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FBI Expands Probe of Mortgage Fraud — Now Involving 19 Mortgage Companies and 1,300 Cases. Reverse Mortgages Also Under Scrutiny.

The FBI is expanding its wide-ranging probe of the mortgage industry.

At a Senate hearing on Wednesday, FBI Director Robert Mueller said his agency is currently investigating an estimated 1,300 home mortgage fraud cases, and that the FBI’s probe into potential mortgage fraud now includes investigations into 19 separate mortgage companies.

The FBI, he said, has already “identified 19 corporate fraud matters related to the sub-prime lending crisis … targeting accounting fraud, insider trading, and deceptive sales practices.” 

Mueller also said that the FBI expected to expand its investigation even further. 

There was, he said, “no end in sight” to the growing number of fraud cases. 

“We’ve had a tremendous surge in cases related to the sub-prime mortgage debacle,” Mueller told a Senate Appropriations panel. “We expect them to grow even further.”

“I’m not sure at this point we can see the extent of the surge,” he added.

Mueller declined to go into the specifics of the investigation, but in previous announcements the FBI said it was looking into possible accounting fraud, insider trading or other violations in connection with loans made to borrowers with weak, or subprime, credit.

Mueller said he believes part of the problem is “rampant conflicts of interest in the corporate suites.” He said that FBI investigations “further emphasize the need for independent board members, auditors, and outside counsel. Shareholders rely on the board of directors to serve as the corporate watchdog. … [But] board members are often beholden to the executives they are expected to oversee.”

With one exception, the agency declined to identify the companies under investigation but has said that the inquiry, which began last spring, involves companies across the financial industry, including mortgage lenders, loan brokers and Wall Street banks that packaged home loans into securities.

The FBI has also said that the “hotspots” for its mortgage fraud investigations include California, Texas, Arizona, Florida, Ohio, Michigan, and Utah.

The one company that Mueller did acknowlege as being involved in the probe, Doral Financial Corp., had its former treasurer indicted last month for investment fraud. 

The FBI has also acknowledged in the past that the largest U.S. mortgage lender, Countrywide, is under investigation for misrepresenting its financial position and the quality of its mortgage loans.

It is also known that several major investment banks, including Goldman Sachs, Morgan Stanley, and Bear Stearns, have been asked to provide information to the government, and Beazer Homes has said that it had received a federal grand jury subpoena related to its mortgage business.

In addition to announcing an expansion of the number of cases and companies being investigated, Mueller also indicated a new direction for the FBI’s inquiry: reverse mortgages. 

Reverse mortgages release the equity in a property to the homeowner in one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves the home.  In the U.S., reverse mortgages are available for people 62 years old or older.

Reverse mortgages are typically used to finance retirement or pay unexpected medical bills.  While reverse mortgages can make sense for seniors, the FBI is concerned about possible abusive sales practices that prey on seniors, such as aggressive and untruthful marketing and excessive fees.

Mueller said that the increasing number of mortgage cases has forced the FBI to shift agents from other areas, such as health care fraud and other financial crimes, to focus on mortgage lending practices.

The FBI has also previously indicated that it is cooperating with the Securities and Exchange Commission, which is conducting more than three dozen civil investigations into how subprime loans were made and packaged, and how securities backed by them were valued. 

UPDATE:

For the latest news of the FBI’s expanding probe of the mortgage industry, click here.