Market Overview

Wagner told FCIC to Ignore the Fraud Lions and Chase the Mice


Benjamin Wagner testified to the Financial Crisis Inquiry Commission (FCIC) after he made his infamous comments when interviewed about the Department of Justice’s (DOJ’s) failure to prosecute the banksters – and after I wrote to him explaining the many errors in this statement.

“Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.”

Despite being informed in detail of his errors, Wagner continued to mislead FCIC about the nature of mortgage fraud.  Despite his efforts to get FCIC to believe that the problem was the mice, however, Wagner’s explanation of the nature of the frauds inadvertently presented compelling evidence that epidemics of accounting control fraud had caused the crisis. 

The Growing Hurdles that Wagner Had to Surmount to Blame the Mice for the Crisis

Wagner testified on September 23, 2010 at the last fact-finding hearing (in Sacramento) that FCIC conducted.  As DOJ’s top prosecutor on mortgage fraud he must have kept apprised of the evidence presented at prior hearings that established the paramount role that large financial institutions played in driving the three epidemics of mortgage fraud.  This included the testimony of both white-collar criminologists (Henry Pontell and I testified at the hearing in Miami) and Richard Bowen, the Citigroup whistleblower. 

Wagner’s panel testified immediately before the panel that revealed the damning testimony of Clayton that confirmed that the lenders not only originated massive numbers of fraudulent loans, but also sold them to the secondary market through false “reps and warranties.” Clayton tried hard not to find problems, but still found that 46% of the “reps and warranties” were false.  Those reps and warranties were fraudulent because an enormous percentage of the loans being originated were fraudulent overwhelmingly due to the twin liar’s loan and appraisal fraud epidemics. 

The paramount role of lenders in causing the appraisal fraud epidemic was known

Professor Kurt Eggert testified on that same panel that:  “Lenders have put great pressure on appraisers to overstate the value of houses to justify loans and on investment houses to reduce their due diligence in examining loans….”  Honest lenders would never pressure appraisers to overstate the value of the collateral.  Honest, competent lenders would be delighted to have due diligence conducted because it would document their high loan quality which would allow them to charge a premium price in the secondary market.  Eggert later expanded on this subject.

“Home appraisers widely complained of lender pressure to inflate the value they assigned to houses for lenders. Lenders that hold their own loans desire accurate appraisals to protect themselves with an equity cushion should the borrower default. For lenders that securitize, however, home appraisals represented not a protective mechanism to reduce loan losses but rather a pesky hurdle to overcome in order to make and sell the loan. Artificially inflating the appraised values makes loans more valuable by decreasing their loan-to-value ratios and can also justify higher loan amounts. Banks too often let their loan officers or underwriters manage the hiring of appraisers, which allowed their loan officers to pressure appraisers to come up with an appraisal high enough to justify the desired loan (Taylor, 2004) Appraisers that refused to meet appraisal targets could expect to lose business as a result (N.Y. Comm’n of Investigation, 2008).


Other appraisers apparently did ‘play ball’ with lenders and brokers, and a review of a small sample of loans from 2006 that suffered early default showed that more than half had appraisal problems, such as inaccurate appraisals, conflicting information, or items

‘outside of typically accepted parameters’” (Fitch Ratings, 2007).


Eggert cited both the results of NY’s investigation and a 2004 publication.  As DOJ’s top mortgage fraud prosecutor it is impossible that Wagner was unaware of these facts.  Note also that even when the direct coercion came from lower level bank employees the only reason it was possible for them to coerce appraisers was that the bank’s senior managers deliberately created a perverse system for ordering appraisals that every banker knew would encourage widespread appraisal fraud.  Eggert is wrong in implying that securitization removes the incentive of honest lenders to avoid the criminal trifecta of extorting appraisers to inflate the market value, fraudulently originating mortgages on the basis of fraudulent appraisals, and selling the fraudulently originated mortgages to the secondary market through fraudulent reps and warranties.  These criminal acts also allow the purchaser to force the lender/loan seller to repurchase the loan and to sue them for punitive damages. 

