The subprime bank heist

It might seem extreme to consider anyone wanting to buy a house as a potential criminal, but this may not be as far away from the truth as one might imagine. Intentionally or not, borrowers have been quick to jump into the getaway car being driven by unscrupulous mortgage brokers offering incredible deals. While lenders can be blamed for making it too easy to rob the bank, this doesn't change the fact that fraud is fraud. And as the postmortem on the subprime debacle unfolds, the topic of fraud has climbed to the top of the list.

The US Federal Bureau of Investigation created a mortgage fraud task force in March, after statistics from the Financial Crimes Enforcement Network showed that suspicious activity reports related to mortgage fraud rose to an astonishing 46,700 in 2007 from just 3,515 cases in 2000, representing approximately $1 billion in losses (see "Deception and lies", page 22).

Also in March, New York attorney-general Andrew Cuomo struck a deal with government-sponsored mortgage agencies Fannie Mae and Freddie Mac to prevent the future mis-selling of mortgages and to tighten up lending practices. Under the deal, euphemistically termed the "New Home Valuation Protection Code", the agencies agreed to buy new mortgages only from banks that adhere to rules designed to combat mortgage fraud and predatory lending.

Lenders are also looking at ways to get a grip on the problem, in particular, the role of mortgage brokers. When the US housing market was on the rise, lenders largely turned a blind eye to the kinds of dubious deals that brokers had been striking with borrowers.

No longer. Since noticing that certain brokers were purposely selecting lenders for bad loans, they began looking for an impartial third party to collect data on the loan level, specifically related to the geography and the broker. Brokers are not liable for loans taken out and they typically earn higher commissions for more complex loan structures, so there have been suggestions in the market that brokers pushed borrowers to the limit and byond. In some cases, brokers were even said to have helped borrowers commit fraud or were themselves part of a ring of fraudsters (see Cover story, page 16).

First American CoreLogic in Sacramento, California, has stepped into the breach with its Broker Scorecard, which allows an originator to type in a code to review how an individual broker is ranked in terms of their business and the industry as a whole. And in a sign of just how bad things have become, Walter Allen, senior vice president of capital markets at the firm, reports that originators have observed suspect brokers moving to other banks for business as the new due diligence solutions take hold, (see "Core value", page 20).

This leads one to wonder whether the US subprime debacle wasn't a financial markets catastrophe at all but the biggest bank heist ever - not just in terms of money, but also for the sheer number of thieves involved.- William Rhode, acting managing editor.