WASHINGTON—Lee Bentley Farkas, the former chairman of a private mortgage lending company, Taylor, Bean & Whitaker (TBW), was convicted today for his role in a more than $2.9 billion fraud scheme that contributed to the failures of Colonial Bank, one of the 25 largest banks in the United States in 2009, and TBW, one of the largest privately held mortgage lending companies in the United States in 2009.

The conviction was announced today by Assistant Attorney General Lanny A. Breuer of the Criminal Division; U.S. Attorney Neil H. MacBride for the Eastern District of Virginia; Acting Special Inspector General Christy Romero for the Troubled Asset Relief Program (SIGTARP); Assistant Director in Charge James W. McJunkin of the FBI’s Washington Field Office; Michael P. Stephens, Acting Inspector General of the Department of Housing and Urban Development (HUD-OIG); Jon T. Rymer, Inspector General of the Federal Deposit Insurance Corporation (FDIC-OIG); Steve A. Linick, Inspector General of the Federal Housing Finance Agency (FHFA-OIG); and Victor F.O. Song, Chief of the Internal Revenue Service Criminal Investigation (IRS-CI).

After a 10-day trial, a federal jury in the Eastern District of Virginia found Farkas guilty of one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; four counts of wire fraud; and three counts of securities fraud. At sentencing, scheduled for July 1, 2011, Farkas faces a maximum prison term of 30 years for the conspiracy charge and for each count of bank fraud, 20 years for each count of wire fraud related to TARP, 30 years for each count of wire fraud affecting a financial institution and 25 years for each securities fraud count. Farkas was remanded into custody.

According to court documents and evidence presented at trial, Farkas and his co-conspirators engaged in a scheme that misappropriated more than $1.4 billion from Colonial Bank’s Mortgage Warehouse Lending Division in Orlando, Fla., and approximately $1.5 billion from Ocala Funding, a mortgage lending facility controlled by TBW. Farkas and his co-conspirators misappropriated this money to, among other things, cover TBW’s operating expenses. The fraud scheme contributed to the failures of Colonial Bank and TBW.

Six individuals have pleaded guilty for their roles in the fraud scheme, including: Paul Allen, former chief executive officer of TBW; Raymond Bowman, former president of TBW; Desiree Brown, former treasurer of TBW; Catherine Kissick, former senior vice president of Colonial Bank and head of its Mortgage Warehouse Lending Division (MWLD); Teresa Kelly, former operations supervisor for Colonial Bank’s MWLD; and Sean Ragland, a former senior financial analyst at TBW.

“Lee Farkas, the former chairman of TBW, masterminded one of the largest bank fraud schemes in history,” said Assistant Attorney General Breuer. “His shockingly brazen scheme poured fuel on the fire of the financial crisis. It not only led to the downfall of TBW, one of the largest private mortgage lending companies in the United States, but also contributed to the failure of one of the country’s largest commercial banks. Mr. Farkas may have thought he could steal nearly $3 billion from investors and taxpayers and sail into the sunset. But now a jury has told him otherwise, and he must face the severe consequences.”

“Today a jury convicted Lee Farkas of orchestrating one of the longest and largest bank fraud schemes in the country,” said U.S. Attorney Neil H. MacBride. “In 2008, Lee Farkas boasted that he ‘could rob a bank with a pencil.’ And he did just that. His staggering greed led him to steal nearly $3 billion from Colonial Bank and other investors. Farkas’s mammoth fraud contributed to the toppling of a financial institution and the ripple effects were felt from Wall Street to Main Street. Now he’s being held responsible for the financial ruin he left in his wake.”

“This investigation required thousands of hours of work by investigators, forensic accountants and analysts to sort through complex mortgage and lending documents,” said Assistant Director in Charge McJunkin. “I’d like to thank the many other agencies who worked with FBI personnel to build a strong investigative team; a team still out there working today to protect federal funds and innocent victims.”

“Today’s verdict ensures that Farkas will pay for his crime—an unprecedented scheme to defraud regulators during the height of the financial crisis and to steal over $550 million from the American taxpayers through TARP,” said Acting Special Inspector General Romero for SIGTARP. “SIGTARP and its partners in the Financial Fraud Enforcement Task Force stopped the scheme dead in its tracks and will continue to bring to justice those criminals who seek to profit by exploiting TARP through fraud.”

According to court documents and evidence presented at trial, the fraud scheme began in 2002, when Farkas and his co-conspirators ran overdrafts in TBW bank accounts at Colonial Bank in order to cover TBW’s cash shortfalls. Farkas and his co-conspirators at TBW and Colonial Bank transferred money between accounts at Colonial Bank to hide the overdrafts. Evidence presented at trial showed that after the overdrafts grew to more than $100 million, Farkas and his co-conspirators covered up the overdrafts and operating losses by causing Colonial Bank to purchase from TBW over time more than $1.5 billion in what amounted to worthless mortgage loan assets, including loans that TBW had already sold to other investors and fake pools of loans supposedly being formed into mortgage-backed securities. Farkas and his co-conspirators caused Colonial Bank to report these assets on its books at face value when in fact the mortgage loan assets were worthless. By August 2009, approximately $500 million in fake pools of loans remained on Colonial Bank’s books.

According to court documents and evidence presented at trial, Farkas and his co-conspirators at TBW also misappropriated more than $1.5 billion from Ocala Funding. Ocala Funding sold asset-backed commercial paper to financial institution investors, including Deutsche Bank and BNP Paribas Bank. Ocala Funding, in turn, was required to maintain collateral in the form of cash and/or mortgage loans at least equal to the value of outstanding commercial paper.

Evidence presented at trial established that Farkas and his co-conspirators diverted cash from Ocala Funding to TBW to cover its operating losses, and as a result, created significant deficits in the amount of collateral Ocala Funding possessed to back the outstanding commercial paper. To cover up the diversions, the conspirators sent false information to Deutsche Bank, BNP Paribas Bank and other financial institution investors and led them to falsely believe that they had sufficient collateral backing the commercial paper they had purchased. When TBW failed in August 2009, the banks were unable to redeem their commercial paper for full value. Farkas and his co-conspirators also caused approximately $900 million in loans to be held on Colonial Bank’s books when in fact the loans had already been sold to Freddie Mac and other investors.

According to court documents and evidence at trial, in the fall of 2008, Colonial Bank’s holding company, Colonial BancGroup Inc., applied for $570 million in taxpayer funding through the Capital Purchase Program (CPP), a sub-program of the U.S. Treasury Department’s Troubled Asset Relief Program (TARP). In connection with the application, Colonial BancGroup submitted financial data and filings that included materially false information related to mortgage loans and securities held by Colonial Bank as a result of the fraudulent scheme perpetrated by Farkas and his co-conspirators. Colonial BancGroup’s TARP application was conditionally approved for $553 million contingent on the bank raising $300 million in private capital.

Evidence at trial established that Farkas and his co-conspirators falsely informed Colonial BancGroup that they had identified sufficient investors to satisfy the TARP capital contingency. Farkas and his TBW co-conspirators diverted $25 million from Ocala Funding into an escrow account and falsely represented that the money was on behalf of capital raise investors. Farkas and his TBW co-conspirators caused Colonial BancGroup to issue a false and misleading financial statement to the Securities and Exchange Commission (SEC) and press release announcing the success of the capital raise. Ultimately, Colonial BancGroup did not receive any TARP funds.

Evidence at trial also established that Farkas and his co-conspirators caused Colonial BancGroup to file materially false financial data with the SEC regarding its assets in annual reports contained in Forms 10-K and quarterly filings contained in Forms 10-Q. Colonial BancGroup’s materially false financial data included overstated assets for mortgage loans that had little to no value that Farkas and his co-conspirators caused Colonial Bank to purchase. Farkas and his co-conspirators also caused TBW to submit materially false financial data to the Government National Mortgage Association (Ginnie Mae) in order to extend TBW’s authority to issue Ginnie Mae mortgage-backed securities.

According to court documents and evidence presented at trial, Farkas also personally misappropriated more than $20 million from TBW and Colonial Bank to finance his lifestyle, including purchasing multiple homes, scores of cars, a jet and sea plane, and restaurants and bars.

In August 2009, the Alabama State Banking Department, Colonial Bank’s regulator, seized the bank and appointed the FDIC as receiver. Colonial BancGroup also filed for bankruptcy in August 2009.

“The successful prosecution of Farkas and his associates highlights the commitment and combined efforts of DOJ and federal law enforcement to hold those responsible from all levels of a mortgage company,” said Acting Inspector General Stephens for HUD-OIG. “Efforts to protect FHA and Ginnie Mae are strengthened by this verdict.”

“Today’s verdict confirms that the former chairman of one of the leading mortgage lending firms in the Southeast engaged in criminal conduct during the mid-2000s,” said Inspector General Rymer of FDIC-OIG. “We are proud to work with our partners at the Justice Department’s Criminal Division and in the U.S. Attorney’s Office for the Eastern District of Virginia to bring to justice individuals whose fraud contributed significantly to the financial crisis and the failure of a major financial institution.”

“This conviction represents a victory for Freddie Mac and American taxpayers, who have invested $64.2 billion in Freddie Mac to date,” said Inspector General Linick of the FHFA-OIG. “ The fraud that Farkas perpetrated on Freddie Mac directly affected its bottom line and, in turn, American taxpayers. FHFA-OIG looks forward to future cooperative efforts with law enforcement partners to combat fraud against Freddie Mac, Fannie Mae, and the Federal Home Loan Banks.”

