Things About Mortgage Fraud that Holder Should End Today: Suspect Ethnic Groups

By William K. Black

I am returning to my series of articles about the pathologies that have caused the Department of Justice (DOJ) to suffer a strategic failure in prosecuting the banksters that led the three fraud epidemics that caused the financial crisis and the Great Recession.  I have been inspired by Tom Frank’s column in Salon covering our successful defense of a mortgage fraud case in Sacramento.  This column addresses the single most offensive thing I learned in the course of that case.  Under U.S. Attorney Ben Wagner’s leadership the Eastern District of California has begun targeting immigrants of Russian descent for mortgage fraud prosecutions.

The links are all broken because the Sacramento Bee does not preserve its links, but the spoor of those links shows that the paper has repeatedly written that Wagner’s mortgage fraud prosecutions now target dozens of Russian-Americans.  This should be immediately suspicious, for mortgage fraud was, according to Wagner’s theories, committed by over three million Americans in 2006 alone.  The incidence of fraud in “liar’s” loans, in the study relied upon by the federal government, including key members of DOJ’s task forces against mortgage fraud, was 90 percent.  By 2006, roughly 40 percent of all home mortgage loans originated – well over two million – were liar’s loans.  That means that there were over two million fraudulent mortgage loans, and over three million borrowers signing the notes on those loans.  Far from being an “ethnic” crime, mortgage fraud was ubiquitous in the United States and the United Kingdom (where 45% of all the loans made in 2006 were liar’s loans).

I was preparing to excoriate Wagner for his selective prosecutions of a disfavored minority when, to my horror, I found that the FBI is also promoting mortgage fraud as an ethnic crime.

The FBI’s 2008 report to the nation on mortgage fraud prominently features this claim.

Mortgage Fraud Perpetrators

Mortgage fraud perpetrators are industry insiders, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives. Perpetrators are also known to recruit ethnic community members as victims and co-conspirators. FBI reporting indicates numerous ethnic groups are involved in mortgage fraud either as perpetrators or victims. This type of mortgage fraud is known as affinity fraud. Ethnic groups involved in mortgage loan origination fraud include North Korean, Russian, Bulgarian, Romanian, Lithuanian, Mexican, Polish, Middle Eastern, Chinese, and those from the former Republic of Yugoslavian States. Street gangs such as the Conservative Vice Lords, Black P. Stone Nation, New Breeds, Four Corner Hustlers, Bloods, and Outlaw Motorcycle Gang are also involved in various forms of mortgage loan origination fraud as a means to launder money from illicit drug proceeds. Additionally, African, Asian, Balkan, and Eurasian organized crime groups have also been linked to various mortgage fraud schemes.

The FBI’s 2009 report has the identical language.

A Thought Exercise

What if the FBI’s list of suspect ethnic groups contained the word “Jew?”  We all know that the list would last less than a day before it was removed amidst a blizzard of criticisms and unctuous apologies blaming obscure staffers.  If the above list contained the descriptors “white” and “male” the inanity of the list would have been clear.  It would have been clear that everyone involved in the home lending industry – an overwhelmingly “white” and “male” group of actors – was a potential suspect for mortgage fraud.  The list would have been promptly taken down among a chorus of jeers for the FBI.  Indeed, the list as it was actually written is a superb guide to what ethnic groups the FBI’s leadership thinks it can safely label “the [suspect] other” in America today.

If the FBI were compiling an accurate list of ethnic and demographic groups leading the epidemics of accounting fraud the list would consist of two descriptors ”Jews” and “high status white male banking executives.”  For obvious reasons, the FBI will never use either descriptor to create a “suspect ethnicity list.”  In the rare studies that have been done of the ethnicity and demographics of the most destructive white-collar criminals in the U.S., being Jewish, an adult, male, with high social status, a college degree, business executives, and owning a home are the variables that best predict those crimes.  The classic white-collar criminology study of perpetrators, “White Collar Crime and Criminals,” was published in 1988 by Stanton Wheeler, David Weisburd, Elin Waring, and Nancy Bodett.  Their study found that Jews were far more likely to have been convicted of white-collar crime than any other religious group, but were underrepresented among blue collar criminals.  (Protestants were substantially underrepresented among criminals of both the streets and suites.)

“Jews, although roughly eight percent of the population of our districts, make up only three percent of our common crime sample, but fifteen percent of our white collar sample?” It would be a fair summary of our data to say that, demographically speaking, white collar offenders are predominantly middle-aged white males with an over-representation of Jews.”

