Tue Jan 29, 2008 5:39pm EST
By Randall Mikkelsen
WASHINGTON (Reuters) - The FBI has opened criminal investigations into 14 corporations as part of a crackdown on improper subprime lending, agency officials said on Tuesday.
FBI officials told reporters the probes involved potential violations, including accounting fraud and insider trading.
They did not identify the companies. But the probes reached across the industry to include developers, subprime lenders, companies that securitized loans and investment banks that held them, said Neil Power, head of the FBI's economic crimes unit.
"Currently there are ... 14 investigations, inquiries open right now," he said.
Cases involving individual loans have also risen sharply in a crackdown on subprime lending irregularities, officials said.
"We anticipate in the next year that another wave of adjustable rate mortgages will reset and with that we anticipate that the mortgage corporate fraud potential cases to increase," said Sharon Ormsby, head of the FBI's financial crimes section.
The FBI is investigating the corporate cases in parallel with the Securities and Exchange Commission, which has opened about three dozen civil investigations into the subprime market collapse. Some of the probes overlap, an official said.
Targets of the SEC probe include Swiss bank UBS AG and U.S investment banks Morgan Stanley, Merrill Lynch, Bear Stearns, as well as bond insurer MBIA.
The SEC, which has formed an internal subprime mortgage task force, is looking at how financial firms priced mortgage-based securities and whether they should have told investors earlier about the declining value of those securities.
The U.S. attorney in Brooklyn, New York and the FBI earlier launched a criminal investigation into two mortgage-related hedge funds at Bear Stearns that collapsed during the summer.
There are also state investigations.
The corporate investigations are part of an FBI crackdown on improper subprime lending, which also includes a focus on fraud in loan origination.
The agency has about 1,200 active cases, up 40 percent from 2006, with 321 criminal complaints or indictments, officials said.
"Subprime loans are decreasing but ... suspicions of mortgage fraud are increasing," Ormsby said.
Some of the loan origination cases are spurred by individuals lying to qualify for mortgages, but about 80 percent of the cases involved fraud for profit, Power said.
Particular problem areas included California, Texas, Arizona, Florida, and the Midwest, officials said.
My Comment: As a housing counselor, I see people all of the time who are losing their home and who got loans they should never have gotten.
Many times there is not a lot of reason to feel much sorrow for the borrower. Often the sub-prime Adjustable Rate Mortgage with a teaser introductory rate allowed the borrower to buy more house than they could afford and they got into the house with no money down. If they lose the house, they are not really losing anything, since they have no equity in the home. They wanted a $200,000 house when they could only afford a $120,000 house. The borrower just knew they wanted that house and did not pay attention to the details of the financing. The borrower was greedy and irresponsible. Don't waste your compassion on these people. They got to live beyond their means for two year, and now they have to face reality. In these cases, they need to lose the home, learn a hard lesson and just start over and do it right next time.
On the other hand, I also see people who could have qualified for a good loan, but were sold a very bad sub-prime product. I also see cases of falsified loan applications. Usually in the case of the falsified loan application, the falsification was started by the loan officer. The loan officer types up the app and gets the borrower to sign it. Either the borrower never notices the incorrect information or the loan officer explains away the discrepancy and tells the borrower not to worry about it, that that is just how things are done. I also see inflated appraisals. I have seen "flipping" of loans which is when loan is refinanced over and over each time eating up the equity in the house until the person can't refinance anymore and loses the home.
Buying a home, for most people is the biggest financial decision they will ever make and is their primary method of creating wealth. They should use caution and make sure they understand what they are doing. However, many borrowers are not very sophisticated or educated, and financing a home can be complicated. Many borrowers assume their loan officer will get them financing that is in their best interest. There are many honorable, honest loan officers who do just that and over the years I have worked with many people for whom I have the up most respect. There are, however, a lot of unscrupulous crooks waiting to prey on the unsophisticated borrower. They target the elderly, minorities, and anyone who they think they can get by with victimizing. They lie, mislead, and withhold vital information. I am all for a person making an honest buck, but to rip people off by putting them in a bad mortgage product when the borrower could have qualified for a good product is unconscionable.
I do not believe this culture of greed and corruption in the mortgage business started at the level of the loan officer. I must believe that it was condoned higher up the chain of command. I will be delighted to see some CEO's go to jail. I hope it happens.