Main Street Mafia: How Big Banks helped make Mortgage Fraud Big Business for Organized Crime

The housing bubble of the mid-2000’s brought all sorts of characters to the table.

Government regulators, like then-congressman Barney Frank wanted to "roll the dice" on more housing loans to sup-prime applicants.

Mom and pop investors, burned by the bubble in technology stocks wanted something simple and easy to understand… like the home they had owned for years. They bought second properties, and found the fast profits didn’t come from renting the place out, but from slapping on a new coat of paint and selling it for far more money.

Mortgage originators were encouraged to make new loans, any loans. They’d be bundled off to Wall Street and sold to places like Norwegian fishing villages for their pension fund. Thus, the quality of any individual loan didn’t have to meet conventional lending standards.

Enter the NINJA loan: standing for No Income, No Job.

Indeed, with hindsight it’s easy to see the bubble forming and how it would eventually burst. Everyone had a stake in things going… but almost all of it relied on a steady stream of new buyers eager to take out a mortgage and help house-flippers stay profitable in the process.

With traditional lending standards basically thrown out the window, criminals took advantage of the situation to the fullest. This was no secret; of course. The G-Men were instantly on the case… but they quickly became overwhelmed by the fast growth of Mortgage Fraud.

Consider these simple facts:

• In 2006, the FBI reported a 62 percent increase in mortgage fraud cases over the prior year.
• In the prior year, 2005, the Feds reported that mortgage fraud was, "one of the fastest-growing white collar crimes in the United States."
• And back in 2004, they even warned that the extent of mortgage fraud could cause a massive financial crisis!

Think about that.

The 2006 warning came a year before the bubble started bursting. Before investors or the mainstream media ever clued in to the way that lenders were throwing money at anyone with a pulse, criminals were already on the case. At the time, for them, it just made more sense than traditional criminal activities like shakedowns or loan sharking. Here’s how it works.

Crook A buys a home on the market … let’s say for $150,000. About three months later, Crook B (our "straw buyers") comes along and offers an exorbitant price for the home. "I’ll give you $425,000!" Crook B promises, "Sold!" shouts Crook A, all while agents and lenders look on with dollar signs in their eyes.

Our straw buyer gets the mortage, our first crook gets the proceeds of the sale (minus whatever was left on his own mortgage for the house), and the two crooks vanish off into the night after splitting the loot—our straw buyer never for a moment intending to make a single payment towards his $425,000 obligation, instead defaulting on the loan right away and effectively leaving the bank out quarter-million or so.

Good racket, huh?

Complicating the issue is the fact that mortgage fraud itself isn’t a crime. The real charges include wire fraud for the actual transfer of money, as well as money laundering and making false statements under penalty of perjury.

Fraudsters Get Away with the Green… Thanks to Linda Green

One woman has complicated the issue even further, making it easy for criminals, organized or not, to get away with their ill-gotten gains. This woman’s name is Linda Green.

Check your mortgage paperwork if you bought our refinanced your home in the mid-2000’s. You might find her name there. Court documents across the country show that Green was simultaneously a vice president at U.S. Bank, Wells Fargo, Bank of America, and dozens of other lenders. Her name is on hundreds of thousands of mortgage documents.

In reality, one Linda Green worked for a document processing company out of Georgia. However, it’s clear that more than one employee signed with that name, given the significant variation in her signature in various loans.

And that matters. A lot. What’s the point of this signed documentation?

By using a document processing company, banks were able to speed up the loan origination process. That allowed them to bundle loans and sell them off faster, rather than keep these toxic mortgages on their books. And when the financial crisis hit and it came time to foreclose, Linda Green’s signature popped up on those documents as well.

Several judges in foreclosure cases have stopped proceedings with the mere mention of Green’s name. There’s no way to tell that Green had personal, firsthand knowledge of the loan. There’s simply too many of them.

Essentially, the bank may be foreclosing on a home where it doesn’t really have any concrete proof that they still own the loan. (The problem is also exacerbated in loans that were cut into multiple "tranches" and sold off in different pieces to different buyers).

That makes it difficult, if not impossible for the banks to foreclose. If it was the buyer’s intent to defraud, they can get away scot-free, thanks to this fraud committed by the banks. Even otherwise law-abiding homeowners have used this loophole to avoid foreclosure.

Ultimately, crime still pays.

Many would like to see the heads of large banks head to prison for the housing crisis. But they didn’t do anything wrong (not personally at least). Regulators demanded they make more subprime loans. And with the housing crisis peaking during the 2008 election, nobody needed to call for the heads of government politicians. A lot of incumbents either got voted out or opted to retire in 2008 and 2010.

Meanwhile, those who knowingly committed mortgage fraud during that time got a free pass—just like everyone else. Whether the default in your credit history was due to a "Straw buy" or an instance of legitimate hardship, they’ll generally be looked upon in the same light. There will be future fraud. After all, organized crime would rather get a few hundred thousand in one fell swoop than making smaller sums from ongoing illicit activities.

The latest version? Using a home mortgage as a way of laundering money. Buyers will offer $100,000 over the asking price, and ask for that cash back after the deal closes. That way, they have an asset, and some walking around money too. For some buyers, this takes money made from illegal activities like drug running and turns it into clean, documented cash.

Preventing Future Fraud: Crooks Always a Step Ahead

No kind of fraud could really ever be eliminated.

And even innocent homebuyers who got caught up in the bubble have gotten some reprieve thanks to this fraud at the bank level. But if you’re looking to sign a mortgage and want everything above board, find a lender that doesn’t send its loan documents to a robo-signer. That protects both sides in the event of litigation.

The housing bubble brought out petty crooks and professional criminals alike. It brought out the institutional evil of government agencies failing to regulate. It brought out those who still believed in the American Dream—before the bursting bubble turned it into a nightmare.

The ultimate lesson is to know who you’re doing business with, as well as their motivation behind the deal. A traditional bank wouldn’t make a loan you couldn’t afford to sell it off to Wall Street—they keep all their loans on the books. But when lenders are willing to give you six or seven figures in cash without asking for much in return, it’s good to keep a healthy skepticism.

Finally, take a long, close look at banks and financial institutions before you buy their shares of stock or their bonds. These companies have gone a long way to prevent future mortgage fraud from occurring, but criminals are always a step ahead.

About The Author:

Based in Miami, FL, Houses.com provides the world's largest online marketplace for homes and real estate. Showcasing over 4 million listings for sale, rent & vacation in over 70 countries, Houses.com is dedicated to helping buyers and sellers turn their House into a new Home.