The case was prosecuted by Deputy Chief Patrick Stokes and Trial Attorney Robert Zink of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Charles Connolly and Paul Nathanson of the Eastern District of Virginia. This case was investigated by the FBI’s Washington Field Office, SIGTARP, FDIC-OIG, HUD-OIG, FHFA-OIG, and the IRS Criminal Investigation. The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury also provided support in the investigation. The Department of Justice would like to thank the SEC for their assistance.

This conviction is part of efforts underway by President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency task force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information about the task force visit: www.stopfraud.gov.

Defendants Allegedly Fraudulently Obtained Nearly $22 Million in Loan Proceeds

DALLAS—A 29-count indictment, returned last week by a federal grand jury in Dallas and unsealed this week, charges five individuals with various felony offenses related to a mortgage fraud scheme they ran for nearly three years in the Dallas-Fort Worth area, announced U.S. Attorney James T. Jacks of the Northern District of Texas (NDTX).

The indictment charges Michael Anthony Baker, 31, presently of Houston, Texas; Monique Untae Stallworth, 37, of Garland, Texas; Sterling Wesley Harris, 29, of Dallas; Koreem Dujuan Baker, 34, of Dallas; and Folami Dayo Baker, 36, of Desoto, Texas; each with one count of conspiracy to commit wire fraud. Michael Baker was a Dallas resident at the time of the alleged fraud. Michael and Koreem Bakers are brothers.

Harris appeared earlier this week before U.S. Magistrate Judge Irma C. Ramirez for his initial appearance and was released on personal recognizance bond. Michael Baker, Stallworth, and Folami Baker are expected to surrender within a few days. Koreem Baker is currently in state custody and is expected to be transported to the NDTX within the next few weeks.

The indictment alleges that the defendants operated a mortgage fraud conspiracy from December 2004 until at least October 2007 to defraud and obtain money from lending institutions by, among other things, using straw buyers to purchase homes by submitting false and fraudulent documents and statements to lenders. In total, the indictment alleges that the defendants obtained nearly $22 million in fraudulently obtained loan proceeds.

In addition, all of the defendants are charged with multiple substantive counts of wire fraud. Michael Baker is charged with one count of money laundering, and Koreem Baker is charged with 16 counts of engaging in a monetary transaction with criminally derived property.

The indictment alleges that the defendants profited from loans to purchase residences in the Dallas area; fraudulently obtained mortgages in others’ names; fraudulently obtained mortgages for more than the sales price; fraudulently found individuals with sufficient credit to qualify for the loans; fraudulently made each borrower appear to be a qualified, bona fide purchaser who intended to reside in the property, when the borrower had no intention of doing so; fraudulently created surplus loan proceeds by creating bogus invoices for repairs/upgrades which were never done; fraudulently allowed the residences to go into foreclosure after no, or just a few, payments were made on the loan; and fraudulently shared in the surplus loan proceeds.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes. For more information about the task force visit: www.stopfraud.gov.

An indictment is an accusation by a federal grand jury, and a defendant is entitled to the presumption of innocence unless proven guilty. If convicted, however, the conspiracy to commit wire fraud count and each of the substantive wire fraud counts carries a maximum statutory sentence of 20 years in prison and a $250,000 fine. The money laundering count carries a maximum statutory sentence of 20 years in prison and a $500,000 fine, upon conviction. Each of the counts charging engaging in a monetary transaction with criminally derived property carries a maximum statutory sentence of 10 years in prison and a $250,000 fine, upon conviction. The indictment also includes a forfeiture allegation which would require any convicted defendant to forfeit to the U.S. proceeds or property traceable to their offenses.

The case is being investigated by the Internal Revenue Service – Criminal Investigation and the FBI. Assistant U.S. Attorney J. Nicholas Bunch is in charge of the prosecution.

HOUSTON—Vincent Wallace Aldridge and Tori Aldridge, both of Fresno, Texas, surrendered themselves to federal authorities as a result of the return of a 19-count indictment arising from an alleged scheme to defraud residential mortgage lenders of more than $3.7 million in connection with home purchases in the Houston area, United States Attorney José Angel Moreno, FBI Special Agent in Charge Richard C. Powers, and Internal Revenue Service-Criminal Investigation (IRS-CI) Special Agent in Charge Rodney E. Clarke announced today. Vincent Aldridge, 45, is a former fee attorney of First Southwestern Title Company and attorney with Aldridge and Associates, while Tori Aldridge, 32, is a former employee of the same title company.

Vincent and Tori Aldridge surrendered to special agents of the FBI and IRS-CI at the FBI this morning and both are expected to make their initial appearances before U.S. Magistrate Judge John R. Froeschner in Houston later today. A third defendant, Gilbert Barry Isgar, 50, of Katy, Texas, the co-owner of Waterford Homes, appeared before U.S. Magistrate Judge John R. Froeschner earlier this week pursuant to a summons. Isgar was arraigned and his case was set for jury selection and trial before U.S. District Court Judge Sim Lake on May 24, 2010.

The 19-count indictment returned by a Houston grand jury on Thursday, March 25, 2010, accuses Vincent Aldridge, Tori Aldridge, and Isgar of conspiracy to commit wire fraud, wire fraud, conspiracy to commit money laundering, and money laundering.

According to the allegations in the indictment, Vincent and Tori Aldridge and Isgar conspired to devise and execute a scheme during 2004 and 2005 to receive proceeds from real estate transactions based upon materially fraudulent information that was intentionally supplied to at least three lending institutions as the basis for an agreement between the lending institutions and borrowers.

Vincent Aldridge allegedly lured borrowers by representing the scheme as an investment opportunity. For the use of the borrowers’ credit to obtain mortgage loans, they were promised $10,000 after the closing of their respective property. They were also allegedly told that the property would be sold after a year for a profit. Once a borrower agreed to the deal, Vincent Aldridge and Tori Aldridge acting as both an escrow officer and a loan processor and met with the borrower to obtain the necessary personal identifying information to complete the borrower’s lending package.

Prior to the submission of the lending packages to the lending institutions, it is alleged that Vincent and Tori Aldridge modified the lending package to enhance the borrower’s ability to qualify for the requested loan. These enhancements, according to the indictment, included fraudulently overstating the borrower’s income, misrepresenting the borrower’s principal residence as rental property and misrepresenting the purchase property as the principal residence. The mortgage loans totaled approximately $3,700,000. Each property sold in amounts between $344,000 and $365,000 and were funded to First Southwestern Title Company by wire.

As a part of the scheme, the indictment alleges that Isgar, co-owner of Waterford Custom Homes, inflated the sales price of the properties to be purchased by the aforementioned recruited borrowers. As a part of the alleged illicit agreement between the Aldridges and Isgar, the Aldridges were to receive the proceeds of their scheme by including disbursement authorizations for attorney’s fees signed by Isgar to the title company prior to closing. These amounts were listed on the loan closing documents as seller disbursements for attorney fees and were in addition to the attorney’s fees stated on the attorney fee line in the closing documents.

Once the loans were funded to the title company, the Aldridges are accused of causing several checks to be drawn on the account of the title company, each totaling more than $10,000, payable to a bank account controlled by Aldridge & Associates. The checks totaled approximately $442,089 and represented a portion of the illicit proceeds obtained through the mortgage fraud scheme.

The maximum penalty, upon conviction, for the conspiracy to commit wire fraud and each of the 11 wire fraud counts is 20 years in prison as well as substantial fines. The maximum penalty for the conspiracy to launder money and for each of the six money laundering counts is 10 years in prison. A conviction for money laundering carries the most significant fine of $250,000 or twice the amount of the criminally derived property, whichever is greater.

Assistant United States Attorney Jennifer Lowery is prosecuting the case.

The investigation leading to the charges was conducted by the FBI and IRS-CI, members of President Obama’s Financial Fraud Task Force. The President established the interagency Financial Fraud Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task fforce includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement, who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets and recover proceeds for victims of financial crimes.

PHILADELPHIA—Frank J. Dattilo, 64, of Holland, Pennsylvania, was sentenced today to 15 months in prison for a scheme to defraud mortgage lenders in an effort to obtain money and property, announced United States Attorney Zane David Memeger. DAttilo was the owner and operator of the mortgage brokerage firm Provident Financial Group (“PFG”), located in Bensalem, PA. He employed Michael Giello as a mortgage broker and loan officer, and Jason Megow as a loan processor. Dattilo marketed to people with poor credit or low incomes. Between January 2004 and February 2007, Dattilo, Giello, and Megos created false documents for use in mortgage applications. The falsified forms, among other things, overstated borrowers’ income, falsely showed that borrowers had rental histories, and showed that a property was an income-producing rental property when, in fact, it was not. These fraudulent documents made borrowers appear more creditworthy than they were, thereby misleading the banks into funding the mortgage loans.
All three defendants pleaded guilty to two counts, each, of mail fraud. Giello was sentenced to one year and one day; Megow was sentenced to one day in prison and five years of supervised release. In addition to the prison term, U.S. District Court Judge Norma Shapiro ordered the three defendants to pay total restitution in the amount of $117,673.66.
This case was investigated by the Federal Bureau of Investigation and Pennsylvania Department of Banking. It was prosecuted by Assistant United States Attorney Maria M. Carrillo.

