Following the third major "sweep" of the mortgage industry in four years, the U.S. Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) announced on Thursday that it had arrested over 400 real estate industry players since March, dozens of them over the last two days, for incidences of mortgage fraud that have contributed to the housing crisis.
Announcement of the arrests came at a Thursday afternoon Justice Department press conference conducted by Deputy Attorney General Mark R. Filip and FBI Director Robert Mueller.
Filip said the arrests took place in Chicago, Atlanta, Miami, and suburban Maryland among other locations and those arrested included industry borrowers, loan originators, and real estate agents. 60 people were arrested on Wednesday alone with the round-up continuing.
The sweep, code named Operation Malicious Mortgage
, was the third major action that the Department of Justice has headed up since 2004 against mortgage fraud and related crimes. The most recent activity has resulted in 144 mortgage fraud cases in which 406 defendants have been charged since March 1. Cases were brought in every region of the country and in more than 50 judicial districts. The FBI estimates that approximately $1 billion in losses resulted from the mortgage fraud schemes employed in these cases.
In general, mortgage fraud involves three distinct types of fraud; lending fraud, foreclosure rescue scams and mortgage-related bankruptcy schemes. Lending fraud frequently involves multiple loan transactions in which industry professionals construct mortgage transactions based on gross fraudulent misrepresentations about the borrower's financial status, such as overstating the borrower's income or assets, using false or fictitious employment records or inflating property values. Foreclosure rescue scams involve criminals who target legitimate homeowners in dire financial circumstances and fraudulently collect fees for foreclosure prevention services or obtain ownership interests in residential properties. Both of these fraudulent mortgage schemes may be furthered by filing bankruptcy petitions that automatically stay foreclosure.
In the case of the recent DOJ action, the most common type of mortgage fraud was misstatement of income or assets, followed by forged documents, inflated appraisals and misrepresentation of a buyer's intent to occupy a property as a primary residence.
Filip said, "The integrity and credibility of these markets depend upon fair dealing. While the law cannot dictate economic outcomes or protect individuals from bad investment decisions or unlucky greats, it does protect them from fraud." He said that the investigation and prosecution of these crimes will continue.
In a separate action, an indictment was unsealed in the Eastern District of New York charging two Bear Stearns portfolio managers with conspiracy, securities fraud, wire fraud, and insider trading charges growing out of alleged misrepresentations to two Bear Stearns hedge funds that invested in securities tied to mortgage debt. The indictment alleges that the two marketed the funds as a low risk strategy. By March, 2007 they believed the funds were in grave condition and at risk of collapse but made misrepresentations about the amount of money other investors were withdrawing and about the extent of their personal investment in the funds. This was done, the indictment alleges, to stave off investor withdrawal. The funds did collapse last summer, resulting in losses to investors estimated at $1.4 billion.
Filip and Mueller credited a number of other federal agencies with assisting with the investigation including the Internal Revenue Service, U.S. Postal Service, Immigration and Customs Enforcement, the Federal Deposit Insurance Corporation, and the Department of Housing and Urban Development.
The FBI says it has arrested about 300 real estate industry players since March -- including dozens over the last two days -- in its crackdown on incidents of mortgage fraud that have contributed to the country's housing crisis. (We assume that the discrepancy in numbers arrested is attributable to police actions taken by other agencies.)
One law enforcement official put the losses to homeowners and other borrowers who were victims in the schemes at over $1 billion.
Over the last several months, the FBI has been investigating an estimated 1,300 mortgage fraud cases -- including 19 involving subprime lending practices by U.S. financial institutions.