US DOJ mortgage fraud crackdown produced inflated data, poor results, OIG says

In the wake of the 2008 financial crisis, the US Department of Justice found itself facing an array of fraudulent mortgage practices that had driven the US housing market to near-collapse, from questionable subprime loans to “toxic” mortgage-backed securities.

In the midst of a public outcry, federal prosecutors cast about for a remedy – and a culprit. To recover the hundreds of millions of dollars earned from mortgage fraud and to recompense tens of thousands of victims, the department created programs such as “Operation Stolen Dreams” in 2010 and the “Distressed Homeowner’s Initiative” in 2011.

Attorney General Eric Holder highlighted the success of these mortgage fraud programs in press conferences and echoed comments of President Obama, assuring the public that mortgage fraudsters of all stripes – from low-level straw buyers to senior financial institution executives – would face prosecution.

A report released last week by the department’s internal watchdog, the Office of Inspector General (OIG), led by Inspector General Michael Horowitz, casts doubts on those claims. Based on an audit of the costs, procedures and results of the department’s mortgage fraud effort, the OIG says statistics on mortgage fraud enforcement reported by the department were substantially incorrect.

The report, “Audit of the Department of Justice’s Efforts to Address Mortgage Fraud,” says the department and its constituent unit, the Federal Bureau of Investigation, met with limited success in launching investigations, bringing prosecutions and holding financial services executives to account. The report covers the years 2009, 2010 and 2011. Data for the year 2012, which could be telling, is not analyzed or reported in the OIG report.

Holder announced in October 2012 that in the previous fiscal year, 530 criminal defendants had been charged, including 172 executives, in cases involving 73,000 victims and losses of more than $1 billion.

The OIG report says there were only 107 persons were charged with crimes, and most were not high-level executives. The losses in the cases initiated by the department’s Mortgage Fraud Task Force, $95 million, were 91% lower than the number reported by the department.

Mortgage fraud the ‘lowest priority’ of the FBI

Apart from reporting incorrect numbers, the OIG audit report sheds light on another troubling aspect of the Justice Department’s operation.

“We found that, despite public statements by the Financial Fraud Enforcement Task Force and the department about the importance of pursuing financial fraud cases, including mortgage fraud, the FBI Criminal Investigative Division ranked complex financial crimes as the lowest of the six ranked criminal threats within its area of responsibility, and ranked mortgage fraud as the lowest subcategory threat within the complex financial crimes category,” the report states.

The six ranked threats of the FBIs are public corruption, southwest border enforcement, civil rights, violent crime, organized crime and complex financial crime. Complex financial crimes include corporate and securities fraud, health care fraud and mortgage fraud, according to the FBI.

The OIG found mortgage fraud to be a low priority, or not even a priority at FBI offices in Baltimore, Los Angeles, Miami and New York.

Despite greater funding, investigations and agents decline

Despite assurances in 2012 by Michael Bresnick, Executive Director of the Financial Fraud Enforcement Task Force, that “preventing, detecting and prosecuting mortgage fraud is a top priority,” the results indicate otherwise.

The FBI received $196 million in fiscal years 2009 through 2011 to investigate mortgage fraud, but the OIG found that the number of FBI agents assigned to mortgage fraud investigations decreased during that time. The FFETF is a multi-agency task force formed in 2009 to target complex fraud schemes.

DOJ ‘didn’t have stomach’ for high-profile cases

The Department of Justice has not responded to the OIG report, although an official response appears imminent.

James Cox is an attorney specializing in corporate and securities law and a professor at Duke University School of Law. He said the DOJ has done its part in bringing civil cases, but it has fallen short with criminal prosecutions.

“They pushed the envelope in the meltdown of the dot com era, but now they [DOJ] didn’t have the stomach to really go out and take on high risk cases,” Cox said.

“The government went after individuals [in the past] and it was salutary – but now I don’t see the government having strength in its convictions.”

In 2012, Obama said in his State of the Union speech that the mortgage fraud task force he created would “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”

With few criminal cases, banks pay off civil liability

While the US Justice Department’s mortgage fraud effort may have been found to be lagging, mortgage fraud victims and others caught up in the widespread mortgage fraud morass last week found something to cheer about. On Tuesday, a court-appointed monitor announced that Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, had finished paying out $25 billion to borrowers to settle claims that the institutions had committed fraud in their foreclosure and loan origination practices. The settlement is part of a 2012 state and federal civil agreement. The repayments came in the form of loan forgiveness, forbearance or refinancing.

Senators press Justice Department for action

Despite the civil settlement, some Members of Congress are pushing for more. Senator Elizabeth Warren, Democrat of Massachusetts, wrote to Attorney General Holder shortly after release of the OIG report. She called into question the department’s commitment to stronger action against mortgage fraud.

“We request a meeting to review the Inspector General’s findings and to understand the steps that will be taken to ensure that the Department’s efforts to identify and prosecute those responsible for fraudulent mortgage practices are equal to the harms such crimes have caused,” Warren wrote.

Read the Inspector General’s report here