Eggert does not discuss the implication of the exceptionally high incidence of appraisal fraud in cases of early mortgage defaults. Inflating an appraisal should be strongly associated with “loss upon default,” but it is only about a year after the bubble bursts that it should display a (much weaker) association with increased defaults.  The reason for the lag is that borrowers are more likely to default when their home is “underwater,” and home prices are famously “sticky” downwards.  At the time Fitch was studying early defaults the fall in house prices was still modest, so – absent fraud – one would not expect to see inflated appraisals strongly associated with early mortgage defaults.  The primary drivers of early mortgage default should be the inflation of the borrower’s income, health emergencies, and job losses. 

If, however, the officers controlling the lender were originating large numbers of fraudulent loans it is likely that they would inflate both the borrower’s income (via liar’s loans) and the appraisal in order to make the loan appear to be low-risk and improve their ability to sell the loan (via fraud) to the secondary market.  As I have often explained, the best single act of chutzpah in the entire crisis was that when Clayton would find evidence that the borrower’s income was inflated it would often purport to “compensate” for that fraud by relying on the loan’s unusually low loan-to-value (LTV) ratio – and vice versa.  This is hilarious because it is likely that that the low LTV is a result of inflating the “V” (“value” = appraised market value of the home).  If that is too crazy to understand, you read it correctly – Clayton would purport to use the results of one epidemic of loan origination fraud to “compensate” when their due diligence identified the presence of the other epidemic of loan origination fraud.  Clayton’s “due diligence” (they must have given special training to their staff so they could say those words without a belly laugh) employed this formula.

X = mortgage origination fraud via liar’s loans

Y = mortgage origination fraud via appraisal fraud

X = Terrible

Y = Terrible

Y +X = Fabulous! (in the third fraud epidemic – fraudulent secondary market sales)    

Consider another fact that demonstrates that the banks’ senior officers led the epidemic of appraisal fraud.  The appraisers actually started their warnings in 1998 (they made their petition public in 2000).  By 2007, the officers controlling the banks had known for over a decade that appraisal fraud was epidemic and that the epidemic was growing, yet they left in place the criminogenic compensation incentives and appraisal systems.  Does anyone believe that they could not figure out over the course of a decade that they needed to ensure that the loan officers could not select the appraiser and that the bank needed high quality review appraisers to ensure that appraisals were not being inflated?   

Wagner, as DOJ’s top prosecutor for mortgage fraud, could not have been unaware by the time of his FCIC testimony about the appraisers’ petition identifying lenders as the source of the extortion of appraisers to inflate appraisers.  Extorting appraisers to inflate the appraisal is a crime, and when it is the lenders’ officers or agents who commit that crime they do so for the purpose of committing another crime – endemic mortgage fraud.  Wagner could not have failed to understand these implications, for there is no exculpatory alternative.  Wagner would have also known from state AG investigations that it was the lenders and their agents who led the crime spree of extorting appraisers and that they did so in order to inflate appraisals in order to drive the epidemic of mortgage fraud through appraisal fraud.

It was known that fraudulent lenders’ formal underwriting systems were deliberate shams

Eggert testified to other critical aspects of mortgage fraud by the lenders and the secondary market sellers and purchasers.  Focus on his comments about underwriting and due diligence.

“Investment houses also should have disclosed the results of their due diligence efforts in determining whether the loans fit the purported qualifications of the pool. In this due diligence process, some portion of the pools would be examined, often by a third party, to see if the mortgages met the criteria for the pool. What percentage failed in this examination was important information for investors, as it would tell them about the actual, as opposed to claimed, underwriting by the lender. Instead of disclosing the due diligence reports to rating agencies and investors, however, it appears that some Wall Street firms may have been using those reports primarily to increase their own profits.


According to recent reports, some Wall Street firms used due diligence reports showing a large number of problem loans in order to negotiate a lower price with the originator, then securitized the problem loans anyway without disclosing the problems to investors (Mor[]genson 2010). Such behavior, if proven, stands due diligence on its head, and turns if from a mechanism to protect investors from problem loans to a mechanism for investment houses to benefit from problem loans at the expense of investors who unknowingly end up with the bad loans.”


