The Return of Liar’s Loans

chase-mortgage-memo-pushed-cheats-and-tricks-to-get-liar-loans

 

This is an extract from a blog post (“The Bank Whistleblowers United Plan of Urgent Financial Change”) by Bill Black, author of The Best Way to Rob a Bank Is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Many of us a bit long in tooth remember a time that when you wanted to buy a home, you had to genuflect to a banker and put up gallons of blood and your first-born. Changes in bank policy—and levels of greed—ultimately helped lead to the great recession we’re still struggling with. And virtually nobody has been held accountable. Here are some of his thoughts:

Our goal of restoring accountability to Wall Street is not controversial.  Indeed, there is unanimity among the candidates for the presidency that accountability for Wall Street elites has disappeared and urgently needs to be restored.  But that same unanimity among candidates has existed for over a decade.  Beginning with DOJ’s failure to prosecute the elite bankers that aided and abetted Enron’s senior managers’ looting and destruction of Enron in 2000-2001 – the consensus on the need to restore accountability has failed to produce accountability for elite bankers for over 15 years.  Every political leader says they want to help honest bankers succeed.  Nearly every political leader agrees that the “revolving door” corrupts Wall Street’s regulators.  The movie The Big Short has a scene at a pool that is designed to be emblematic of the public perception that the SEC (and, by extension, the other federal financial regulators, the FBI, and the DOJ) is staffed by lawyers whose goal in life is to be hired by Goldman Sachs.  One of our major insights is how law enforcement priorities with regard to financial elites have become sharply perverse as the financial regulatory agencies’ input to the FBI and DOJ have virtually ceased through the destruction of the agencies’ criminal referral process and been replaced by misdirected law enforcement priorities pushed by the elite bankers.  We propose concrete steps to return our priorities to the most damaging financial frauds, which are always led by elites….

We have no constraints on our ability to speak the truth and we have a history of speaking truth to power.  What follows is not the product of press flacks or political spinmeisters.  We have the expertise and personal knowledge to explain five key facts.

  • The most recent U.S. bubble and resultant financial crisis and Great Recession were driven by three epidemics of fraud led by elite bankers. The three epidemics that drove the crisis are appraisal fraud, “liar’s” loans (collectively, these were the loan origination frauds), and the resale of those fraudulently originated mortgages through fraudulent “reps and warranties” to the secondary market and the public.  Banks, like fish, rot from the head – the “C Suite.”   Liar’s loans is an industry term that shouts the industry’s knowledge that it was originating overwhelmingly fraudulent loans.  In a liar’s loan the lender agrees not to verify data that is essential to prudent underwriting.  This would be an insane practice for an honest lender – and it was practice that was always discouraged by the federal regulators – but it optimizes “accounting control fraud.”[1]

Tom Miller, the Nation’s longest serving state attorney general (for Iowa), was also a leader of key combined DOJ and state task forces on mortgage fraud.  Industry spokesmen invariably try to get the public to believe that the banks were the victims of liar’s loans, but as Miller testified before the Fed, investigations prove the opposite.

“[Many originators invent] non-existent occupations or income sources, or simply inflat[e] income totals to support loan applications. Importantly, our investigations have found that most stated income fraud occurs at the suggestion and direction of the loan originator, not the consumer.”

  • Not a single one of those elite bankers who led the fraud epidemics has been prosecuted and only one, a woman who was only moderately senior, has been held personally accountable in any meaningful way through a civil suit (made possible by a whistleblower). This is the greatest strategic failure of the DOJ in recent history.
  • The SEC has also proven ineffective in holding the elite Wall Street bankers who led these fraud epidemics personally accountable. As with DOJ, one of the fundamental problems that has gotten worse is the “revolving door.”  We propose a practical means of reducing that problem.
  • Dodd-Frank has not fixed the gaping problems endemic to finance that will cause future epidemics of elite financial fraud and resultant global crises.
  • We know how to identify developing fraud epidemics before they hyper-inflate financial bubbles, how to prevent or at least greatly reduce such epidemics, and how to prosecute effectively the elite banksters. Our group includes former regulators who demonstrated each of these abilities.  What we need is the political will to make the vital changes in the face of fierce opposition from the elite banksters.  That will is sapped by the revolving door.

And here’s a related piece that appeared on Bloomberg Business last fall.

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