Monday, May 5, 2008

Feds Looking At Mortgage Fraud


A task force of federal, state and local agencies will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud, the Journal said.

The Federal Bureau of Investigation is already targeting major corporate insiders and criminal groups in its investigation of fraud in the mortgage lending industry. The FBI has said it is investigating 19 companies in mortgage cases.

The formation of the task force amplifies efforts already under way in Brooklyn, where prosecutors are investigating whether investment bank UBS AG improperly valued its mortgage-securities holdings, the report said.

Also being investigated are the circumstances surrounding the failure of two hedge funds at Bear Stearns, which collapsed last summer because of losses tied to mortgage-backed securities, the report said.

Separately, the New York Times said the FBI and the criminal division of the Internal Revenue Service had formed a task force to examine mortgages that were made with little or no proof of the earnings or assets of borrowers.

The group also includes federal prosecutors in New York, Los Angeles, Philadelphia, Dallas and Atlanta, the Times said, citing an unidentified official.

First -- this should surprise no one. The latest expansion will go down in mortgage lender history as the best years ever. There was no oversight because no one had a vested interest in actually investigating the loans brokers and lenders were making. Brokers didn't hold the mortgages because they sold them to banks. Banks didn't hold mortgages because they sold them (but usually retained servicing fees). Hedge funds were "protected" through "diversification" (or was it "deworsification" from Peter Lynch's vocabulary?).

Secondly -- I am still waiting for the Congressional investigation. There are a ton of players who need to see the light of day. I'm think here of Countrywide and Washington Mutual, all of the ratings agencies, along with some of the larger investment banks. I want to know what they knew and when they knew it.

Third -- someone (or a group of people and/or companies) are going to get hammered over this. When the truth comes out my gut says it will be extremely ugly and painful for all involved.