DALLAS—Three Dallas businessmen, Mark Manners, Robert L. Loeb, and Andrew Siebert, who were involved in a massive mortgage fraud scheme that they ran in the area, were sentenced this afternoon by U.S. District Judge Barbara M.G. Lynn, announced James T. Jacks, acting U.S. Attorney for the Northern District of Texas.

Mark Manners was sentenced to 30 months in prison, followed by three years of supervised release, and ordered to pay $1,762,362.71 in restitution.

Robert L. Loeb was sentenced to 18 months in prison, followed by two years of supervised release, and ordered to pay $2,027,841,34 restitution.

Andrew Siebert was sentenced to 60 months in prison, followed by three years of supervised release, and ordered to pay $2,027,841.34 restitution.

Their co-defendant in the scheme, Charles Cooper Burgess, 53, was sentenced in March 2008 to nearly 22 years in prison and ordered to pay more than $3 million in restitution for his role in this mortgage fraud scheme and another scheme involving golf course property in Arkansas. Burgess pled guilty in January 2006 to his involvement in two fraudulent schemes, one involving mortgage fraud and one involving defrauding individuals who invested in golf course property in Arkansas. In November and December 2006, Burgess testified about Manners and Siebert’s extensive role in the mortgage fraud scheme. At the conclusion of that trial, both Manners and Siebert were convicted.

Regarding the mortgage fraud scheme, Burgess admitted that he recruited 20 straw buyers with good credit but limited funds to sign loan and closing documents to purchase homes. As part of a signed “investor management agreement,” Burgess promised to provide the down payment at closing as well as make all mortgage payments. When Burgess’s company needed additional funds for borrower down payments, Siebert agreed to steal bank escrow funds for the borrowers’ down payment. As part of the scheme, Siebert also falsified settlement document on at least 20 loan closings. Siebert only agreed to steal these escrow funds if Burgess agreed to pay Siebert $5000 from each closing as a “kickback payment.” Evidence at trial showed that Siebert stole escrow funds on 20 separate loans and then concealed the theft of these lender funds by falsifying loan closing documents.

Siebert stole lender funds held in escrow and then provided these funds to Manners prior to closing so that Manners could purchase a cashier’s check in the name of the straw buyer. When Siebert received the cashier’s check back from Manners, Siebert falsely certified to the lender on the settlement statement that the down payment came from the borrower. On the settlement statement, Siebert also fraudulently accounted for disbursements to Burgess’ company by falsely listing the expense as a phony lien pay off, or as a “marketing and relocation fee” due to Burgess’ company. Eleven different lenders testified at trial that Siebert falsified the settlement statements to conceal his wrongful and fraudulent release of lender escrow funds. Each lender testified that the loan would never have been funded if the lender had known about the fraudulent use of lender escrow funds.

From December 2002 through March 2004, Siebert stole escrow funds which resulted in the loss of $2,027,841 to 16 different lenders. As a result of Siebert submitting false certifications on settlement statements for each of these 20 loans, Siebert and Manners fraudulently induced the disbursement of loans totaling more than $7 million.

Acting U.S. Attorney Jacks praised the investigative efforts of the Federal Bureau of Investigation and the Federal Deposit Insurance Corporation, Office of Inspector General. The case was prosecuted by Special Assistant U.S. Attorney William M. Martin of the U.S. Department of Justice Anti-Trust Division and Assistant U.S. Attorney David Jarvis.

DALLAS—Three Dallas businessmen, Mark Manners, Robert L. Loeb, and Andrew Siebert, who were involved in a massive mortgage fraud scheme that they ran in the area, were sentenced this afternoon by U.S. District Judge Barbara M.G. Lynn, announced James T. Jacks, acting U.S. Attorney for the Northern District of Texas.

Mark Manners was sentenced to 30 months in prison, followed by three years of supervised release, and ordered to pay $1,762,362.71 in restitution.

Robert L. Loeb was sentenced to 18 months in prison, followed by two years of supervised release, and ordered to pay $2,027,841,34 restitution.

Andrew Siebert was sentenced to 60 months in prison, followed by three years of supervised release, and ordered to pay $2,027,841.34 restitution.

Their co-defendant in the scheme, Charles Cooper Burgess, 53, was sentenced in March 2008 to nearly 22 years in prison and ordered to pay more than $3 million in restitution for his role in this mortgage fraud scheme and another scheme involving golf course property in Arkansas. Burgess pled guilty in January 2006 to his involvement in two fraudulent schemes, one involving mortgage fraud and one involving defrauding individuals who invested in golf course property in Arkansas. In November and December 2006, Burgess testified about Manners and Siebert’s extensive role in the mortgage fraud scheme. At the conclusion of that trial, both Manners and Siebert were convicted.

Regarding the mortgage fraud scheme, Burgess admitted that he recruited 20 straw buyers with good credit but limited funds to sign loan and closing documents to purchase homes. As part of a signed “investor management agreement,” Burgess promised to provide the down payment at closing as well as make all mortgage payments. When Burgess’s company needed additional funds for borrower down payments, Siebert agreed to steal bank escrow funds for the borrowers’ down payment. As part of the scheme, Siebert also falsified settlement document on at least 20 loan closings. Siebert only agreed to steal these escrow funds if Burgess agreed to pay Siebert $5000 from each closing as a “kickback payment.” Evidence at trial showed that Siebert stole escrow funds on 20 separate loans and then concealed the theft of these lender funds by falsifying loan closing documents.

Siebert stole lender funds held in escrow and then provided these funds to Manners prior to closing so that Manners could purchase a cashier’s check in the name of the straw buyer. When Siebert received the cashier’s check back from Manners, Siebert falsely certified to the lender on the settlement statement that the down payment came from the borrower. On the settlement statement, Siebert also fraudulently accounted for disbursements to Burgess’ company by falsely listing the expense as a phony lien pay off, or as a “marketing and relocation fee” due to Burgess’ company. Eleven different lenders testified at trial that Siebert falsified the settlement statements to conceal his wrongful and fraudulent release of lender escrow funds. Each lender testified that the loan would never have been funded if the lender had known about the fraudulent use of lender escrow funds.

From December 2002 through March 2004, Siebert stole escrow funds which resulted in the loss of $2,027,841 to 16 different lenders. As a result of Siebert submitting false certifications on settlement statements for each of these 20 loans, Siebert and Manners fraudulently induced the disbursement of loans totaling more than $7 million.

Acting U.S. Attorney Jacks praised the investigative efforts of the Federal Bureau of Investigation and the Federal Deposit Insurance Corporation, Office of Inspector General. The case was prosecuted by Special Assistant U.S. Attorney William M. Martin of the U.S. Department of Justice Anti-Trust Division and Assistant U.S. Attorney David Jarvis.

Speaking to reporters by phone during this morning’s White House Press Briefing, White House spokeswoman Dana Perino said President Bush is now prepared to sign the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, which is expected to receive full Congressional approval by this time tomorrow. According the legislation, H.R. 3221 will help families facing foreclosure keep their homes, help other families avoid foreclosures in the future, and help the recovery of communities harmed by empty homes caught in the foreclosure process.

To shore up the housing market and ensure the availability of affordable home loans, H.R. 3221 would put a new, independent regulator in charge of housing Government Sponsored Enterprises (i.e., GSEs — Fannie Mae, Freddie Mac, and the Federal Home Loan banks), which is said to be vital to both the financial markets and homeowners. The new regulator is expected to be far better prepared than the current system is to quickly and effectively respond to issues affecting the safe and sound operation of Fannie Mae, Freddie Mac, and Federal Home Loan banks.

The centerpiece of the bill provides assistance to a large number of homeowners now in danger of losing their homes. Lower-cost government-insured mortgages–which Congressional leaders say come at no cost to the American taxpayer–will be offered if President Bush signs the Bill into law, but according to the Congressional Budget Office estimates, the plan could cost taxpayers around $25 billion.

Specifically, the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, includes the following provisions:

FHA Housing Stabilization and Homeownership Retention Act

1. Provides mortgage refinancing assistance to keep at least 400,000 families from losing their homes, to protect neighboring home values, and to help stabilize the housing market at no cost to American taxpayers.
2. Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.
3. Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout, legislators say; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal.
4. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
5. Contains critical protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
6. Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
7. Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

Strengthening Regulations of the GSEs

1. Puts an independent regulator in place with what are said to be significant responsibilities and powers so that Fannie Mae and Freddie Mac can safely and soundly work to provide families with affordable housing.
2. The new regulator will have enhanced authority to raise capital standards, set strict prudential standards, including internal controls, audits, and to enforce these new standards and promptly take corrective action.
3. The new regulator will oversee, and can directly restrict, executive compensation at Fannie Mae and Freddie Mac.
4. Raises the GSE loan limits for single family homes to create more affordable mortgage loans for moderately priced homes by allowing GSE loans up to 115% of the local area median home price, and to make GSE loans effective in high cost areas by raising the permanent loan limit from $417,000 to $625,500.
5. Creates a new permanent affordable housing trust fund–financed by the GSEs and not by taxpayers–to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.

