sums of money are involved invites unsavory characters. With median home prices well over $200,000, housing was no different.
I do not believe Real Estate related fraud, under most circumstances, is all that widespread or common. One of the many things that made the 2002-2006 housing boom so unusual, however, was that fraud had become pandemic.
What might start out as a minor conflicts of interest slips over time into something more nefarious. When False statements get made to counter- or third parties who in good faith rely on those statements to their detriment, you have the makings of fraud. And what these types of undisclosed misleading statements become the norm, you have systemic fraud.
The most recent cycle saw many different types of fraud perpetrated by various industry players. All together, these various fraudulent actions contributed in a large way to the extent of the housing boom.
Here are what I see as the most common forms of fraud during the 2002 – 06 cycle:
1) Appraisal Fraud: Many appraisers found they could attract more referral business by inflating their appraisals to whatever the selling price was priced at. In a boom, it became easy to justify such fraud by using similarly priced homes in the neighborhood. Any basis of intrinsic value could be ignored, so long as “comparable” properties sold for similarly over-priced amounts.
The overuse of comparables helped justify prices that were increasingly unsupportable. As prices spiral upwards, the use of comparables becomes meaningless. High prices justify higher prices. It eventually reached the point where honest appraisers petitioned Washington D.C. to intervene in the widespread fraud. (The White House chose not to intervene).
2) Referral Fraud: Complicit in appraisal fraud were the real estate agencies that knowingly steered appraisal referrals to those agents they knew would give them the valuation they sought, rather than a true valuation. The agents and agencies were the enablers — they are the ones who incentivized the appraisers to commit the actual fraud. The agents were the unindicted co-conspirators to appraisal fraud, as they paid for, aided and abetted the actual fraud itself.
Many buyers do not realize that real estate agents legally represent not them but the seller. They are motivated to close the transaction in order to get their commissions. This can lead to "questionable" referrals (including engineers as well).
3) Application Fraud: It was an open industry secret that mortgage applications were usually completed by mortgage brokers, rather than by the borrowers themselves. “Just leave those lines blank, we will take care of them” was a common refrain. Savvy brokers knew how to meet the requirements of each bank in order to get loans approved. Indeed, the “No credit check, no income verification” loans practically invited this kind of fraud.
That the banks knew what was going on and looked the other way, however, does not make this form of financial deception any less a felony.
4) Underwriting Fraud: Just how aware were the banks that these borrowers were unqualified?
An internal memo from JPM Chase reveals exactly how much the banks understood who they were lending to. It involves Zippy, Chase’s in-house automated loan underwriting system. The memo’s title: "Zippy Cheats & Tricks." It explains to bank employees how to get an unqualified applicant approved for a mortgage. A Chase spokesperson denied that Zippy Cheats & Tricks was official policy; thus we are reassured that this was only "unofficial policy.”
5) Mortgage Fraud: Anyone who filled
out a mortgage app, and put false information on it committed fraud. I
do not believe, as some fraud apologists have claimed, that this rose
anywhere near the level of what has been so disingenuously termed “predatory borrowing.”
We know it happened on more than a few
occasions. Where the intent was to obtain financing that the borrower
would not have otherwise qualified for, it is fraudulent. That banks
should have been more proactive in protecting against this form of
deception is no excuse.
The bottom line remains that anyone who
overstated assets or income or understated debt or financial
obligations committed fraud.
6) Predatory Lending/False Statements: As of this writing, the FBI has arrested nearly 1,000 in connection to this form of fraud. A significant number of borrowers (I don’t have a definitive number) may have been subject to predatory lending.
There have been numerous examples of lenders deceptively convincing borrowers to agree to loan terms that are abusive. One of the most common versions in recent years was representing an adjustable rate loan as a 30 year fixed mortgage. Anecdotally, I have seen many examples of this.
Note: This list is really just on the home purchase side, and doesn’t even get to the doesn’t include the fraud by Moody’s and S&P in rating the various RMBS, CDO and CLS and other RE related structured products.
QUESTION: How many forms of fraud were associated with this last cycle in Real Estate, Mortgages, Securitization, Fund Management, Structured Products, etc. ? What other fraudulent activity took place?
What say ye?