Eggert’s point about loan underwriting by the lenders is simple (and understated) but critical.  What matters in cases of mortgage fraud is not the lender’s written underwriting manual and forms (the “claimed” underwriting) but the reality of its underwriting (the “actual” underwriting).  The lender’s underwriting manual and its loan forms and written instructions to the closing attorney are part of the lies spread by fraudulent lenders that are designed to deceive regulators and secondary market purchasers into believing that the loans were prudently originated.  Had Clayton made public the fact that 46% of loans offered for sale to the secondary market were made on the basis of fraudulent reps and warranties the secondary market and the CDO markets would have collapsed. Of course, honest purchasers would not have purchased loans from entities that made substantial numbers of false reps and warranties.  “Substantial” in this context would have been around one percent, a figure consistent with unintentional errors.

The “Statement of Facts” that DOJ and Citigroup agreed to as part of the recent civil settlement doesn’t make anything clear, but if you are willing to read carefully a document designed to be useless you will find that it confirms that Richard Bowen was correct.  Citi’s purported “underwriting standards” were lies designed to deceive purchasers in the secondary market, regulators, and Citi’s shareholders and creditors.  A financial journalist noted that Clayton’s review of Citi’s deals over a quarter revealed an astounding 57% of the loans that Citi was selling to the secondary market under reps and warranties that they complied with Citi’s underwriting standards did not in fact meet its underwriting standards.

Bowen, whose staff conducted a far more thorough review than Clayton, found that the true percentage of non-complying loans was 60% when first tested and grew to 80 percent despite his repeated warnings to Citi’s senior managers.  Citi’s underwriting standards would have been the envy of Potemkin.

Similarly, Eggert testified about an important aspect of how the secondary market and the CDO markets were run under the financial version of “don’t ask; don’t tell.”  “Due diligence” by investment bankers and the credit rating agencies was a cynical sham designed not to exclude poor quality and even fraudulently originated loans – but to be able to buy them more cheaply and then sell them at a premium as “AAA” CDO tranches.  (Clayton’s representative testified on the same panel as Eggert and confirmed the press reports that Eggert cited.)

Other studies of liar’s loans available to Wagner prior to his Sacramento testimony have confirmed the extraordinary incidence of fraud and the fact that bank underwriting was a sham.  A second Fitch study looked at a small sample of nonprime loans.


“The result of the [Fitch loan file] analysis was disconcerting…as there was the appearance of fraud or misrepresentation in almost every file.


[T]he files indicated that fraud was not only present, but, in most cases, could have been identified with adequate underwriting …prior to the loan funding” [Fitch 11.07].


Fitch did not conduct an investigation.  It simply conducted a review of the loan and servicing files and found endemic fraud obvious on the face of the files. 


It was known that fraudulent lenders led the secondary market frauds

Eggert returned to the theme of the lenders’ pervasive lies about their actual underwriting standards and the fact that they lied about the only thing that was actually “material” to their underwriting decisions in order to deceive secondary market purchasers.

“While offering materials for subprime-backed securities touted subprime lenders’ underwriting standards to investors, it appears that for at least some non-prime lenders, the primary if not sole underwriting question was whether the loan could be securitized. In securities litigation by the Securities and Exchange Commission against Angelo Mozilo, of Countrywide Financial Corp., at one time the nation’s biggest residential mortgage lender, the SEC has argued that ‘the evidence is clear that by as early as July, 2005, Countrywide’s primary ‘underwriting standard’ was not the borrower’s ability to repay the loan, but rather whether it could sell the loan into the secondary market, where Defendants apparently hoped the performance of the loan would then become the purchaser’s problem.’” (SEC Brief, 2010).


Even if Wagner did not stick around to here Clayton’s damning testimony, or assign one of his AUSAs to listen to the full testimony to FCIC (which is pretty close to unbelievable), he could not have missed the media coverage of Clayton’s testimony. Ryan Chittum’s column in the Columbia Journalism Review discusses that coverage.  Chittum specializes in the media coverage of the financial crisis.

