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FBI Launches Sub-Prime Fraud Investigations
February 01, 2008 09:32 AM
by
findingDulcinea Staff
A total of 14 investment banks, loan providers and developers are under FBI scrutiny in the latest government crackdown related to the sub-prime mortgage crisis.
30-Second Summary
The FBI has announced that it is partnering with the Securities and Exchange Commission to investigate 14 companies with ties to the home loan market. The names of the companies were not released.
The SEC is checking financial records for possible links to insider trading. The FBI, for its part, is developing an initiative to investigate fraud related to accounting and mortgage issuance.
“There are some irregularities we are looking at, and [this is] good old-fashioned greed,” said Neil Power, FBI economic crimes unit chief.
The Daily Intelligencer, a blog on the Web site of New York Magazine, writes that Goldman Sachs, Bear Stearns and Morgan Stanley separately announced that government investigators asked for financial records for their divisions with business related to housing loans.
Financial news service Bloomberg reports that Goldman Sachs was named as a defendant, along with banks JPMorgan Chase and Citigroup and accounting firms Grant Thorton and KPMG, in a New York state and city comptroller’s lawsuit against lender Countrywide Financial Corporation and its affiliates.
New York State Comptroller Thomas DiNapoli explained the inclusion of the financial giants: “The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes.”
An August 2007 story in The New York Times featured comments from past employees of Countrywide who said the company disregarded mortgage applicants’ cash reserves, directing some homebuyers toward sub-prime loans when they should have qualified for a safer lending product.
The SEC is checking financial records for possible links to insider trading. The FBI, for its part, is developing an initiative to investigate fraud related to accounting and mortgage issuance.
“There are some irregularities we are looking at, and [this is] good old-fashioned greed,” said Neil Power, FBI economic crimes unit chief.
The Daily Intelligencer, a blog on the Web site of New York Magazine, writes that Goldman Sachs, Bear Stearns and Morgan Stanley separately announced that government investigators asked for financial records for their divisions with business related to housing loans.
Financial news service Bloomberg reports that Goldman Sachs was named as a defendant, along with banks JPMorgan Chase and Citigroup and accounting firms Grant Thorton and KPMG, in a New York state and city comptroller’s lawsuit against lender Countrywide Financial Corporation and its affiliates.
New York State Comptroller Thomas DiNapoli explained the inclusion of the financial giants: “The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes.”
An August 2007 story in The New York Times featured comments from past employees of Countrywide who said the company disregarded mortgage applicants’ cash reserves, directing some homebuyers toward sub-prime loans when they should have qualified for a safer lending product.
Headline Links: FBI begins mortgage fraud investigations
The FBI has launched investigations of 14 unnamed companies on possible illegal activities such as insider trading and bookkeeping fraud. According to Neil Power, head of the economic crimes unit at the bureau, the companies encompass sub-prime loan providers, investment banks and their loan securitization divisions and developers.
Source: Reuters
In what the Financial Times calls “another sign of fallout from the subprime mortgage crisis,” the FBI is working with the Securities and Exchange Commission to investigate the 14 companies. The SEC is looking into possible cases of insider trading, while the FBI is most concerned with mortgage fraud. The state attorney general’s offices in Connecticut and New York are running similar inquiries.
Source: Financial Times (registration may be required)
Background: Countrywide, Beazer and the mortgage crisis
Atlanta-based real estate developer and mortgage originator Beazer Homes was the target of FBI investigations in late March 2007 on corporate, investment and mortgage fraud. On March 28, 2007, shares of its stock slid 8.4 percent, already down more than 17 percent in premarket trading. According to the Charlotte Observer, over 13 percent of the 2,900 homes built by the company in North Carolina’s Mecklenburg County had foreclosed.
Source: MSNBC
According to The New York Times, former employees from Countrywide Financial have described lending practices that showed little concern about whether borrowers would be able to keep up payments. Among the questionable aspects of Countrywide’s business was a computer system in the sub-prime unit that took no account of cash reserves when calculating what mortgage to recommend borrowers. This meant that borrowers were steered toward sub-prime loans when they should have qualified for better interest rates.
Source: The New York Times
The offices of the New York State and City comptrollers added financial service providers Citigroup, JPMorgan Chase and Goldman Sachs and two accounting firms to their list of defendants in a lawsuit primarily against home lender Countrywide. “The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes,” New York State Comptroller Thomas DiNapoli said.
Source: Bloomberg
Opinion & Analysis: Eliminating mortgage fraud
Blog Dvorak Uncensored says of the FBI investigation, companies “can’t be indicted for breaking laws that didn’t exist.” The post accuses Congress and the White House failing to apply the same standards on “store-front hustlers” as it does on bank-originated mortgages.
Source: Dvorak Uncensored
Just after the FBI unveiled its plan to investigate 14 companies for wrongdoing linked to the sub-prime mortgage crisis, investment banks Goldman Sachs, Bear Stearns and Morgan Stanley all announced that government officials had requested documentation on their home-lending practices.
Source: New York Magazine’s Daily Intelligencer
In May 2007, the FBI released a report showing how the rising rates of foreclosure made home mortgages an attractive target for criminals looking to take advantage of homeowners struggling to keep their houses. The FBI is developing a sub-prime mortgage fraud initiative to concentrate its investigation efforts. In regard to the newly launched investigation of 14 companies, Neil Power, chief of the bureau’s economic crimes unit, said, “There are some irregularities we are looking at, and [this is] good old-fashioned greed.”
Source: ABC News
Reference: Adjustable interest-rate mortgages and the impending crisis
As far back as July 2004, financial analyst Peter Schiff wrote that, given the interest rate environment of the time, there were no circumstances in which it would be advisable to get an adjustable rate mortgage. “That such a high percentage of people in the United States and elsewhere are currently opting for adjustable-rate mortgages reflects a level of real estate speculation unparalleled in history,” Schiff argued.
Source: Daily Reckoning
In December 2007, the number of sales of one-family homes in the United States were down 40.7 percent year-on-year, according to the U.S. Census Bureau.
Source: U.S. Census Bureau
The FBI’s report released in May 2007 on mortgage fraud includes definitions and graphs.
Source: FBI
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