Backstopping Fannie Mae and Freddie Mac To Shore Up the Housing Market

1. Gives the Secretary of the Treasury the authority to increase the already existing line of credit to Freddie and Fannie for the next 18 months, as well as giving the Treasury Department standby authority to buy stock in those companies to provide confidence in the GSEs and stabilize housing finance markets.
2. Includes taxpayer protections directing the Treasury Department to take the following into account, when using these authorities: A) Taxpayers should be first in line for being paid back, before other shareholders; and, B) There should be restrictions on dividends for shareholders and on compensation for the executives of the GSE’s until taxpayers are fully reimbursed.
3. Strengthens oversight by requiring the Federal Reserve and Treasury to consult with the new regulator on issues concerning the safety and soundness of the GSEs and use of the standby authority.

Stabilizing Neighborhoods Hurt by the Foreclosure Crisis

1. Provides $4 billion in emergency assistance (CDBG Funds) to communities hardest hit by the foreclosure and subprime crisis to purchase foreclosed homes, at a discount, and rehabilitate or redevelop the homes to stabilize neighborhoods and stem the significant losses in home values of neighboring homes.
2. Foreclosed and rehabilitated homes would be sold or rented to moderate-income individuals and families–those whose incomes do not exceed 120% of the area median income. At least 25% of the funds would be targeted to house low-income and very low-income persons and families–those whose incomes do not exceed 50% of area median income.
3. Any profit from the sale, rental, rehabilitation or redevelopment of these properties must be reinvested in affordable housing and neighborhood stabilization.
4. Provides $180 million for pre-foreclosure counseling, to be distributed in grants by the Neighborhood Reinvestment Cooperation (NeighborWorks), with 15% targeted for low-income and minority homeowners and neighborhoods, and $30 million in grants for legal counseling to assist homeowners in foreclosure.

Preventing Future Abuses and Crises

1. Establishes a nationwide loan originator licensing and registration system that will set minimum standards for loan originator licensing substantially improving the oversight of mortgage brokers and bank loan officers.
2. Establishes improved mortgage disclosure requirements that will help ensure that mortgage borrowers understand their mortgage loan terms.

FHA Modernization

1. Expands affordable mortgage loan opportunities for families (many of whom would otherwise turn to subprime lenders) and for seniors through expanded access to reverse mortgages through Federal Housing Administration reform.
2. Raises FHA loan limits to create affordable mortgage loans for moderately priced homes by allowing FHA loans up to 115% of the local area median home price, and to make GSE loans more available in high cost areas by raising the permanent loan limit from $362,790 to $625,500.
3. Expands opportunities for seniors to tap into equity in their home through FHA reverse mortgage loans, by increasing the loan limit for the program, reducing and capping lender fees for such loans, and strengthening consumer protections limiting the sale of other financial products in conjunction with FHA reverse mortgage loans.
4. Prevents HUD from raising single family loan fees on lower and middle-income borrowers, and from raising loan fees on FHA rental housing loans.

Preserving the American Dream for Our Nation’s Veterans

1. Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.
2. Helps returning soldiers avoid foreclosure and stay in their home by lengthening the time a lender must wait before starting foreclosure, from three months to nine months after a soldier returns from service and providing returning soldiers with one-year relief from increases in mortgage interest rates.
3. Requires the Department of Defense to establish a counseling program for veterans and active service members facing financial difficulties and provides a moving benefit to servicemen and women who are forced to move out because their rental housing was foreclosed on.
4. Increases benefits paid to veterans with disabilities, such as blindness, to adapt their housing and allows the Veterans Administration to provide for improvements to homes of veterans with service-connected disabilities.

Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720)

1. Provides $15 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $11 billion in mortgage revenue bonds for states, and improves access to low-income housing.
2. Gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500 (to be paid back over 15 years) to spur home buying and stabilize the market. The credit will begin to phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).
3. Provides taxpayers that claim the standard deduction with up to an additional $500 ($1,000 for a joint return) standard deduction for property taxes in 2008.
4. Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $11 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance the construction of low-income rental housing.
5. Temporary increase in low-income housing tax credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.

The Wall Street Journal reports this morning that President Bush’s support of the measure is a “dramatic split” for both Bush and congressional Republicans, many of whom the Journal says are “angrily opposed to the housing legislation, which they call a handout for irresponsible homeowners and unscrupulous lenders.” President Bush had voiced earlier objections to a provision that would give grants for local governments to purchase and refurbish foreclosed properties–a provision the White House feels amounts to nothing more than a bailout. But White House spokeswoman Perino said today that President Bush doesn’t feel this is the right time for a “…prolonged veto fight, but we are confident the President would prevail in one.”

According this morning’s edition of The Wall Street Journal, tensions are rising between federal and state authorities as the number of agencies–including the FBI, SEC, Justice Department, Office of Federal Housing Enterprise Oversight, and New York Attorney General Andrew Cuomo’s office–investigating mortgage fraud expands.

Cuomo, the Journal reports, “is in a tussle with the Office of Federal Housing Enterprise Oversight (OFHEO), the federal regulator that oversees mortgage giants Fannie Mae and Freddie Mac… Their dispute is over who should be the investigating allegations of fraudulent appraisals and mortgage fraud.”

From Kara Scannell at The Wall Street Journal:

The interaction of state and federal oversight has long been a political hot potato. Friction is expected to increase as rising number of participants — including the Justice Department and Securities and Exchange Commission — probe the mortgage area.

Mr. Cuomo’s office is precluded by law from investigating federally chartered banks, where federal oversight pre-empts state interest.

Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

When you apply for a loan, who takes your application? What role does that person play? Who does the person represent–you or the lender? What’s the difference between a mortgage broker, a loan officer, a loan originator, and a lender? For many consumers, the answers to these questions are a complete mystery.

First, let’s examine the title and the role that each of the various people play in providing mortgage loans:

• Lender: The lender is the person or institution that ultimately provides the money used to purchase the property. In the past, this was typically a bank, credit union, or savings and loan (S&L) that loaned out money that was deposited by its customers. Now, the term “lender” can also be applied to investors who purchase securities backed by mortgages.
• Mortgage broker: A mortgage broker is a person who acts as a middleman between the lender and the borrower. The mortgage broker typically has a selection of mortgages from a variety of lenders to offer to clients. The primary job of the mortgage broker is to match the borrower to a lender whose guidelines fit the borrower’s situation. The broker takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to a lender. If the borrower accepts the terms of the loan as offered by the lender, the borrower is then dealing through the mortgage broker with the lender. The mortgage broker is paid on commission that can come either from the borrower, the lender or both, but the broker is expected to help borrowers secure mortgage loans that best meet their needs and are affordable. Mortgage brokers are also called loan officers, although loan officers are not always brokers.
• Loan officer: A loan officer takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to the lender that they work for. A loan officer is “usually” an employee of a bank, savings and loan, or other lending institution. The loan officer is also paid a commission that can come from either the borrower, their employer/lender, or both, the same as the mortgage broker.
• Loan originator: Anyone who takes your application and advises you on your mortgage loan is a loan originator, even if the institution for which the person works allows them to “broker” the loan to another lender and even if the person is a licensed mortgage broker. The term “loan originator” is a more generic term for mortgage broker and loan officer.

Note: Mortgage brokers, loan officers, loan originators, and all salespeople, for that matter, who achieve long-term success are dedicated to serving the needs of their clients. The people who cause problems are the ones who typically enter the industry for short-term gain.

Although loan originators may, in some circumstances, (this can vary by state) have a fiduciary responsibility to the lenders who supply the products (mortgages) they sell, to be successful, they need to provide their clients (the borrowers) with affordable mortgages that best meet their needs and qualifications. When they achieve this goal, everyone wins–the lender, the borrower, and the loan originator.

Borrowers often become confused, because well-intentioned “experts” provide them with the wrong advice. These “experts” often offer misleading suggestions such as the following:

• “Go to the loan officer not to the broker”
• “The broker can serve you better then the loan officer”
• “Go to your bank not the mortgage broker”

The fact is that titles matter very little. A mortgage broker who has access to a diversity of mortgage loans may be able to give you a much better deal than your local bank is offering. A highly qualified loan officer may be more knowledgeable than a particular broker. As a consumer, you need to pick the individual whom you trust and with whom you feel most comfortable. Ask friends, family members, and colleagues for recommendations. Interview at least three loan originators and check their references. Don’t worry so much about the person’s title.

Too often in our society we rely on a person’s title alone to indicate competence. This is not a useful approach with all professionals whose services you seek.

You also have the right to seek legal advice during the entire process and be represented by an attorney (whose competence you have verified, as well). You need not only take the word of the lender, loan officer, loan originator or mortgage broker. Caveat emptor! (Buyer beware!)

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To leave a comment for the author: Please click on the “Comments” link below to leave a comment for the author or to share your opinion.
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Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by W. Greg Sugg.
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Financing and refinancing the purchase of a home has become incredibly easy. Mortgage lenders eager for your business are just a phone call or Web visit away. Fewer than 40 years ago, however, mortgage loans were not nearly as accessible, especially if you were seeking a loan to cash out the equity in your home or to purchase a vacation home or income or rental property. Money and credit were tight.

Until Fannie Mae (FNMA) and Freddie Mac (FHLMC) came along, local sources were pretty much solely responsible for providing money to buy homes. Once the local bank met its lending limit based on its deposit pool, it was closed for loans until either a loan was paid off or more deposits came in.

