The Little Guys Squash Easier
Joe Nocera writes in The New York Times about how the government is going after the smallest of the small fry for home loan fraud, like Charlie Engle, 49, who went to jail for lying on a "liar loan" during the housing bubble:
There were two things about Charlie's prosecution that really bothered me. First, he'd clearly been targeted by an agent of the Internal Revenue Service who seemed offended that Charlie was an ultramarathoner without a steady day job. The I.R.S. conducted "Dumpster dives" into his garbage and put a wire on a female undercover agent hoping to find some dirt on him. Unable to unearth any wrongdoing on his tax returns, the I.R.S. discovered he had taken out several subprime mortgages that didn't require income verification. His income on one of them was wildly inflated. They don't call them liar loans for nothing.Charlie has always insisted that he never filled out the loan document -- his mortgage broker did it, and he was actually a victim of mortgage fraud. (The broker later pleaded guilty to another mortgage fraud.) Indeed, according to a recent court filing by Charlie's lawyer, the government failed to turn over exculpatory evidence that could have helped Charlie prove his innocence. For whatever inexplicable reason, prosecutors really wanted to nail Charlie Engle. And they did.
Second, though, it seemed incredible to me that with all the fraud that took place during the housing bubble, the Justice Department was focusing not on the banks that had issued the fraudulent loans, but rather on those who had taken out the loans, which invariably went sour when housing prices fell.
As I would later learn, Charlie Engle was no aberration. The current meme -- argued most recently by Charles Ferguson, in his new book "Predator Nation" -- is that not a single top executive at any of the firms that nearly brought down the financial system has spent so much as a day in jail. And that is true enough.
But what is also true, and which is every bit as corrosive to our belief in the rule of law, is that the Justice Department has instead taken after the smallest of small fry -- and then trumpeted those prosecutions as proof of how tough it is on mortgage fraud. It is a shameful way for the government to act.
P.S. Check out the end line of Nocera's piece, referencing Enron, Worldcomm and Tyco prosecutions during the previous administration:
Amazing, isn't it? George W. Bush has turned out to be tougher on corporate crooks than Barack Obama.
And yes, Engle did engage in fraud, but regarding who gets prosecuted and who does not, as the saying (sorta) goes, "Some people's fraud counts more than others.'"
I was in the mortgage industry for a while...too corrupt, got right back out.
While I was in I did do some liar loans. The borrowers were completely complicit and told me to do whatever I had to do to make the numbers look right to the underwriters.
Remember, peeps, these people are very focused on the idea of homeownership or the money gained when one uses ones house as an ATM.
Would most of us taken these loans or committed fraud? No. That's why you have to do so much cold calling. But the people who want the payoff really, really, really want the payoff.
This is like saying a casino, which one does not have to go to, is preying on gamblers. So, yes, the borrowers need to be prosecuted too.
deathbysnoosnoo at June 3, 2012 6:44 AM
Amy,
You have to remember this is the same Justice Department that refused to prosecute voter intimidation by the Black Panthers.
This is the same Justice Department that is facing a Contempt of Congress charge for not turning over documents in the Fast & Furous investigation.
This is the same justice department that is not going after anyone the Solyndra collapse.
This is the same Justice Department that went after Ted Nugent for a Lacey Act violation. This is the first such prosecution for this violation.
Look at what they did to Ted Stevens, and others.
Remember -- never talk to a government official without a lawyer.
Jim P. at June 3, 2012 6:47 AM
So you were enticing people into taking these loans?
You were complicit in the fraud?
The casino analogy fails on this one. This is more like saying the alcoholics failure to recover was not my fault because I ran a bar in the Betty Ford clinic.
If the Betty Ford clinic did have a bar, would you solely prosecute the alcoholic, or would you also try to shut down the clinic?
Jim P. at June 3, 2012 9:21 AM
To make money from a scam, you have to sell something for more than it is worth to a sucker who is willing to buy it. In the housing crisis, who was selling and what sucker was buying?
We have heard the term "predatory lending". So, the evil bank or broker loans money to Tom, who buys a nice house with little or no money down (borrows nearly the full value of the house) and then either can't make the payments or loses value on his house. Then, the bank supposedly makes out like a bandit when it forcloses on the house and collects, after expenses, between 30%-80% of the amount loaned.
Wait a second. The bank gave $100K to Tom, and eventually gets $30K - $80K back. The bank lost money. That isn't a great scam for the bank. They are a really bad predator. How were they supposed to make profits on this deal?
What happens when a loan is created? We think of Tom "receiving a loan from the bank". More exactly, Tom is selling a repayment obligation to the bank in exchange for the money which the bank gives to him. The bank then "owns the loan". The bank owns the right to be paid monthly for 30 years, in exchange for the lump of cash given to Tom. The mortgage is a separate document pledging Tom's house as collateral if Tom doesn't or can't repay.
The mortgage broker can own the loan agreement, or can sell that loan to a bank or another institution, typically for a few percent more than the amount loaned.
Tom was not scammed in this transaction. Tom sold a loan agreement. He received money to buy a house. If Tom did not understand that transaction, then it was despite mountains of government regulation and requirements that Tom signed in detail. If Tom was misled about his ability to repay the loan, it was probably because he was too trusting of the safeguards that the government advertises but doesn't enforce. Most people think, "If the bank is willing to give me the money, then they must believe that I can pay it back."