Case studies of accounting control frauds were available to Wagner

If you were DOJ’s top prosecutor on mortgage fraud you would also know about Michael W. Hudson’s brilliant articles about Ameriquest and the fact that he was about to publish the best study of a lender at the malignant heart of the fraud epidemics that caused the financial crisis.  By the time Wagner testified to FCIC, Hudson had already completed writing his book about Ameriquest aptly titled The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis.  If you were DOJ’s top prosecutor you would have asked for, and received, a copy of the manuscript before you testified in Sacramento to the FCIC.  But Wagner is made of more friable stuff.  I seriously doubt that he has even read the book four years later.

It was known that the banks trained loan officers and incented brokers to commit fraud

Here’s what the former head of the professional association for loan brokers (a strong foe of effective regulation) told FCIC about his profession.

“Marc S. Savitt, a past president of the National Association of Mortgage Brokers, told the Commission that while most mortgage brokers looked out for borrowers’ best interests and steered them away from risky loans, about 50,000 of the newcomers to the field nationwide were willing to do whatever it took to maximize the number of loans they made. He added that some loan origination firms, such as Ameriquest, were ‘absolutely’ corrupt” (FCIC 2011: 14).


Mortgage banking and mortgage brokers were the most corrupt entities in the financial sphere. 

“According to an investigative news report published in 2008, between 2000 and 2007, at least 10,500 people with criminal records entered the field [as loan brokers] in Florida, for example, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion” (FCIC 2011: 14).


No governmental entity ever required or even encouraged banks to use loan brokers.  George Akerlof and Paul Romer explained that loan brokers had long been notorious in their famous 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”).  It is essential to understand, however, that the banks and S&Ls that made liar’s loans also had to train their loan officers to make vast numbers of bad and fraudulent loans.  The Financial Crisis Inquiry Commission (FCIC) reported on why the banksters created the perverse incentives and training systems to ensure that their loan officers would ignore the bank’s nominal underwriting standards and say “yes” to hundreds of thousands of bad loans.

“More loan sales meant higher profits for everyone in the chain. Business boomed for Christopher Cruise, a Maryland-based corporate educator who trained loan officers for companies that were expanding mortgage originations. He crisscrossed the nation, coaching about 10,000 loan originators a year in auditoriums and classrooms.


His clients included many of the largest lenders—Countrywide, Ameriquest, and Ditech among them. Most of their new hires were young, with no mortgage experience, fresh out of school and with previous jobs ‘flipping burgers,’ he told the FCIC. Given the right training, however, the best of them could ‘easily’ earn millions.


‘I was a sales and marketing trainer in terms of helping people to know how to sell these products to, in some cases, frankly unsophisticated and unsuspecting borrowers,’ he said. He taught them the new playbook: ‘You had no incentive whatsoever to be concerned about the quality of the loan, whether it was suitable for the borrower or whether the loan performed. In fact, you were in a way encouraged not to worry about those macro issues.’ He added, ‘I knew that the risk was being shunted off. I knew that we could be writing crap. But in the end it was like a game of musical chairs. Volume might go down but we were not going to be hurt.’”


On Wall Street, where many of these loans were packaged into securities and sold to investors around the globe, a new term was coined: IBGYBG, ‘I’ll be gone, you’ll be gone.’  It referred to deals that brought in big fees up front while risking much larger losses in the future. And, for a long time, IBGYBG worked at every level” [FCIC: 7-8].


When Mr. Cruise explains that it was “easy” for young people whose previous employment experience was “flipping burgers” to “make millions” we know that he is describing a fraudulent market and that when he uses the phrase “the best of them” he means the worst of them.  The least ethical brokers and loan officers did not care that they were submitting falsified applications that would place the borrower in a loan that they could not repay for an overvalued house at the peak of the bubble.  In a single large (“jumbo”) mortgage a broker could “earn” a fee that would match his annual income flipping burgers.  This explains why so many brokers and loan officers did not risk their fee on the borrower providing the “right” (by which I mean the wrong, inflated) information on his income so that the loan would be approved and the debt-to-income ratio would maximize the broker’s fee.  Here, the right stated income was the inflated value necessary to get the loan approved and the broker’s or loan officer’s fee maximized.  The borrower would rarely know the income levels necessary to maximize the broker’s fee.


