FBI Partners with Banks and Blames Mortgage Fraud on Poor Borrowers

Jessica Desvarieux, TRNN Producer: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore. And welcome to this edition of the Bill Black report.

Bill Black is now joining us. He is the associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist and former financial regulator. He’s also the author of the book The Best Way to Rob a Bank Is to Own One.
Thanks for joining us, Bill.

Bill Black, Assoc. Prof. Economics and Law, UMKC: Thank you.

Desvarieux: So, Bill, you’ve been working on this series looking at how the DOJ, as well as the FBI, have been investigating and have been unsuccessful in prosecuting the financial fraud in this country. Can you just talk to us a little bit more about what you’ve been working on?

Black: Sure. For one thing, I have to credit Bob Prasch, who is a wonderful economist at Middlebury, who summed it up very nicely. He said, what you really found is that the Justice Department has channeled its inner Tea Party. It formed a partnership with the big banks, and it blames the entire crisis on little people who supposedly—you know, the hairdressers that were able to cleverly defraud the most financially sophisticated financial institutions in the world and such, which is, of course, and an inherently preposterous story.

So what I looked at was the 2010—which is the most recent report, by the way, which tells you part of the problem—of the FBI about mortgage fraud. And you access that through a page that begins by describing all this stuff as “shenanigans,” which is an interesting word where the primary connotations are, you know, sort of a mischievous, playful thing that kids do, as opposed to elite frauds that caused the worst financial crisis in 75 years. And then you go into the heart of this 2010—which, again, this is very late into the crisis. This is years into it, and they should have figured things out. But instead, it’s remarkable.

So the first thing you learn is they don’t even mention the banking regulatory agencies as a source of criminal referrals. In this description in 2010, referrals basically come only from the industry itself. Well, to state the obvious, the industry isn’t going to make criminal referrals against their own CEOs. So if you go back to the savings and loan crisis, again, one-seventieth the size of this crisis, both in terms of losses and in terms of scope of fraud, the Office of Thrift Supervision makes over 30,000 criminal referrals against the savings and loan croaks. And that’s vital to producing over 1,000 felony convictions of savings and loan folks. And that’s only in cases designated as major by the Department of Justice.
In this crisis, the Office of Thrift Supervision, the same agency that was supposed to regulate Countrywide, IndyMac, Washington Mutual, the largest makers of fraudulent loans in the world, made zero criminal referrals. And what’s bizarre, of course, is the FBI doesn’t even act like that’s strange, doesn’t explain that this is a difference, takes no steps to re-create the criminal referral process. So what do you do if you don’t get any criminal referrals and you have a definition supplied by the Mortgage Bankers Association, which is the trade association of the perps?

So the Mortgage Bankers Association and the FBI form a partnership in 2007, and the partnership is formed, from the FBI perspective, because they’re not getting any criminal referrals from the agencies, they’re not getting any expertise from the banking regulators who are supposed to understand the industry and provide the experts. So the FBI instead goes to the most inappropriate group it could to get expertise, and that’s the industry, the Mortgage Bankers Association, as I say, the trade association of the perps. And the Mortgage Bankers Association provide them with a supposed definition of mortgage fraud. But it’s a bizarre definition of mortgage fraud that doesn’t fit any of the facts that the FBI knew, and it doesn’t fit reality. But the definition says that the bank is always the victim of the fraud. Right? And the fraudsters, well, sometimes they might involve loan brokers and such, but mostly it’s just, you know, Fred and Mary Homeowner who lie to the poor virginal bank, and these, as I said, clever hairdressers making $26,000 a year defrauded the most elite financial institutions in the world.

And you’re going, you know, like, this is a comedy, right? This is an April fools joke. But no, this is actually the official FBI report on mortgage fraud that says this is what they commission specially to do the analytics. So they really understand mortgage fraud. And so they could tell the rest of the world about mortgage fraud. And it’s a story that has no basis in reality, and it’s utterly preposterous. Indeed, if you think about it, mortgage fraud, of course, was always a potential risk, but we’ve had underwriting standards at banks for 100 years which have kept mortgage fraud to a trivial level, where losses are far less than one half of 1 percent and fraud is rare.

But in the crisis, liars’ loans, we know from the Mortgage Bankers Association themselves, their anti-fraud experts and their report in 2006, that the incidence of fraud in liars’ loans was 90 percent, and we know that by 2006 roughly 40 percent of all the loans made that year were liars’ loans, and we know that it was overwhelmingly lenders who put the lies in liars’ loans, and we know that it was almost exclusively lenders who put the lies in appraisals. So these frauds are overwhelmingly coming from the banks, but are being completely ignored, because the FBI is operating in this bizarre Tea Party world in which the banks are wonderful and honest and it’s the small people who are the nasty, terrible folks. And as I said, you’d believe it was an April fools story, especially under a president who is African-American and an attorney general who is African-American buying into the Tea Party story that it’s largely minorities who caused this entire crisis. It’s the bizarrest thing I’ve found in 35 years of research.

Desvarieux: Wow. Really interesting series, Bill. Thanks so much for joining us.

Black: Thank you.

Desvarieux: And thank you for joining us on The Real News Network.