BLOG VIEW: Blame The Terrorists

Written by Jessica Lillian
on August 28, 2008 No Comments
Categories : Blog View

While the mortgage lending community and the borrowing community work on divvying up fault and responsibility for the mortgage crisis, various government-affiliated individuals and groups have entered the mix as well – both voluntarily and involuntarily.

Unfairly or fairly, the latest party to be spotlighted in the great blame game is none other than the Federal Bureau of Investigation (FBI).

Earlier this week, Congressman Chaka Fattah, D-Pa., sent a formal letter to FBI Director Robert Mueller requesting an investigation into what he deemed an insufficient allocation of money and criminal investigation brainpower to keeping mortgage fraud in check. Fattah says the agency holds a basic obligation to consumers to prevent fraudsters from preying on them.

Moreover, he asserts in the letter, the FBI may have even been able to prevent much of the meltdown on a nationwide level had it appropriately reacted to its own early discovery and admission that a major subprime- and fraud-induced storm was brewing.

According to a recent Los Angeles Times article, Chris Swecker, the FBI official in charge of criminal investigations at the time, even warned reporters in Sept. 2004 that low interest rates and skyrocketing home values were a recipe for disaster and enormous financial losses when combined with dishonest market players liable to take advantage of such favorable conditions. In fact, Swecker said, ‘It has the potential to be an epidemic.’

One epidemic later, all signs point to an agency that obviously did not heed its self-generated warning. But to what degree – if any – is it genuinely at fault for doing so?

Analyst Corey Lorinsky states on ClusterStock.com that blaming the FBI for the mortgage crisis is ‘as silly as blaming the SEC for the 2000 market bust.’ No matter how powerful, no government organization can manipulate market bubbles and value curves at will, of course.

The agency's inadequate fraud-prevention efforts are more likely to come under fire as more details emerge from the pre-meltdown era. More specifically, why did declarations like Swecker's seem to go ignored?

It appears that while the need for fraud-related investigations became more acute at this time, the resources for doing so became more scarce – thanks to an overwhelming emphasis on national security.

‘Just as Swecker was making his doomsday forecast, the FBI, under pressure from Congress and the White House, was creating a crime-fighting brain dream, transferring hundreds of agents from its criminal investigations unit into its anti-terrorism program,’ the Times article explains.

In fact, about 2,500 agents involved with the criminal investigations work – or approximately 20% of the entire force – were shifted to fighting terrorism instead. By 2007, the total number of agents investigating mortgage fraud had plummeted to around 100, according to the article, over the requests from some FBI officials for additional assistance in taking on mortgage fraud.

Whether in 2004 or today, arguing for additional attention to mortgages – at the potential expense of national security – is a controversial request, to say the least.

After all, on the most basic level, is it more important to protect Average Joe from an exploding ARM or an exploding airplane?

The question of why adequate staffing, funding and resources for both divisions was not prioritized, in spite of what were likely imposing budget limitations, might be a more appropriate inquiry. Fattah even likens mortgage fraud to ‘domestic terrorism’ in his letter to Mueller.

For us nongovernment, non-FBI-insider types, however, the most suitable response of all at this point might be to simply look at the present rather than drown in the quicksand of ‘would have, could have, should have.’ So, what is the FBI doing today to combat mortgage fraud?

With Operation Malicious Mortgage and other initiatives in full swing, the group's thorough devotion to these efforts is now well documented.

‘The FBI, of course, plays a major role in investigating mortgage fraud – and our caseload has more than tripled in the past five years,’ the agency points out in a recent online article targeted at consumers.

Indeed, reports of grand jury investigations, sentences and charges abound in recent headlines. According to a recent CNNMoney.com report, the FBI currently has 180 agents concentrating on mortgage fraud, and these officials are involved with over 1,400 investigations at the moment – in addition to examining 22 corporations for dubious subprime-related activities.

Better late than never?

– Jessica Lillian, Commercial Mortgage Insight

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