The officers did not have to be “gone” before their loan originations, sales, and purchases caused catastrophic losses.  The failure of the entity that made or purchased vast amounts of liar’s loans was certain – both the high reported income and losses in the future were “sure things” rather than “risks.”  The fact that accounting control fraud was sure to make the officers wealthy while causing grave losses to the firms explains Akerlof and Romer’s title – “Looting: the Economic Underworld of Bankruptcy for Profit.”


The rot in the financial sector was deep in our largest banks. 


“Sabeth Siddique, the assistant director for credit risk in the Division of Banking Supervision and Regulation at the Federal Reserve Board, was charged with investigating how broadly loan patterns were changing. He took the questions directly to large banks in 2005 and asked them how many of which kinds of loans they were making.  Siddique found the information he received ‘very alarming,’ he told the Commission.

In fact, nontraditional loans made up 59 percent of originations at Countrywide,

58 percent at Wells Fargo, 51 at National City, 31% at Washington Mutual, 26.5% at CitiFinancial, and 28.3% at Bank of America. Moreover, the banks expected that their originations of nontraditional loans would rise by 17% in 2005 to 608.5 billion. The review also noted the ‘slowly deteriorating quality of loans due to loosening underwriting standards.’ In addition, it found that two-thirds of the nontraditional loans made by the banks in 2003 had been of the stated-income, minimal documentation variety known as liar loans, which had a particularly great likelihood of going sour.


The reaction to Siddique’s briefing was mixed. Federal Reserve Governor Bies recalled the response by the Fed governors and regional board directors as divided from the beginning. ‘Some people on the board and regional presidents . . . just wanted to come to a different answer. So they did ignore it, or the full thrust of it,’ she told the Commission.


Within the Fed, the debate grew heated and emotional, Siddique recalled.  ‘It got very personal,’ he told the Commission.  The ideological turf war lasted more than a year, while the number of nontraditional loans kept growing….” (FCIC 2011: 20-21).


If you want to know how bad the rot was at the level of Alan Greenspan and Ben Bernanke, consider the fact that simply provision of data to them by the staff prompted a “heated and emotional … ideological turf war.”  It is so revealing that the simple act of the staff doing its job and providing vital information to their senior bosses was treated by the dominant bosses as an act of treason that produced a “very personal” attack on the staff.  It’s worth mentioning that the staffers who were worried were correct and Greenspan and Bernanke were dead wrong.  We can now understand why the regulators were so ineffective.  Greenspan, like Wagner, believed that accounting control fraud could not exist.  Underwriting standards and loan quality were collapsing, not “slowly deteriorating.”    


“Financial Factories”: The Extraordinary FCIC Testimony of Keith Johnson

Johnson is unique.  He was a senior officer of Washington Mutual (WaMu), then ran its notorious affiliate Long Beach Mortgage before leaving to run Clayton. 

“Unlike most large mortgage companies that contain multiple origination channels, retail,

direct mail, telephone and refinance desks, Long Beach was a sub prime lender that relied

100% on mortgage brokers.”

Long Beach was acquired by WaMu from Ameriquest – which was “absolutely corrupt.”  Ameriquest was notorious at the time WaMu purchased it, which tells us a great deal about WaMu’s controlling officers.  WaMu is the largest financial institution failure in U.S. history.  Johnson’s FCIC testimony is an essential introduction to the true scale of the three fraud epidemics and why it is essential to focus all of our scarce resources on the senior officers who led those epidemics.  He explains that a variety of changes “transformed traditional lending platforms into large financial factories.” 

“Several of these factories were originating, packaging, securitizing and selling at the rate of $1 billion a day. The quality control process failed at a variety of stages during the manufacturing, distribution and on-going servicing.”

Long Beach was a good test of the model of a financial fraud factory that incentivized a massive array of brokers to fraudulently originate mortgages.  Johnson’s conclusion about loan brokers should have provided Wagner with an epiphany about accounting control fraud. 

“[P]erformance data [have] shown that the broker model became flawed with greed, fraud and deception. Low barriers of entry, lack of regulatory supervision or enforcement, coupled with rich incentives for production created an environment that contributed to the surge in defaults. During my period of time at Clayton, I was able to observe the operations of close to 40 of the largest mortgage originators and servicers in the United States. To[o] late to be effective, it became obvious that the only way to correct the broker model was to shut it down and wait for regulatory reform and enforcement.”