Home ownership was also a major explanatory variable for white-collar crime perpetrators.

“[F]orty-six percent of our white collar offenders own their own homes, in contrast to only six percent of the common crime defendants.”

Unlike the FBI’s reckless claims that mortgage fraud was a “[disfavored] ethnic group” crime, the authors of the 1988 study (funded largely by DOJ) did real empirical work that led to actual correlations in which demographic factors varied considerably in their association (or lack thereof) with white-collar crime perpetrators.

“It seems well established, then, that whatever else may be true of the distinction between white collar and common crime offenses and offenders, they definitely do draw from distinctively different sectors of the population.”

The authors’ sample came from judicial districts in which Jews were far more common (roughly eight percent of the districts’ total population) than in the U.S. as a whole (roughly two percent).  Relative to the two percent figure, the over-representation of Jewish white collar criminals found in their same study (fifteen percent) was extreme.  The authors stressed in their later book on this subject– quite correctly – that none of this suggested that Jews were more likely to commit white-collar crimes than non-Jews for any reasons unique to their religion.  Jews were more likely to hold more senior positions in their organizations in the seven metropolitan areas studied and therefore had more opportunity to commit larger white-collar crimes.

Criminologists do not like to discuss these matters because it is certain that some yahoo will grab a quotation about the Jews, ignore the paragraph about opportunity (immediately above), and trumpet the quotation as proof of perfidy of Jews.  In the case of the current crisis, where the triple epidemics of mortgage fraud were led by the officers controlling investment, mortgage, and commercial banks, the degree to which Jews are overrepresented leading such frauds is likely to be exceptionally large given those differences in opportunity.  But no one has done that work and unlike the era when Wheeler and his co-authors conducted their studies, DOJ is now infamous for refusing to prosecute those who occupy the C-suites even of the far from elite mortgage banks that caused billions of dollars of losses by systematically originating fraudulent loans and then selling those loans to the secondary market through false “reps and warranties.”  Wheeler’s study design would produce nonsense results if it were applied to DOJ’s current practices of prosecuting solely the least culpable individuals engaged in alleged mortgage fraud.  Wagner’s selective indictments would “prove” that Russian-Americans are far more likely to be mortgage fraud perpetrators.

In any event, the FBI has no basis for it “ethnic” speculation – mortgage fraud was led overwhelmingly by folks not on the FBI’s “suspect ethnicity” list.  The FBI’s suspect ethnicity list for mortgage fraud is far worse than the CDC’s infamous labelling of being “Haitian” as a “risk factor” for AIDS.  In that era there was at least a positive (albeit spurious) correlation between AIDS and being a resident of Haiti and there was uncertainty about how AIDS was transmitted.  The true correlation between the ethnic and demographic characteristics on the FBI’s suspect ethnic groups list and the leaders of the mortgage fraud epidemics is negative – and was always obviously negative.  Members of the ethnic groups on the FBI’s suspect ethnicity list were virtually never important leaders of the three mortgage fraud epidemics.  The FBI’s advice that investigations of the leaders of the three mortgage fraud epidemics should begin by concentrating on mortgage fraud by “Russians” or by gangs such as the “New Breeds’ is beyond silly.

The FBI’s suspect ethnicity list is the indefensible product of bigotry and anti-empirical practices.  Attorney General Eric Holder purports to be a huge opponent of this kind of faux “profiling” of a disfavored minority.  The clock is ticking.  How long will it take Holder (or the FBI’s director) to end the travesty of the FBI’s suspect ethnic group list?  And how long will it take for Wagner to stop his selective prosecution of disfavored minorities?

8 responses to “Things About Mortgage Fraud that Holder Should End Today: Suspect Ethnic Groups

  1. I’ve been given the impression that Wall Street committed fraud, but now I’m also getting the impression that borrowers committed fraud, too.

    Professor Black, I’d love to know if you have any major disagreements with the following article: http://www.salon.com/2013/10/14/greed_destroyed_us_all_george_w_bush_and_the_real_story_of_the_great_recession/

  2. I just want to point out that ALT-A financing had a specific borrower targeted and were never intended to be liar’s loans, therefore not all ALT-A loans were fraudulent. BUT they were used infrequently enough to be a BIG red flag when the rate of the rate of use began to spike. I have an ALT-A because I was leaving steady employment to start a business in ’97. Underwriting required a copy of my business plan, my CV, and material on other similar businesses. My fixed 30 had an interest rate of 7.25%. It was sold three times. surprising to me, landing on the desk of Wells Fargo (the servicer) and Freddie Mac, the owner. My business did great, but my health failed (BP and stroke x 2), so it was touch and go after missing six payments. The crisis helped me because the bank and Freddie were less determined to foreclose. Nine months later I was back on track and the house close to being paid off (I refinanced at a much lower rate and a 15 year term). I was lucky. The readers should understand that originally, the ALT A had a purpose and included specific underwriting, but the no doc aspect was abused during the crisis. (no verifiable past income history or future prospects relative to the current employment status ).