Over the course of a few short decades, all that has changed. The source for capital to finance mortgages has moved from Main Street to Wall Street. This revolutionary change in the mortgage lending industry has had its share of benefits and drawbacks. While it has made more money available for more people to purchase homes, it has also contributed significantly to the current mortgage meltdown and credit crunch.

The whole idea behind the creation of Fannie Mae and Freddie Mac was brilliant. Created and chartered as “quasi-government agencies” these companies could raise capital at more affordable rates than the private sector. Investors could purchase mortgage loans from local and national banks and other lenders, enabling lenders to get their money back to lend again and again.

The concept was very simple, but to make it run smoothly, guidelines needed to be established to define which loans the agencies would purchase. These guidelines would need to set standards for things like down payment, borrower income, credit, and appraised value. Creating standards for mortgage loans made the pooling of these common types of loans into batches or securities easier and enabled investors to have a clearer understanding of what they were buying.

To simplify the process even more, Fannie and Freddie became the purchaser, packager, and re-seller of mortgage loans from all over the country. This worked so well over the last several decades that pretty much anyone who knew the standards could sell loans to these agencies. The agencies would then, with the assistance of Wall Street bankers, bundle the loans and sell them as mortgage-backed securities (MBS) to investors.

Contrary to what many people assume, the investors who purchase mortgage-backed securities are not all Wall Street fat cats with tons of money. An investor could be you, your neighbor, or the widow down the street. Anyone with money invested in a savings plan, IRA, mutual fund, insurance annuity, or any other managed fund may be an investor in all sorts of things. In fact, if you read the “prospectus” or simply the list of what the fund manager has your money invested in, you likely will see a mention of mortgage-backed securities among other things like stocks and bonds.

These pooled loans traditionally have provided a safe stable rate of return with little risk and therefore have functioned as good investment choices to balance against other more volatile investments, such as stocks.

By enabling investors to indirectly finance the purchase of homes, the American dream of homeownership became much more accessible to many more people and enabled the mortgage banking and real estate industry to grow to the enormous size we see today. In fact, several trillions of dollars are lent annually by all types of lenders in an industry that employs hundreds of thousands of people.

Until recently, the system was very reliable, primarily because the standards that Fannie and Freddie set for mortgage loans were strict. Lenders simply wouldn’t approve a mortgage loan for borrowers unless they could put 20% down, had a good job with a couple years tenure, had an excellent credit history, and were purchasing in a solid neighborhood with appreciating values. Many borrowers could qualify under the more liberal FHA or VA guidelines, but those loans were insured by the federal government. If neither of those government agencies approved your loan and you couldn’t convince the seller to finance it for you, you were out of luck.

During the last major credit squeeze of the early 80′s when mortgage interest rates were in the upper teens, many people who wanted to purchase homes simply could not qualify for mortgage loans under the strict guidelines. As a result, Fannie, Freddie, Wall Street, and the lending community decided to do something to make credit more affordable and attainable. First came the creation of adjustable rate and graduated payment mortgages with starting rates less than the fixed rate programs. After those types of loans became common, the industry began to relax certain guidelines. For example, borrowers were allowed to make lower down payments as long as they purchased private mortgage insurance (PMI), or they could make a larger down payment, say 30%, to avoid having to provide employment verification. All of these changes were designed to make the process faster, more affordable, and more accessible to more people. In many cases it did, but it also opened the door to fraud.

We relaxed standards and created a host of products to make the American dream of homeownership more accessible to more people, to create a higher demand for our products, and to feed Wall Street’s insatiable appetite for mortgage-backed securities. In the process, we took our eye off the ball. In fact, this industry should have gone through a natural slow down when rates edged up in 2005, but instead, with much help from Wall Street and its big banking houses, we created products such as payment option arms (POI’s) that allowed anyone, and I mean anyone, the ability to purchase not only one home, but pretty much as many as they wanted on the “if come” that values would never fall because demand was so high. However, the demand was artificially created by allowing the pool of buyers and potential buyers to grow on the promise of cheap money and cash-out capital from endless appreciation.

The loosening of underwriting guidelines and cheap money compounded the problem by attracting people to the industry who were not fully qualified and committed to the health of the industry.

With rising property values and an influx of cash from Wall Street, money was abundant, greed soon followed, and close on its heels was fraud. The relaxation of the standards that made an industry grow began to undermine its very foundation. Our current “mortgage meltdown,” “credit crunch,” and “sub prime crisis” are all products of greed and fraud. Please don’t confuse this with “predatory lending” which is entirely another issue. Mortgage fraud occurs when a borrower knowingly engages in a transaction, usually with the assistance of one or more industry insiders (such as a loan officer, real estate agent, or appraiser), to fool a lender into approving a loan that the lender would not approve if it knew the truth. Usually, mortgage fraud is committed to gain profit or housing; either way, it is illegal.

The winners in fraudulent transactions are typically a select few. The losers are many. Lenders and investors lose money. Investors lose confidence in the market. Housing markets become unstable. Credit tightens making the American dream of homeownership less accessible. Home values crash, so homeowners cannot even refinance their way out of trouble. Foreclosures, as we have already begun to see, skyrocket, and neighborhoods begin to crumble. Local, state, national economies suffer. Even the global economy takes a hit.

The big story and likely the most costly tragedy impacts all the loans that currently are serviced and being paid by those of us that own a home and have a mortgage. One of the biggest financial crises yet to totally unfold as I write this, are the astronomical losses that banks and mortgage servicers are taking to adjust the values of the mortgages and mortgage-backed securities they hold and collect payments for. As the quality of the loans in default have become known and the numbers of them have increased, Wall Street and the rating agencies have downgraded their views on purchasing mortgage-backed securities and credit has dried up for all but the most ridiculously pristine borrowers.

Even though the vast majority of homeowners with mortgages are still paying on their loans, the value the mortgage banker carries it for on their books has to be reduced, resulting in large losses against current earnings. This further hurts the housing industry as those write downs take the capital that would normally be used to run the business and provide credit.

Experts have estimated that we will not be out of this housing mess until 2009 in most areas of the country. It is amazing to me what going too far to bend the rules and create demand has done. Interestingly enough, in the last five or so years Europe and other places throughout the world used the U.S. mortgage industry as a model for efficient flow of capital. They were fast followers and unfortunately, they too are feeling the sting of their own credit crunch. There is no doubt this cycle will end sometime, but when and at what permanent cost are still unanswered questions.

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Editor’s Note: The proceeding Guest Commentary was written exclusively for FlippingFrenzy.com by W. Greg Sugg. To leave a comment for Mr. Sugg, please click on the “Comments” link below.
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During the current mortgage meltdown, the press has turned its focus on the most obvious culprits–the irresponsible and often unethical loan officers, mortgage brokers, appraisers, Realtors, and even the borrowers. Those are the people I like to call the riggers–the people you usually think of when you picture someone taking out a loan or buying a home.

Working behind the scenes, however, are other culprits who facilitate and often encourage the riggers to commit fraud. These are the people I call the triggers. When the triggers and the riggers got together, they ignited the blaze that has engulfed the mortgage industry. The riggers spilled the gas, and the triggers dropped the match. Now homes, communities, cities, states, and the entire nation are ablaze.

Recently while talking to a senior underwriter for a major Wall Street bank, she shared with me that she had witnessed the sinister inner workings of the lending industry first hand. The underwriter’s job is to provide an unbiased assessment of the risk level of a particular loan. This particular underwriter has always taken great pride in protecting the lender/investor from approving overly risky loans and protecting the borrower from becoming saddled with debt that he or she cannot repay.

She and her colleagues did their best to identify bad loans and sound the alarms, but the bank’s managers and account executives prevented them from doing their jobs. The underwriters were expected to let the loans slide through the approval process despite the fact that many of these loans should never have be approved. The underwriters were told that they should be happy to have jobs.

Feeling the stress of being forced to act unethically, many of her colleagues resigned. This particular person felt that it was her responsibility to remain on the job and call attention to this problem from the inside, where she could witness this institutional fraud with her own eyes. Currently, I cannot disclose the identity of my source or the bank she works for.

SLC: Submit, Lock, and Close

What this senior underwriter and her colleagues have witnessed can be summed up in a single acronym: SLC (Submit, Lock, and Close). As soon as a loan application is submitted , they lock their focus on it and move it through closing. It’s like a sweat shop for the loan industry, an assembly line, no questions asked, where they approve and process as many loans as possible, so they can make money and stay in business.

As underwriters, they have called their managers’ attention to blatant signs of fraud–fraudulent income and assets, questionable transactions, and so on. The managers have told them to let it go. They call it a “business decision,” a “relationship building tool.” In fact, it’s fraud, plain and simple.

How It Works

In the good old days, lenders viewed underwriters as the good guys and gals, protecting lenders from approving bad loans. Most recently, however, brokers and account executives, driven by greed, have found ways to work directly with one another to bypass the underwriter.