That is an exceptionally important conclusion.  Johnson said that the entire broker system, which originated trillions of dollars in mortgages, was so rotten with “greed, fraud and deception” that it needed to be “shut … down.”  Not a single one of the brokers with whom he was familiar should have been allowed to continue in business.  No one in the government ever urged or required a lender to use loan brokers, so we know that the problem arose at the level of the lenders.  The lenders decided to enlist, incent, and maintain their ties with the loan brokers despite copious evidence that they were fraudulent financial factories.  That means that the officers controlling those lenders desired that outcome.

WaMu and Wagner

WaMu and Long Beach preyed on the Eastern District of California’s – Wagner’s district.  Prosecuting their senior officers should be one of Wagner’s five highest anti-mortgage fraud priorities.  Instead, “At least two of the cases [Wagner’s office prosecuted] named Washington Mutual, now part of JPMorgan Chase, as a victim.”

The reporter, Kathleen Pender, then added exactly the right points.

“Wagner said his investigation showed that JPMorgan sold securities that contained ‘a substantial number of loans’ it knew to be defective, meaning they did not comply with the underwriting guidelines of the loan originators, and did not disclose this to investors.

‘The appraisals were in some cases inflated. There were stated income loans,’ Wagner said.

In other words, they were the kind of loans Washington Mutual was allegedly duped into making.

Asked whether it is ironic that he was investigating JPMorgan for selling the kind of loans Washington Mutual and other banks were allegedly tricked into making, Wagner said, ‘It's not ironic, it's appropriate. A lot of the conduct, the fraud operated in an environment ... where everyone was eager to make more loans, get more commissions. Very little attention was paid to the creditworthiness of a lot of these loans.’”

So, JPMorgan fraudulent sold fraudulently originated mortgages through fraudulent reps and warranties, but it is somehow the “victim” of its fraudulent origination.  JPMorgan’s senior officers crafted – and maintained – the perverse financial incentives essential to the scheme to originate massive amounts of loans on the basis of inflated income and appraisals (“commissions”) and to sell them to the secondary market through fraudulent reps and warranties and gutted the underwriting systems so that they would not block uncreditworthy loans.  Wagner is oblivious to the irony because as the son of a prominent JPMorgan executive he knows that senior bankers can do no wrong.  The perverse compensation systems and the deliberate destruction of the banks’ vital underwriting systems were apparently created through “spontaneous generation” – just like rotten meat spontaneously generates maggots.

Wagner’s Hollow Promises of Prosecution

Wagner testified that “we vigorously pursue substantial jail sentences, restitution to victims, forfeiture of crime proceeds, and the imposition of severe monetary penalties through civil suits.”  Unless, of course, they are senior (or even middling) bank officers, in which case there are zero prosecutions for originating millions of fraudulent loans, no forfeiture of their crime proceeds, and virtually no civil suits.  Further, the “restitution” ordered in cases against the fraud mice frequently goes to the principal fraud perpetrators.


Wagner Pretends that the Large Banks and their Controlling Officers do not Exist

Faced with all the testimony evidencing the three epidemics of accounting control fraud and my letter to him explaining why his claim that banksters would never deliberately make bad loans was wrong, Wagner had the perfect opportunity in his FCIC testimony to try to support his position.  He might have testified that he had investigated the large lenders and their senior officers always sought to underwrite loans superbly.  That wouldn’t be true, but at least it would be responsive.  What Wagner did instead, as he did with his mortgage fraud training materials for AUSAs that I have discussed at length, was remove the banksters and the big banks from his narrative.

Wagner Blames the Fraud Mice

Wagner’s testimony is an exercise in self-parody.

“Although the mortgage fraud we have seen in this district takes a number of forms, the fraud schemes prevalent during the period from 2003 through 2008 were loan origination schemes, all of which essentially come down to one thing – material lies to the mortgage lender.”


“Seen” is the operative word.  The three epidemics of accounting control fraud that drove the crisis were present in record amounts in Wagner’s district, but all he saw was the mice.  To him, it’s a simple story of bad people lying to the innocent “mortgage lender.”