How to Get an "Iffy" loan approved at JPM Chase (March 2008)
FBI Probes Unusual Incentives for Home Buyers
Investigators Ask Whether Payments Misled Lenders
WSJ, August 16, 2008; Page A2
Long time readers are familiar with my fascination with antique sports cars. One of my pals, Jan, is a well known Porsche collector who is also affiliated with the International Automotive Appraisers Association (IAAA). Its a hobby for him, and he specializes in the rehabilitation and appraisal of antique sports cars. He has rebuilt and appraised everything from celebrity Bugattis to classic Ferraris to modern supercars.
I call Jan "landed gentry" — he’s owned a major car rental firm (sold it), develops real estate, buys/sells land and houses. He is quasi-retired, leaving him plenty of time to play with his many fine automobiles — and for us to discuss the housing market collapse.
Amongst our many discussions, we have gone over the issue of housing appraisal fraud. So when the IAAA newsletter sent out the tale (below) to its members as a warning against fraud, conflict of interest, and corruption, it got his attention — and he forwarded it to me. His comments were: "This is even worse than the nightmare of corruption you described."
Let me hasten to add that many appraisers were offended by the corruption of colleagues in their industry, especially those greased by the worst elements among mortgage brokers and real estate agents. In 2005, more than 8,000 appraisers — roughly 10 percent of the industry — signed a petition asking the federal government to take action; the White House and Federal agencies demurred, and appraisal fraud continued unabated. Eventually, Phony and Fraudy cut a deal with NYS AG Cuomo to stop enabling the appraisal fraud.
Which brings us to the now defunct Indy Mac, and the below diatribe about the criminality, corruption, and rampant appraisal fraud that was the CountryWide spinoff’s stock in trade.
Martin was the chief commercial appraiser for Indy Mac from October 15, 2001, to when he was terminated six months later for failing to look the other way or actively engage in fraud. Most of the details below are culled from the public record of his wrongful termination litigation, which was eventually settled in Martin’s favor.
My quick overview of the conflicts, fraud, and criminality at Indy Mac —
• Underwriting loans based on appraised values well above purchase prices;
• Fabricating rent rolls for commercial properties to be appraised;
• Over-stating Construction work as 80% complete versus 15% in actuality;
• Attempting to change discounted cash flow models for subdivisions in order to increase appraised value;
• Attempted intimidation of Appraisers;
• Providing false information to appraisers;
Conflict of interests:
• Appraising a development where the land was being purchasing from David Loeb, IndyMac’s Chairman of the Board;
• On one transaction, the CEO’s father and father-in-law were
commercial construction inspectors for the firm; the loan officer was
the CEO’s brother (a former police officer with no loan experience);
That’s just the overview.
Amazingly, these events took place before the enormous Housing and Construction boom from 2003-06. One is left to imagine just how insane the place must have been during that period. I’d love to find the details, and given the enormous lending losses — $8B and counting — we can only begin to imagine what sort of rampant fraud took place. I hope the FDIC releases a full report of their investigation of the collapse of Indy Mac. (Gee, I wonder how Senator Schumer caused THOSE problems back in 2001? CNBC should know better than to publish trash such as this.)
You really need to read the entire piece to get a feel as to just how much of a criminal enterprise Indy Mac was before it went under.Is it any surprise the entire firm, and not just any individuals, are under FBI investigation for Fraud?
These things have a tendency to disappear, so I am capturing a PDF and the text (after the jump) in case it somehow vanishes.
Idiots Fiddle While Rome Burns (July 2008)
My experience at IndyMac
Vernon Martin, Certified General Appraiser
Appraiser’s Forum, 07-14-2008, 12:41 AM
Appraisal fraud: your home at risk
Appraisers say they’re being pressured by lenders to inflate their estimates of home values
CNN/Money June 2, 2005: 9:56 AM EDT
Fannie Mae, Freddie Mac agree to new appraisal standards
L.A. Times, March 04, 2008
My experience at IndyMac- General Real Estate, Mortgage, and Economic Discussions – Appraisers Forum PDF Download my_experience_at_indymac.pdf
IndyMac fraud probe launched; FBI looking into firm, not individuals
Lara Jakes Jordan, The Associated Press 07/16/2008 09:08:13 PM PDT