Here’s how the relationship typically develops:

1. A prospective borrower visits a mortgage broker to take out a loan.
2. The loan officer (working on behalf of the broker) has the borrower complete the loan application and then collects all the documentation, packages it up, and sends it to the lender/investor for approval.
3. All files go to underwriting.
4. A senior underwriter examines the documentation and discovers a problem; for example, a fraudulent pay stub. He reports the problem to his manager. The good news is that the senior underwriter has done his job to protect the lender/investor.
5. The loan officer is informed that the loan application he has submitted has been rejected.
6. The loan officer reports the problem to the manager of the mortgage company.
7. The manager of the mortgage company contacts the account executive for the lender/investor and threatens to pull his 20 closings a month, which would negatively affect the income of the account manager.
8. The account executive approaches the manager of the underwriting department and reminds him that they both get paid on volume and that this loan needs to be approved in order to preserve future business.
9. The underwriting manager instructs the senior underwriter to approve the loan and simply document any concerns that she may have in order to protect herself. The manager justifies approving the loan as a business decision that is beyond the senior underwriter’s pay scale.

As you can see, the system in place is designed to protect the lender/investor, and it would work well if the underwriters were allowed to do their jobs. The trouble is that, in this case, greed has turned the system upside down, exposing the lender/investor to loans that are likely to have high default rates.

In the process, the mortgage broker/loan officer loses all respect for the underwriter’s decisions and calls the account executive on every file. The account executive calls the manager who rubber stamps every file, overriding the underwriters, who have no power to stop it. According to my source, “The managers would overturn every decision to deny a loan, every request for complete documents, bank statements, or pay stubs. Everything we questioned in our capacity as underwriters was overridden.”

The Hype

The underwriters were reminded daily of all the companies like theirs that were shutting down as a result of the mortgage meltdown and that their company was one of the few survivors. They were told to keep closing loans. With all of those other companies going out of business, they now had a golden opportunity to increase market share and become the lender of choice. They were told that management was aware and that they were over staffed, but because they were doing so much business, nobody would have to be laid off. They didn’t have to worry about having a job as long as they continued to close loans. “It’s a bad time to be looking for a job in this industry, so we all need to work together.”

From my perspective, this is just one of the pieces that contributed to the mortgage meltdown and why it will continue until the underwriters are allowed to do their jobs. As I have always stated, it takes more then one to hold a “fraud party.” Most people would never imagine that the lending industry functions as a good ol’ boys network, with favors being traded to the detriment of consumers, the industry, and the entire economy, but that’s exactly what’s going on, and it continues even with all the bad press swirling around.

This situation has been turned into the authorities, and FBI interviews have begun. To the credit of this lender/investor, once they were presented with the information, they acted quickly and have already released one of the offenders from employment. There is more that needs fixing, however, than simply removing a few bad apples. This case demonstrates several problems:

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• Lenders being pressured to approve more loans to feed Wall Street’s insatiable appetite for mortgage-backed securities
• Lowering the FICO score to allow more borrowers to qualify for mortgage loans
• Risky products, including adjustable-rate mortgages, being pushed on unsophisticated borrowers
• A system of checks and balances that was designed to curb irresponsible lending but that was all too easy to circumvent
• Greed, pure and simple

On the heels of news from the Mortgage Bankers Associations that the the delinquency rate for mortgage loans now sits at its highest since 1986, President Bush today announced what the White House is spinning as a major initiative to “limit the rise in foreclosures that would have negative consequences for our economy” (said differently, the President’s plan targets the estimated 1.2 million American homeowners who can afford their mortgages at the current rate, but not at the higher interest rate that their adjustable-rate loans are about to reset to).

First up on the President’s plan: “FHA Secure.” A program that gives the FHA greater flexibility to offset refinancing to homeowners — to offer refinancing to homeowners who have good credit histories but cannot afford their current payments. In just three months, according to the President, the FHA has helped more than 35,000 people refinance. And in the coming year, the FHA expects this program to help more than 300,000 families.

Next up: “HOPE NOW Alliance.” in August, President Bush asked members of his Cabinet to work with trade associations, lenders, loan servicers, mortgage counselors and investors (including American Financial Services Association, American Securitization Forum, Assurant, Inc., Bank of America, CCCS Atlanta, Inc., Citigroup Inc., Consumer Bankers Association, Consumer Mortgage Coalition, Countrywide Financial Corporation, Fannie Mae, The Financial Services Roundtable, First Horizon National Corporation, Freddie Mac, GMAC ResCap, Homeownership Preservation Foundation, Housing Partnership Network, The Housing Policy Council, HSBC North America Holdings, Inc., JPMorgan Chase & Co, National City, NeighborWorks America, Mortgage Bankers Association, Option One Mortgage, PMI Mortgage Insurance Co., Securities Industry and Financial Markets Association, State Farm Insurance Companies, SunTrust Mortgage, Inc., Washington Mutual, Inc., Wells Fargo & Company.) on an initiative to help struggling homeowners find a way to refinance. HOPE NOW, according to the President, is an example of government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies and without government mandates.

According to the President, representatives of the HOPE NOW Alliance plan to help homeowners who will not be able to make the higher payments on their sub-prime loan once the interest rates goes up — but only those who can at least afford the current, starter rate. HOPE NOW members have agreed on a set of industry-wide standards to provide relief to these borrowers in one of three ways:

1. By refinancing an existing loan into a new private mortgage
2. By moving them into an FHA Secure loan
3. Or by freezing their current interest rate for five years

Lenders, President Bush says, are already refinancing and modifying mortgages on a case-by-case basis. With this systematic approach, HOPE NOW says it will be able to help large groups of homeowners all at once. This will bring relief to more homeowners more quickly, says President Bush. The HOPE NOW Alliance estimates there are up to 1.2 million American homeowners who could be eligible for their assistance.

Finally, according to the President, the federal government is taking several regulatory actions to make the mortgage industry more transparent, reliable and fair (sorry, no catchy name for this program). President Bush says later this month, the Federal Reserve intends to announce stronger lending standards that will help protect borrowers. At the same time, HUD and federal banking regulators said to be taking steps to improve disclosure requirements — so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages.

As the federal government take these steps, President Bush indicated that the Department of Justice will continue to pursue fraud in the banking and housing industries — so we can help ensure that those who defraud American consumers face justice.

So there you have it. This is how President Bush and members of his Cabinet intend to stop foreclosure-related bleeding in the housing market and save our current economy. While homeowners with good credit scores are going to be able to refinance their loans (with some lenders reportedly ready to waive prepayment penalties), the millions upon millions of Americans with poor credit — regardless of why the have a low credit score — and many of those American’s already facing foreclosure, are most likely going to be bounced to the curb.

While response to the President’s plan is sure to be swift, you yourself may be wondering how all of this impacts you (that is, if you are currently facing foreclosure or rent a property that is facing the same). For more on that, I am going to quote an often reliable source, BusinessWeek:

Can you get your mortgage payments lowered because of the bailout?

It depends. If you’ve got an adjustable-rate mortgage, you may qualify under certain conditions. If you’ve got a standard mortgage with a fixed interest rate, you’re not affected.

Which adjustable-rate mortgage holders are affected?

Only a small group. To qualify, you need to have received your loan sometime between Jan. 1, 2005 and July 31, 2007, and you need to be facing a reset of your interest rate sometime between Jan. 1, 2008 and July 31, 2010. If you’re within this range, you may be eligible to have your interest rate frozen, so you can keep your current, lower rate for five years.

Who qualifies within that range?

The bailout is really designed for homeowners who could run into trouble if their mortgage payments are raised sharply and face the prospect of losing their homes. If you’re well enough off that you can afford the higher mortgage payments after a reset, you won’t qualify. And if you’re in bad enough shape that you can’t handle the current low interest rate, you won’t qualify. For example, if you’ve already fallen behind on your mortgage payments, you’re not eligible for the rate freeze.

Do you need to live in your home to qualify?

Yes. The plan excludes people who don’t live in the homes for which they have mortgages so that speculators can’t benefit.

Why is there going to be a bailout?

Bush, Paulson, and the Administration are concerned about the fallout from the housing slump. If many people fall behind on their mortgages and have to give up their houses, there will be a series of negative repercussions. First, tens of thousands of Americans could be forced to leave their homes. They would lose whatever equity they had. Consumer spending more broadly would likely slow, hurting the economy overall. In addition, home prices could fall even more quickly than they are now. That could hurt consumer confidence well beyond those people directly affected.

Is the bailout going to be enough?

It depends on your definition of enough. The deal will add some stability to the housing market, but it won’t stop all the problems in the troubled sector. The same day Bush unveiled his plan, the Mortgage Bankers Assn. said that foreclosures had reached a record high in the third quarter. The share of mortgages that have entered foreclosure hit 0.78% in the quarter, up from the previous high of 0.65% set in the previous quarter. At the same time, delinquencies for all mortgages rose to 5.59%, from 5.12%, in the second quarter. None of the people who are delinquent or facing foreclosure will be helped by the plan.

Questions, comments, concerns? Please click on the “Comments” link below and let’s get some dialogue started on this one. We have a lot of experts that read and comment on a daily basis, as well as a lot of homeowners in need of help!

I received a press release the other day announcing that The U.S. Conference of Mayors would be holding a special meeting in Detroit tomorrow to address the “growing foreclosure crisis and its impact on American families, property values, neighborhood blight and crime.”

Outstanding, glad to here it… may I attend?

Nope… it’s a closed door meeting for a “select group of mayors” and leading non-profit counseling agencies, mortgage providers, and financial institutions to discuss crisis intervention strategies, loan modification and rescue programs and the maintenance and management of foreclosed properties to mitigate their negative effects on neighborhoods.