Wagner doubles down on his “the mice did it” meme.


“Mortgage fraud perpetrators primarily lied about borrowers’ qualifications for obtaining a mortgage loan, about the true market price of the property securing the mortgage loan, and about what the money being borrowed was to be used for. In our work, we have seen mortgage professionals who lied to increase their already-generous commissions, real estate investors who lied to finance property-flipping schemes, buyers and sellers who lied to extract equity from homes or simply to strip cash out of the transaction, and builders who lied and used straw buyers to get properties off their books in a down-turning market.”


Again, the key word is “seen.”  One of our mantras with regard to sophisticated frauds is that “if you don’t look; you don’t find.”  The occupation that is conspicuously missing from this son of a senior bank executive is bank executives – the bankers and brokers who are incentivized through “commissions” paid for closing loans are the fraud mice.

Wagner’s Initial Misrepresentations

Wagner starts out peddling the false claim that the crisis occurred because “With loans being re-sold on the secondary market shortly after they were closed, these loan originators were insulated from the consequences of their bad loans.”  This is not true.  Loans sold to the secondary market were overwhelmingly sold on the basis of “reps and warranties” and that is why so many successful lawsuits have been brought for fraudulent reps and warranties.  Fraudulent sales to the secondary market are also criminal. 

The lenders and their officers were not “insulated from the consequences of their bad loans” by gaps in the law.  They were insulated from the consequences of their criminal act of defrauding secondary market purchasers by the anti-regulators and the anti-prosecutors – led by the banksters’ best friends – Obama, Holder, Breuer, and Wagner.  (Yes, Bush and what Tom Frank aptly named his Wrecking Crew were even worse.)

Wagner then claims no one could spot mortgage fraud until the housing bubble burst.

“At the same time, it is important to note that, although the extent of the mortgage fraud schemes occurring during this period are clear as we sit here today, it took the drop-off in the housing market to bring them to light.”

It is “clear” that the major mortgage fraud schemes are not “clear” (or even translucent) to Wagner today, much less when he testified in 2010.  In fact, as I quoted from Fitch’s study, normal underwriting would have detected and prevented the overwhelming majority of the fraud schemes – preventing the frauds from being committed.

The appraisers spotted the lenders’ appraisal fraud schemes no later than 1998 and warned publicly from 2000 onwards about such frauds.  The 2003 and 2006 surveys of appraisers confirmed their warnings.  DEMOS called appraisal fraud “epidemic” in 2005.  The FBI warned publicly in 2004 of an “epidemic” of mortgage fraud.  We (OTS’ West Region) stopped mortgage fraud via liar’s loans in Orange County, California in 1990-1991 because we listened to our examiners’ warnings that no honest lender would make liar’s loans.  At our examiners spotted problem Orange County real estate prices were surging.  Wagner’s statement is preposterous.

The reason for Wagner’s clumsy lie became clear in his next statement – he is making an apologia for elite bankers and his office’s failure to stop the fraud epidemics despite copious warnings.

“Similarly, lenders did not have reason to audit their files for fraud, file Suspicious Activity Reports, or refer cases to law enforcement when loans were being re-paid in full. For these reasons, our mortgage fraud enforcement efforts really took off in 2007 and 2008, once the backsliding market brought the fraud into high definition. Once these investigations developed, the extent of the fraud, reaching back as far as 2003, became visible.”


Wagner’s apologia his office’s failure to even serve as a speed bump to rise of the triple mortgage fraud epidemics is normal, but his shilling for the industry reveals another aspect of why DOJ has suffered its greatest strategic prosecutorial defeat.  Lanny Breuer, when head of the Criminal Division, lost sleep not over the catastrophic damage done to America, Americans, and other people by the banksters, but over the supposedly terrifying risk that a bank being run as a criminal enterprise would be put in receivership.  Attorney General Eric Holder testified that he thought the largest banks might be too big to prosecute (the public reaction soon caused him to try to walk that back). 