Many borrowers were criminals who never intended to pay off the loans.
Anyway, the mortgage broker gave money to Tom, who in many cases did not have a verified income or credit history. It was the mortgage broker who was scammed.
The twist in this story is that we know someone was scammed, and we assume the mortgage broker would not scam himself, so many conclude that Tom was scammed. But, Tom received the money. In fact, the mortgage broker temporarily scammed himself!
The mortgage broker in turn scammed an institution which bought that loan from him, namely Fannie Mae, Freddie Mac, and and large banks. Why were they so gullible?
Fannie and Freddie (FanFred) didn't care. They were implementing policy set by the House Financial Services Committee chaired by Barney Frank (D. MA), and the similar Senate committee chaired by Christopher Dodd. Congress wanted poorer people to own houses, and set decreasing standards over time for the income and credit history needed for a "conforming loan" (a loan which FanFred would buy).
FanFred advertised their decreasing standards, and mortgage brokers were happy to create any loans which they could sell immediately to FanFred. Brokers were actually ordered not to verify the income and asset information supplied by poor buyers, so that the brokers could not "unfairly" discriminate against the poor. The politically connected executives at FanFred made big bonuses on the increased volume of transactions.
FanFred is a Government Sponsored Enterprise, but received little money from the government (until it was bailed out). It borrowed money from private institutions and governments. Those institutional lenders were willing to loan money to FanFred because FanFred explicitly guaranteed repayment of principal and interest on any mortgage bonds (repackaged pools of housing loans) sold by FanFred. And, the US government (politicians) implicitly guaranteed that FanFred would have the resources to make good on that guarantee.
FanFred bought huge amounts of substandard home loans and packaged them into housing bonds, which it sold to large institutions. FanFred took the money from those sales and applied it to buying more substandard housing loans. The institutions continued to buy the FanFred bonds (promises by FanFred to repay) because FanFred was backed up by the implicit government guarantee of powerful politicians.
The government put up a sign "We Buy Bad Loans". Now our politicians complain that evil businessmen created the bad loans that they wanted to buy, granting the loans to home owners who could not repay. Our politicians simply ignored that possible outcome, or felt that houses would always be worth what it cost to build them.
The scam was complete. Politicians explicitly and implicitly guaranteed FanFred mortgage bonds, supporting huge flows of money into FanFred, to buy increasing volumes of housing loans, at lower and lower standards for repayment. Everyone but the taxpayer made money. When these substandard loans collapsed, the huge losses were placed on the taxpayer by bailing out the institutional lenders. The Congress made good on its implicit guarantee to all of the institutions who supplied money for this rush of substandard, sub-prime lending.
Why do we not see the prosecution of the banks and mortgage brokers who created all of these bad loans? There are very few to prosecute. They were almost all following the idiotic rules set by Congress. They were scamming FanFred with the full cooperation of FanFred and Congress.
Our recession was promoted by collapsing home prices and mortgage losses, after an extended period of government providing easy money and guarantees to support Fannie Mae and Freddie Mac. The regulations for all banks encouraged them to regard all housing bonds as zero-risk investments which had never defaulted (until they did). The government continues to guarantee housing loans. This bad housing policy was designed, encouraged, and required by government, mostly by Democrats. Republicans sometimes complained, but they didn't want to smeared as anti-poor.
See also We Guarantee It - The Government Caused the Economic Crisis
Andrew_M_Garland at June 3, 2012 1:04 PM
Andrew M. Garland,
Thank you for your informative and crystal-clear comments. This is why I frequent blogs which draw intelligent (mostly ;) )commentary from readers.
So, kudos also to you, Redhead!
Jay R at June 3, 2012 1:52 PM
The reason for the prosecution is simple; for far too many district attorneys and assistant district attorneys the win/loss record is all important. The same with the IRS. As a result, they have an incentive to go after low hanging fruit. Better to win an easy case than lose a hard one.
Plus, lets be honest, an awful lot of prosecutors aren't that bright.
(Then you have DAs like a local one who suddenly realize the implications of the counter suits by the people they are prosecuting and drop the case. Or they suddenly realize that they WILL be overturned on appeal and have no desire to be named in that loss.)
Joe at June 3, 2012 2:37 PM
Andrew nails it.
Jeff Guinn at June 4, 2012 12:55 AM
To Jay and Jeff,
Thanks for the support.
Andrew_M_Garland at June 4, 2012 9:14 AM
Charlie signed the application.
Somebody else may have filled it out, but Charlie verified the information on the application with his signature.
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Add me to the list of people lauding Andrew's concise explanation of the origins of the crisis.
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Recommended reading: Reckless Endangerment by Gretchen Morgensen and Joshua Rosner. Order it through Amy's Amazon link today.
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I was in the mortgage industry during the heyday of the liar loans. Depending upon the program, bankers were not allowed to question or verify the information on the application.
I audited the underwriting department at the time. The underwriters knew they were being lied to, but they weren't allowed (by the government) to question the applicant's stated information.
So, the gardening company employee ("Landscape Engineer") whose only assets were $100 in the bank and a 1982 Toyota Corolla was approved for at $400,000 loan (with no money down) because he said on the application that he made $250,000 a year.
The banks made the loans they were forced to make and turned around and sold them to the FanFred as quickly as possible.
Conan the Grammarian at June 4, 2012 1:46 PM
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