FBI on mortgage meltdown: "We are not banking regulators"

In a letter to the Los Angeles Times, the FBI is defending its response to the wave of mortgage fraud, and rejecting the suggestion it could have done more to prevent the current mortgage crisis.  The letter is in response to a Times story this week headlined "FBI saw threat of mortgage crisis," which reported that a top FBI official had warned in 2004 of widening loan fraud.

The FBI letter follows.

Dear Editor:

Your 8/25 story on the mortgage crisis ("FBI saw threat of mortgage crisis", L.A. Times, August 25th 2008) implied that if the FBI had made more arrests for mortgage fraud, the crisis could have been averted. To even suggest that is a cry for a lesson in both civics and basic economics.

The story's premise was built around a 2004 quote from an FBI official who said he was confident the FBI could prevent fraud from becoming a massive problem. In context, Assistant Director Chris Swecker meant he believed the FBI could stay focused on mortgage fraud to prevent fraud from becoming the major driver that would cause a collapse of credit in the housing market. We believe by a good measure, the Bureau did that.

The FBI's Criminal Division has arrested 1000 suspects and targeted 180 criminal enterprises since 2004. We targeted those lenders and buyers involved in multiple frauds or cases where the profits went to drug crews, gangs or organized crime. More investigations are ongoing. But the FBI is a law enforcement and intelligence agency, we are not banking regulators.

In the end, most economists have attributed the crisis to very aggressive lending practices and too little risk management throughout the financial services industry. As far as mortgage fraud was concerned the FBI had the right intelligence and provided the right warnings to the industry but fraud alone does not appear to be the straw that broke the mortgage camel's back.

In the boom and bust of the mortgage business, to suggest that making more arrests would have averted the mortgage crisis is to confuse the root cause with the side-effects. It is not a fair or realistic assessment.

Kenneth Kaiser
Assistant Director
Criminal Investigative Division
Federal Bureau of Investigation

--Peter Viles

Photo Credit: FBI director Robert Mueller, via A.P.

Comments

[Cal]

Overstock.com getting into RE.

Its CEO had a couple interesting comments

http://tinyurl.com/5v3nyf

"Had it not been for the housing crisis, the company would not have entered the real estate business at all, said Bill Floor, Overstock.com’s chairman and chief executive officer, who started his business career in real estate.

“Banks go from holding onto homes for too long to dumping them too easily,” Floor said. “It’s more effective to use auctions.”

Floor said he thinks the housing crisis has only just begun. “The U.S. is looking over the precipice of financial disaster,” he said. “We’re not half-way through. We’re not a third of the way through. It’s going to be worse—much worse—coming.”"

[bkl]

I agree with the FBI. Even if they had arrested all the people who scammed the banks with phony appraisals, straw buyers, and multiple flips at sharply rising prices, it wouldn't have stopped banks from lending to ordinary people just trying to buy a house with zero down in a rising market.

The credit crisis was not caused by outright fraud, but by poor lending practices. Those poor lending practices made the fraud easier; the fraud didn't cause the poor lending practices.

[LA-renter]

The point is that the FBI had the "intelligence" to know that things were not right... and realize that the banks and brokers, the supposed victims, were accomplices.

How could the "experts" be anything but sycophants, whores and idiots?

[syscom3]

Most of the mortgage fraud would have been prevented if the "liar loans" were treated by the banks for just like that what they were.

[tew]

Most telling statement: "We targeted those lenders and buyers involved in multiple frauds or cases where the profits went to drug crews, gangs or organized crime. "

In other words, "We don't have the resources to go after the hundreds of thousands - make that millions - of individual cases of fraud".

In most of life the big crimes go un- or lightly punished and small fish tend to get fried. Because this was so pervasive and home "ownership" is so politically popular, the small guy gets a get out of jail free card this time.

[Paco Bell]

Perhaps, in light of rampant financial atrocities, what this country needs is a new crime-fiighting organization that is set up and equipped to deal specifically with the complexities of white collar crime.

They'd be very busy.

[Jim]

What is the FBI's dollar threshold for mortgage fraud investigations? What is the total dollar amount of the alleged fraud that they declined to investigate?

[tedson]

The FBI people were also watching their home values rise and boasting to their neighbors and friends about it just like every other homeowner in this country. No one cares about the people who are less fortunate than they are who don't own homes. When is the last time you gave a dollar to a homeless person?