    As far as Russian organized crime, it is well known that they used the privileged immigration status of Israel as a doorway to enter the US. So by definition, they would be Jews. They moved into South Florida, buying up strip clubs and fleecing customers with bar tabs of thousands, legally. If the customer complains, call the police. Frequently the girls were from Eastern Europe. That they may have smelled the fraud in the housing crisis would be understandable. Instead of defrauding customers, defraud banks, who were overcome with commission mania. All Jews? Nah. In my area it was the Portuguese. A Realtor (speaks the language) with Portuguese immigrant straw buyers and fake upgrade construction receipts. It worked well until one straw buyer was not paid and they went to the bank. In this case the appraiser was 50 miles away, never visited the properties. The comparable properties submitted by the Realtor were all being flipped, by him. Enormous increases in flipping value were justified by market conditions (inflated comparable housing) and (fake) remodeling receipts. I’m not sure how much the straw buyers knew, they were immigrants after all. But they knew something, because money was changing hands and they were not paying the mortgages. In the end, I think only the Realtor went to jail. Everyone else had “clean” hands, and there are a lot of hands in a deal when a house is transferred. The original idea was to inflate the value of several houses, several times over and then let the bank foreclose. The payoff is at the end. Each flip would inflate the value $100,000. So, it made sense for immigrants to buy and sell. No one questioned that only one realtor had such fortunate clients.

  3. Great posting, Prof. Black. While I have long distrusted anything out of the FBI, for obvious historical reasons, since James Comey, former board member of the National Chamber Litigation Center (and who claims to have once been employed at the world’s largest hedge fund so he “could speak truth to power” ? ? ? ?), certainly does not inspire anything by distrust!

    Although I haven’t yet read the FBI report — and I think you for that link, sir — and did peruse the 2010 congressional investigation into Washingto Mutual’s practices, and recall that WaMu purposely got rid of their honest assessors, and ONLY hired and contracted with dishonest RE assessor who they could be sure would falsify various important mortgage details.

    Of course, nobody at the senior executive level (or anyone else) there went to jail (Killinger certainly should have).

    There was one honest senior underwriter at WaMu, Keysha Cooper, who was fired because she refused to underwrite blatantly dishonest mortgages (the investigation uncovered that some of those so-called house mortgages were simply vacant lots with nothing sitting upon them).

  4. Sorry, should have read: since James Comey, former board member of the National Chamber Litigation Center (and who claims to have once been employed at the world’s largest hedge fund so he “could speak truth to power” ? ? ? ?), became director of the FBI,

  5. To say the system is completely corrupt is a gross understatement.

    Sad ….

  6. Pingback: Bill Black: Time to End Ethnic Profiling in Prosecuting Mortgage Fraud | naked capitalism

  7. I myself greatly benefited from the wonderful tradition of local ethnic mobs laundering their cash through loosely watched mortgage markets. In 1993 NYC I bought a modest condo purchased in 1992 for about 60%of what the “owner” (a foreign national who had “gone back home” though in all probability never really existed) still owed at closing.

    The scam goes something like make small but sturdy deposits in many accounts over the years, bring in someone you know will shut up and move when told, make them a co-signer on one of the accounts and drop yourself, get a mortgage on the strength of that solid account history, and flip. Bubble times are heaven, and when the bust hits, you cash out willfully and immeasurably ahead of what any other laundering scheme can get you.

    Your post also brought to mind a point made on a Firing Line debate many years ago by (IIRC) Stanley Fish. He was teaching a course in Ethics and a student asked if it wasn’t obviously true that Jews controlled finance and ran it to their own advantage, and he noted that he (near quote) “was happy to have the Savings and Loan scandal at which to point as a peculiarly gentile form of financial vice”.

  8. roger erickson

    “ethnics” commit mortgage fraud?

    Then he should have no discomfort in finding that “banksternics” commit Control Fraud.