Tuesday, August 12, 2008

Crime in the Mortgage Industry Part 3

Last month we discussed the first two parts of the Borrowers Betrayed investigative series from the Miami Herald. The first part discussed the criminal histories of several Floridian mortgage brokers. The second part delved into the shady history of several loan originators. The example of crime and negligence were very powerful in the first two parts.

The third part of the series is now available. This part involves the probe regarding the lackadaisical (probably even criminally negligent) enforcement of regulators. While the first two parts were devastating, this profile on the regulators is even worse. The people who were in charge to protect the consumers seem to be doing nothing. Hopefully Floridians demand the firing of those responsible as well as a full investigation of every dollar spent and every activity undertaken by the regulators.

And just when the negligence could not seem to get any worse the probe uncovers even more. Let's take a look at what the Miami Herald uncovered during their eight month investigation of 1400 orders issues from the Office of Financial Regulation -
[Complaints to the Office of Financial Regulation,] the state agency created to police the industry -- were routinely ignored, leaving consumers to fend for themselves, according to public records and interviews.

...
While the agency was reaping a windfall during the land boom -- licensing fees drove the OFR's bank balance from $2.7 million in 2000 to $29 million last year -- Florida's mortgage fraud rate was steadily rising.

State law gives the OFR sweeping powers to police the industry. Not only can state agents screen license applicants for prior crimes, but they are entrusted to monitor by investigating brokerages, examining files, levying fines, suspending violators and, ultimately, revoking licenses.

Now onto the results of the investigation -

• One in three brokers the OFR discovered committing fraud -- the most serious offense under state law -- were allowed to keep working in the industry with no monitoring.

• Eighty-one brokers were caught siphoning funds from clients' escrow accounts and gouging customers with excessive fees but were allowed to keep peddling loans.

• While the number of fraud cases soared this decade, regulators opened fewer examinations of brokers' books each year, greatly reducing the threat of state sanctions to fraud mills.

• Suspensions -- another tool to protect consumers -- were used so infrequently that for three years, they weren't imposed at all, records show.

• The most frequent reason brokers were booted out of the industry: bouncing checks for licensing fees to the OFR.

The regulators were more interested in collecting fees rather than monitor then protecting the public. From this article the OFR acted more like a trade organization or union - they were more interested in receiving their fees (read as dues) and protecting their members than looking out for the public. The fines they OFR imposed were minuscule compared to the money stolen. In some cases the fines were less than one percent of the money that mortgage brokers and originators stole from their clients.

The OFR was not doing their job. Now Florida will pay the price for years to come. Aside from all of the stolen money, investors will enter the state with great trepidation. Here are the results of the lax enforcement coupled with the Great Housing Bubble -

Time and again, regulators caught mortgage professionals breaking the law -- fraud, forgery, and stealing from clients -- but allowed them to stay in the business with few consequences during the richest housing boom in state history, The Miami Herald found.

...
Industry experts say the new opportunities for easy money, and the sheer numbers of new brokers entering the business, drove a nationwide epidemic of fraud. Florida became the center.

The state had the seventh-highest rate of mortgage fraud in the country in 2003. It ranked 5th in 2004, 3rd in 2005 and 1st in 2006 and 2007.

By last year, one out of every five fraudulent mortgage applications filed in the United States was written in Florida, according the Mortgage Asset Research Institute, a Virginia-based industry analyst.

But instead of more aggressive enforcement, state regulators actually did less. In fact, the single most effective tool they had, license revocations, declined as the fraud rate soared, records show.

One out of every five fraudulent mortgage applications filed in the US was written in Florida. This is not the area where anyone wants to be number one. Hopefully this will prompt Florida to investigate their regulatory industry. Perhaps the most efficient thing for Florida to do would be to just close this entire agency and develop a new one. The current system is definitely, definitely not working.

This third part of the series also features several brokers that regularly took advantage of their clients. Some were already in jail on mortgage fraud charges for months before the regulators took any action. Others have only paid a pittance in fees and are still working. The examples are shocking - the stories of people taken advantage of going to a state agency for help and getting nothing, absolutely nothing in return. Make sure to take a look at the article for all of the appalling details.

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