How interesting… why are Realtors not invited? (Sorry, I was told when I called; that is just the way it is.)

The press release goes on to say:

During the meeting, mayors will also release a report highlighting the economic ripple impact of the foreclosure crisis on U.S. cities/metros — specifically cities in Arizona, California, Michigan, Nevada and Ohio where the effects of the crisis are most prominent.

So in addition to discussing strategy, The U.S. Conference of Mayors is going to release a report telling us what RealtyTrac tells us in mind-blowing detail each and every quarter… namely, that the foreclosure crisis is worsening and is getting really, really bad in states like Arizona, California, Michigan, Nevada and Ohio? Well, thank God, because the cavalry is about to arrive… The U.S. Conference of Mayors is about to tell us how the bad the problem is, and better yet, how to fix it, boys and girls!

Here is a suggestion for the U.S. Conference of Mayors:

Update your precious Mayors 10-Point Plan: Strong Cities, Strong Families for a Strong America to include something–anything–related to protecting homeowners facing foreclosure.> The fact that your widely publicized and circulated plan contains not one single word related to the mortgage meltdown, foreclosure crisis, and Real Estate and Mortgage Fraud just goes to show how significant out of touch you really are!

How on Earth could these so called “leaders” have developed and released a 10-point legislative agenda on issues impacting cities and families back at the beginning of 2007 and not made any plans whatsoever to address foreclosure, the impact of mortgage payment reset, or Real Estate and Mortgage Fraud? For years now the FBI has been telling us that the fastest-growing white-collar crime in the United States is Real Estate and Mortgage Fraud, yet the much-heralded U.S. Conference of Mayors completely ignored the trend and chose instead to promote the following in its 10-point plan:

1. Energy and Environment Block Grant

2. Federal-Local Partnership on Crime Prevention (violent crime, not white-collar, in case you were wondering)
3. Community Development Block Grants
4. Affordable Housing Fund
5. Public Housing
6. Infrastructure Tax Incentive and Bonds
7. Competitive Workforce
8. Children and Youth (children’s health insurance, and summer and after-school youth programs)
9. Homeland Security
10. Unfunded Mandates/Preemptions

“The fastest-growing white collar crime in the United States.”

I’m not making that up–that statement comes directly from the FBI and has been repeated in 2006 and 2007, and yet the U.S. Conferences of Mayors doesn’t think to include boo about it in its 2007 10-point legislative agenda on issues impacting cities and families. Unreal. Simply jaw-dropping.

Here is another suggestion for The U.S. Conference of Mayors:

Rather than grandstand and issue hollow statements about how bad the problem is and that you’re now on the scene taking care of business, do something tangible:

• Start by doing what California recently did… negotiate with leading loan servicing companies–like Countrywide, GMAC, Litton, and HomEq–to streamline “fast-track” procedures that result in helping keep more sub-prime borrowers in their homes.
• Spur loan servicers to publicly commit to modifying loans in a streamlined and scalable manner.
• Bring Realtors to the table. Do not ignore us–we are a part of this mess too, and if you are sincere about moving forward with an educated base of homeowners, you must involve us.
• Commit to funding public awareness campaigns aimed at educating the masses on their rights, how to avoid foreclosure, and the warning signs associated with Real Estate and Mortgage Fraud.

Yes, this is a rant but an extremely timely and relevant one. When an organization as powerful and representative as The U.S. Conference of Mayors holds a meeting to discuss the growing foreclosure crisis and its impact on our families, property values, and crime, and fails to include Realtors as a part of the discussion, well, they should be called out and told what to do about it!

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Editor’s note: From time to time, Flipping Frenzy readers contact us offline to request that they be allowed to ‘guest blog’ an entry or two on a topic related to Real Estate and Mortgage Fraud. One such reader is Clearwater Beach, Florida-based Larry Rubinoff, who serves a branch manager for Mortgage Lending Direct, a dba of MLD Mortgage, Inc. To paraphrase, Larry says that much of the dialogue surrounding the current mortgage meltdown overlooks and ignores the dramatic impact the crisis is having on honest, hard working mortgage professionals like himself.

In his own words…

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The Real Face of the Meltdown
By Larry Rubinoff

There are millions of stories on what this mortgage meltdown has done to our population and to our economy. While we cannot address or recognize all of them, I will attempt to put a “face” on some of them through a series of guest blog entries, as the story cannot be told in just one.

To date, most of what we hear about are the millions of victims (the homeowners) and the hardships many of them are now facing. There are other victims as well who are also facing hardships due to the “meltdown.” One such group are the professional who work in the mortgage industry. The underwriters, the account executives, the loan originators, the processors, the clerks and staff of the hundreds of companies that have gone out of business not necessarily due to their actions or fraudulent deals, but just due to the shrinking of the real estate and mortgage markets. While this shakeout is getting a lot of bad apples out of the business, it is similarly forcing many good people out as well. My business, as well as the business of many of my friends, has shrunk to almost nothing but this does not even address the thousands of employees at the nearly 190 and counting companies that have gone out of business or those who have had to layoff staff just to survive the mess.

Almost 28,000 people per month are losing their jobs in the mortgage industry. Little is said or reported about them. Many of them are not counted in the unemployment rolls nor do they qualify for unemployment insurance. These people, though faceless, are homeowners themselves, and they too are losing their homes to foreclosure. Like many other people nowadays, they are heads of households with kids to support, car payments to make, and bills to pay (which in many cases they cannot, and like others, their credit is being destroyed). I would say that the majority of these newly unemployed were not the fraudsters, just the everyday hard working people putting in their 8 hours plus per day to feed and support their families.

Many of these people have been in the industry for 10 to 20 years and longer. They are now faced with the challenge of finding new careers and job-related training. In each case, this is becoming a difficult task. Many employers (in ads that I have actually seen) will not even entertain an applicant that has been in the mortgage industry. The belief, as has been constantly reported over the past year, is that anyone with mortgage industry experience is a bad apple; and when you stop to think about it, why would anyone want to hire a media-tried and convicted criminal. A Harvard law professor in an article in the Boston Globe even went as far as to say that all mortgage brokers were “crooks” who took Yield Spread Premium (YSP) from lenders which she called “bribes.” The fact is, the overwhelming majority of YSP are just ordinary mark-ups on a product to produce profit much like the can of the corn we typically find on a grocers shelf (which is marked up from their cost to cover overhead and produce a profit).

I know an underwriter who truly is one of the most knowledgeable people I know; someone who worked for one particular company for over 10 years yet was given only 30 minutes notice that her company was closing and she was terminated. I know and am friends with many brokers who are honest and knowledgeable and who always worked for the best interest of their clients — yet they too are now out of work and are faced with the prospect of having to end their careers. My own stepdaughter is even a casualty in all of this. I brought her into the business nearly eight years ago as an administrator and processor, and she ultimately became my director of branch relations. When I relocated my business and she was unable to move with us, she went to work for a former associate of ours. He is one of the good guys who at the end of this month will be closing his doors after over 20 years in the business. While he will be ok, my stepdaughter may not be. She has applied for over 100 jobs, makes at least five new contacts a day, and has not had one response as of yet. She is a single mother of two children, and is extremely well qualified in operations, accounting and administration.

While what is happening to homeowners is truly tragic, we do not hear nearly enough about the professionals who have been similarly impacted (they number well over 100,000 and growing). Sadly, all of us are victims, which is even more reason for all of us–homeowners and professionals alike–to educate ourselves and police our motives and actions.

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To leave a comment for the author: Please click on the “Comments” link below to leave a comment for the author or to share your opinion.
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Strongly recommended reading from a very well respected colleague… Ann Fulmer of Interthinx (courtesy of National Mortgage News Online):

What Goes Around…

By Ann Fulmer, VP of Industry Relations, Interthinx

The mortgage lending landscape has changed dramatically in the past few months. Dozens of lenders have gone out of business, tens of thousands of workers have lost their jobs and tighter underwriting guidelines are reducing origination volume. Under these circumstances, someone might conclude that mortgage fraud would also be declining.

That would be completely wrong.

The majority of fraudsters are industry insiders who leverage their knowledge to take advantage of weaknesses in lenders’ processes and defenses. Thus mortgage fraud does not disappear during the “down” portion of the mortgage cycle, it just morphs to take advantage of current market conditions. If your company is still in business and originating mortgage loans, it is a target. The question is will your staff recognize a fraudulent application if it sees one?

I ask that question because a friend, who recently took over as the underwriting manager at a community bank, told me that she was teaching her staff to examine disbursements from the seller’s proceeds when one of the employees asked her why they should bother since the money belonged to the seller. My friend explained that mortgage fraudsters use bogus claims and liens against the seller as a way to extract loan proceeds. The employee retorted that their department had never, ever, been hit by fraud. What is much more likely is that these employees simply didn’t recognize fraud because their institution had not been a primary target during the expansion phase of the real estate/credit bubble.

This lack of fraud recognition is not limited to employees of smaller lending institutions. It also plagues some so-called financial experts. For example, last year, I was driving down the road listening to the radio show of a nationally syndicated consumer advocate. A caller told the advocate that his house was for sale, that someone had offered him $100,000 more than the asking price, and could the advocate please tell him how he should respond? The expert said, “I have no earthly idea why someone would offer you more than your asking price.” I nearly drove off the road because I was screaming at the top of my lungs, “I do! It’s mortgage fraud!”

