Investigations into events surrounding the virtual collapse of the mortgage lending industry are expanding on a number of levels.
Various investigative agencies have formed a task force to look into the granting of mortgages which may have been made with little proof of the borrowers' income or assets and, on a broader scale, how those loans may have been bundled and sold on the secondary market.
The task force, which originated in the office of the prosecutors in the Eastern District of New York (Brooklyn) was formed in January, and has become more active recently as write-downs from bad mortgage investments have spread from company to company. According to articles in The New York Times and The Wall Street Journal the task force involves federal prosecutors in New York, Los Angeles, Philadelphia, Dallas, and Atlanta and officials and agents from the FBI's financial institutions fraud unit, the U.S. Postal Inspection Services, the U.S. Secret Service, the New York State Banking Department, the New York City Department of Investigation and the Federal Deposit Insurance Corporation.
The original focus of the investigation was 14 mortgage companies which have not yet been named. Other companies such as now-defunct American Home Mortgage, Countrywide Financial, and UBS are now under separate scrutiny by the U.S. Justice Department and the FBI for infractions ranging from improper valuation of mortgage-securities holdings, accounting fraud, and improper handling of executive stock transactions, to fraud against the Securities and Exchange Commission. Investigators are also looking into the collapse of two Bear Stearns' hedge funds last summer which was apparently caused by losses from mortgage-backed securities.
The Times quoted an anonymous government official as saying that the task force "is a look at the mortgage industry across the board, and it has gotten a lot more momentum in recent weeks because of the banks' earnings shortfalls."
In addition to examining the general poor underwriting that appears to have formed the basis of the subprime crisis such as ignoring poor credit or inflating or failing to document income, prosecutors are also investigating how lenders may have defrauded Wall Street banks. For instance, did some lenders lie to Wall Street firms about the status of loans they sold directly to investors such as Freddie Mac and then fail to pay back the firms after the lenders sold the loans?
According to the Journal, prosecutors also are investigating whether brokers at Wall Street firms lied to investors, orally or otherwise, by stating that their investments in vehicles known as collateralized-debt obligations were backed by, for example, corporate debt rather than assets such as subprime-mortgage loans.