Mortgage fraud

Why sell crack when taking money from a careless lender is so much easier and more profitable?

From the San Diego Union Tribune:

Federal prosecutors indicted 24 people in a massive mortgage fraud scheme that they said was led in part by a gang member from San Diego and netted participants $11 million in profits.

In an indictment unsealed yesterday, prosecutors laid out a wide-ranging racketeering conspiracy that ran from 2005 to 2008 and targeted homes across the county. Among the identified leaders was Darnell Bell, a documented member of the Lincoln Park street gang.

Bell, 38, used his status in the gang to recruit other members for the scheme and “maintain discipline,” according to the indictment.

The sweeping conspiracy involved almost every element in the real estate transaction chain. The defendants include a real estate broker, a group of straw buyers, an escrow officer, an appraiser, tax preparers and a notary.

Prosecutors allege the network used fake buyers to purchase homes for more than the asking price, with the defendants pocketing the overage. Lenders were duped into funding mortgages for the inflated price and later suffered losses when the buyers walked away and the property was foreclosed.

The value of the properties involved is estimated at $100 million.

I’m wondering if the lenders were also “duped” into lending this $100+ million without income documentation or down payments.

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10 thoughts on “Mortgage fraud

  1. GNP

    Is narcotics trafficking–presumably the main activity of a San Diego-based gang–a training ground for real estate fraudsters? Is this an unanticipated consequence on the long-suffering War on Drugs?

    Seems like stealing marijuana from grow operations provides fertile ground for training a few of our more violent young men here in southern British Columbia.

  2. Tim Peterson

    I wonder wether many of the first generation no-doc mortgages were for crack houses and drug labs!
    Such an arrangement would launder the drug money and remove the inconvenience of landlord inspections.
    They would also have a vastly lower than average default rate, which might have skewed the picture for later no-doc lending.

  3. Jeff

    Jim, have you ever looked at Akerlof and Romer (1994)? They show that the common thread in many financial crises is “looting”, i.e., fraud. Reading their paper, it is clear that the current crisis was utterly predictable. The Wall Street “banksters” make the street gangs you refer to look like a bunch of pikers.

  4. Steve Kopits

    As a former investment banker, I can assure you that people need to go to jail for this financial mess we are in.
    Organizations are governed by two essential impulses: fear and greed; or if you are a bit more compassionate, prudence and hope. In every large organization, the risks associated with aggressive behavior are known and resisted, generally by the ‘indians’–employees with ranks from analyst to middle manager. For example, most of Madoff’s employees must have known that the company was engaged in fraud. It must have been inescapable water cooler talk. The issue is whether these lower-level folks are empowered or supressed.
    They are empowered to the extent that the senior management is motivated by organizational failure. However, in the modern era, compensation associated with a single transaction–say, a large IPO–may be sufficient to make a manager wealthy. Therefore, a rational manager will take the organizational risk involved because it is sensible for him personally. As long as the manager is paid his bonus and the bonus is sufficient to compensate for potential subsequential unemployment, he has an incentive to assume risks which may put the entire organization in danger. As I recall, this falls into the category of principal-agent problems related to non-iterated transactions. So large bonuses may create a short-term frame of mind with little regard for long-term consequences. The fear of ruining personal or institutional relationships in the long run will not constitute a sufficient barrier to prevent the assumption of critical institutional or systemic risk.
    Therefore, the manager must be confronted with additional costs for engaging in excessively high risk behavior. Such costs should involve not only the risk of going to jail, but also the risk of being ruined by a legal action of the government (from experience, I can assure you that this motivates investment bankers).
    Consequently, establishing institutional safeguards involves both the actual and attempted punishment of wrong-doers. The government does not have to win, but it does have to try. This will empower the indians to say, “Well, yes, Mr. Smith, we could issue such a security, but as you’ll recall, your predecessor went to jail for such an act, and none of us would want to do that, would we?”
    Unless substantial numbers of people go to jail, a critical cause of this financial crisis will go unaddressed, and the risk of a repeat in the future will remain unnecessarily high.

  5. MikeR

    Steve,
    I agree. Fear, greed and perverse incentives affect not just fat cat investment bankers (from which we expect greed, hence the rationale Glass Steagall) but all people.
    Take the CEO at GM in the 1950’s. Should he fight the union and cause a strike which hurts short term profits, or should he promise workers payment in the future (health care) when he knows that he will be long retired before that promise comes due?
    Or take Clinton. Months before the end of his term, the USS Cole was attacke (with similar suspects to the African embassy attacks). Should you deal with it or just wait for the next president to take the heat? The same could be said of Bush passing the buck on North Korea to Obama.

  6. GNP

    MikeR, You could extend that logic to colonialism which I’ll succinctly define as killing and stealing from other people.

    The USA became the powerhouse it is by killing and stealing from the British Crown, other British colonial settlers, the French, the Spanish, Mexicans and last but not least aboriginal North Americans. It worked remarkably well (if you ignore the losses of the losers).

    Fast forward to the late 20th century and early 21st century. American colonialism and sponsored colonialism in the Mid-East is threatening to permanently dislodge US hegemony and all the privileges that come with that hegemony.

    Should Americans in earlier centuries have simply said “No” to killing and ‘taking’?

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