But I digress.

With lenders returning to more old-fashioned underwriting standards and requiring full documentation, W-2s, higher FICO scores and higher downpayments, “old” frauds are on the rise. So, it’s not surprising that Interthinx investigators and clients are reporting an increase in “silent seconds” and self-employed borrowers. The Interthinx F.R.A.U.D. Report shows that income and employment misrepresentations in new applications doubled between the first and second quarters of this year, and that there are still significant rates of misrepresentation regarding collateral value even in this declining market.

Just as the use of utility and phone records for no-file or thin-file borrowers won’t ensure credit worthiness, requiring full documentation will not stop fraud. In both cases, the required documents are easily forged.

In addition to training staff in the use of automated fraud detection technology to spot “silent seconds,” false collateral values, identity theft and occupancy issues, underwriters must also be able to recognize forgeries and credit profiles that don’t match the borrower’s income, especially when the borrower represents self-employment.

Unfortunately, the old adage, “What goes around, comes around” is all too true. If the industry is content to ignore certain types of mortgage fraud or take a less than aggressive approach to training and automated detection designed to prevent mortgage fraud in the pre-funding stage, then the financial fallout that is sure to follow will bring even more job losses and company closures.

The decision rests with each of us. The time to act is NOW.

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EDITOR’S NOTE (12/27/07): Because of the intense and often off-topic nature of many of the comments left for this blog entry, commenting has been turned off, and all unrelated comments have been deleted
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Every spring and summer, you are sure to spot stories in the press about shark attacks off the cost of Florida, Long Island, and California. You rarely see a story, however, about the loan sharks attacking homeowners all across the United States.

Many people believe that the current mortgage meltdown has been caused primarily, if not exclusively, by homeowners whose appetite for credit far exceeds their ability to repay their debts. This is far from the truth. Mortgage originators acting more like street toughs than representatives of lending institutions have contributed far more to the current crisis. Instead of acting as professionals, they have led homeowners out into the water and essentially bitten off their arms and legs.

Read this comment, which was left here on Flipping Frenzy just yesterday afternoon by Lisa Ashton, from Saunderstown, Rhode Island:

“I am a single mom of two kids–one in college, one in high school. I have raised my kids alone in my home for all this time. I have owned my home for 21 years, actually built it with my ex husband. I hold down three jobs currently to try and make ends meet. I am a registered nurse in a school system.”

“I refinanced my mortgage in April of 2006 with Aegis Lending Corporation. They did a ‘no doc’ loan and lied about how much I made to make a high mortgage amount work. I was trying to take out $25,000 to finance my daughter’s college needs at the time. They said I made enough to cover a $493,000 mortgage! In reality I earn only about $55,000. I now have house payments that eat up about 98 percent of my monthly income.”

“They also hired an appraisal company (Macloud Appraisers in Narragansett, RI ) who somehow agreed to appraise my home for $560,000 when the town only values my property at $320,000, and it would probably sell for about $400,000 on the market today.”

“To bring my interest rate down to 6.5 percent, Aegis charged me $30,893 in discount points at closing. That would have meant that their standard interest rate was 14 percent! What sort of ARM starts out at 14%?”

“Now you may wonder why I would agree to such an arrangement. Well, Aegis advised me to stop paying my mortgage while they were refinancing me, because it would screw up the payoff amount they received. Admittedly, I was naive in following their advice–I stopped paying my mortgage. After all, they had already approved my loan.”

“Aegis failed to provide me with a closing packet prior to the closing date to review. They didn’t even tell me what to expect in terms of a monthly payment. I discovered all of this on closing day, when I was already two payments behind on my existing mortgage. I realized that if I refused to sign for the new mortgage, I would be in big trouble with my previous mortgage company, so I signed the papers.”

“Aegis told me not to worry. Within six months, I could refinance with them again and lower my payment to $2918 per month. (I currently earn about $3600 take home.)”

“Instead of refinancing my loan, Aegis sold it within a week after closing to GMAC Mortgage company and then filed for Chapter 11 Bankruptcy. Now I was really stuck.”

“I have gone through all of my retirement ($30,000) and all of my savings ($15,000) and maxed out every credit card to stay current with my mortgage for this past year or so. No one will refinance me, and now since I’m so maxed out on credit cards, I’ve watched my credit scores plummet well over 100 points in the past four months.”

“GMAC has told me they will NOT work with me to help me out. I have called them for the past three months asking about some way to help me, so I don’t end up in foreclosure. They have told me that they rather have my home.”

“September 2007 was the first time in 21 years I’ve ever missed a payment on my home, and I’m just sick about it. I did receive something from the court stating I could file a claim against Aegis Mortgage–a ‘proof of claim’ form–but who knows how long that will take to work through the system. By that time, my children and I will have been evicted from our home.”

“So that’s my story. I can’t lose this home. I’ve worked so hard to keep it. It’s my children’s safety net. This is all they’ve known, and I can’t take it away from them. I won’t. But I don’t know what to do.”

This is just one story, but it is representative of what has been happening in every state in the Union–lenders preying on homeowners who have been duped into trusting the system and the professionals who run it. It is the equivalent of going into a doctor’s office and intentionally been diagnosed as having cancer. The “doctor” prescribes a host of expensive tests, medications, treatments, and therapies just to jack up your fees, and then flies out of the country when you’re money runs out.

When you seek the advice of any professional–a doctor, attorney, accountant, Realtor, or whoever–you expect that the person is going to give you accurate information and reliable advice. You do not expect the person to flat out lie to you.

We have to stop blaming homeowners for the current mortgage meltdown and start holding loan originators to the same standards we set for doctors and other professionals. We also need to start placing the blame where it belongs–not with the homeowners but with the loan originators who know better.

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EDITOR’S NOTE (12/27/07): Because of the intense and often off-topic nature of many of the comments left for this blog entry, commenting has been turned off, and all unrelated comments have been deleted
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As we scramble here in the United States to pick up the pieces from the latest credit crisis and housing market crash, we often overlook the fact that U.S. lenders did not simply sell risky mortgages to homeowners. No, once they were done fleecing homeowners, lenders decided to sell those risky mortgages to overseas investors. After all, why hold onto mortgages that you know homeowners are going to be unable to pay? The U.S. mortgage lending industry essentially pulled off a Ponzi scheme of global proportions, and now the United States stands to pay the price.

Here’s how the scam went down. Back in 2000, the American economy was floundering. Some sort of correction needed to happen, but Alan Greenspan, the Federal Reserve Chairman at the time, decided that we could give the economy a bit of a boost by cutting interest rates.

Mortgage interest rates dropped, more Americans could afford to buy homes, housing prices rose, and suddenly, Americans were rich with equity. Housing values were climbing like there was no tomorrow, and with loans being so cheap, people started cashing out that inflated equity in their homes to finance their enjoyment of the good life.

Unfortunately, housing prices hit a critical tipping point. Fewer and fewer Americans could afford these overpriced abodes. Again, a market correction was in order, but the banks didn’t want that. Instead of letting the housing bubble naturally burst, which would have resulted in more affordable houses, they decided to offer more affordable mortgages–adjustable rate mortgages (ARMs) with low introductory interest rates. This enabled more people to continue buying homes, and home prices to continue to rise.

Everyone was happy. Interest rates were low, so more people could afford to buy houses, lenders and mortgage brokers were processing more loans, Real Estate agents were earning higher commissions, builders were selling more newly constructed homes, and state and local governments were raking in higher property taxes. Life was good.

The only trouble was that the banks failed to account for the fact that eventually the housing market would tank and the teaser rates on the adjustable rate mortgages were scheduled to skyrocket. The banks failed to think ahead… or did they?

Based on what you read in the mainstream press, you might tend to believe that the banks did not know what was going to happen. After all, many mortgage lenders had to fold up shop. Others were brutally punished in the stock market when their share price took a nose dive. The thought the banks were clueless, however, is simply not true. The banks were fully aware of the looming sub-prime mortgage crisis. In fact, they were well prepared to quite literally pass the buck… to foreign investors.

Passing the buck

To get these risky sub-prime mortgages off their books, the banks diversified and then bundled their mortgages, repackaged them, and peddled them to the international community as safe investments. Through financial sleight of hand, the banks tricked investment-rating agencies including Moody’s and Standard & Poor’s to assign these mortgage securities higher ratings and valuations than subprime mortgages would generally receive.

Trusting the U.S. banks and America’s well-known investment-rating agencies, foreign investors bought these securities hook, line, and sinker.

As long as the party was in high gear and housing prices were soaring, foreign investors were completely unaware of what was about to happen on the other side of the ocean (their investments were performing quite nicely, thank you very much). Unseen to them, however, interest rates on many sub-prime mortgages were scheduled to rise, making mortgage payments unaffordable for millions of Americans. When what was fated actually started to happen, foreclosure rates skyrocketed, and foreign investors were left holding the bag.

Now, the U.S. is in quite a financial pickle. Deep in debt and stripped of equity, the U.S. relied on consumer confidence and foreign investment to fuel its economy. Now that both of those assets have been shredded by the mortgage lending industry and rampant real estate fraud, what can we rely on to fuel our economy in years to come?