Wagner’s shilling for the banks is even worse because he repeatedly says things that are false but make it much harder for a courageous AUSA to prosecute the elite banksters.  Lenders had every reason to conduct proper underwriting to prevent fraud, to audit to look for fraud, and to make criminal referrals for mortgage fraud.  Wagner has this bizarre view that internal audit only checks on things if they are reported to be in crisis and that internal auditors (absent illegitimate pressure from management) are incapable of deciding to audit a lending activity that is reporting results that are “too good to be true.” 


Federally insured lenders are mandated to file criminal referrals about crimes regardless of whether the loss was reduced by a housing bubble.  If we had vigorous regulators they would have sanctioned hundreds of lenders for failing to make criminal referrals.  An honest lender would file criminal referrals for mortgage fraud regardless of whether it had a regulatory to do so and regardless of whether the mortgage fraud losses had been reduced by a bubble.


The lenders were the leading cause of the three fraud epidemics.  While fraud increased sharply from 2003 on because banksters decided to massively increase the origination of fraudulent liar’s loans, appraisal fraud was a severe problem no later than 1998.


Wagner Testifies that the Banksters Created a Criminogenic Environment

Wagner’s testimony fatally undermines his thesis that the mice did it by showing instead that the banks’ senior officers repeatedly chose actions that optimized their ability to loot the bank. 

“These loan products were sold by the lenders’ own account executives in concert with independent mortgage brokers, both of whom earned substantial commissions on every home purchase or mortgage re-finance. These commissions, while substantially increasing the cost of the loan to the consumer, were not as transparent as they are today, and provided an incentive to generate as many loans as possible.

Many individuals who acted as mortgage brokers had little or no previous training in the field, and often were not even licensed, operating instead under the license of an off-site broker who may not have exercised any actual oversight. Some of the off-site brokers operated multiple unlicensed sub-offices in different locations, each producing scores of fraudulent loans.

Licensing and professional development requirements for appraisers, title officers, and real estate salespeople were low enough to allow quick entry by individuals more interested in earning quick money than adhering to professional standards.

‘Stated income’ loans were widely available, requiring little or no proof of income and employment, and leading some unscrupulous mortgage brokers and account executives to simply create income numbers to justify a loan. With compensation tied almost entirely to the amount and volume of loans produced, and large bonuses available to high-producers, mortgage brokers and account executives had a strong incentive to push loans through.

And, in the days of exponentially rising home prices, borrowers and banks were protected from the effects of fraud by the easy ability to re-sell the home, and thereby recoup the loan….”

Note that the most senior bankster in Wagner’s testimony is the lowly bank “account executive.”  I’ll summarize the key points quickly.  First, the lenders’ senior personnel made each of the key business choices that Wagner described.  No one told them to use loan brokers, much less unlicensed loan brokers with no experience and subject to no meaningful regulation.  No one told them to then compensate the loan brokers through a means that Wagner admits successfully created perverse incentives to engage in fraud.  No one told them to make liar’s loans – the ideal “ammunition” for mortgage fraud.  No one told them that once they were warned on numerous equations that their actions were leading to endemic fraud that they should continue these perverse incentives.  

No, borrowers and lenders were not protected from fraud.  In a housing bubble, the best way for a mortgage lender to suffer material losses is to make a material number of fraudulent loans.  What Wagner has described include many accounting control frauds. 

“[W]e have heard witnesses describe how account executives of the lenders themselves would sit down in the offices of mortgage brokers, both licensed and unlicensed, to train them how to inflate income, generate false supporting documents, and package fraudulent loan files. Those mortgage brokers trained others who came and went in the fluid atmosphere of the mortgage loan business, creating a web of fraud that extended far and wide in this district. We have seen mortgage brokers encouraging buyers who are not qualified to buy a single property buy four to six properties within the space of two months, indicating to the lender that each is a primary residence, and hiding the multiple transactions by conducting them so close in time that they do not show up during the title searches conducted during the escrow process.”

Yes, and at the center of the “web of fraud” lies (er, lay) the bankster.  Wagner knows that  it was overwhelmingly the lender and its agents that put the lies in liar’s loans, but he fails to explain the significance of the fact to the FCIC (or the AUSAs he trains).

Wagner concludes on this sad note of non-analysis.

“Lenders have suffered losses as a result of fraud by real estate and mortgage professionals, their own employees, and by buyers, all of whom took advantage of an atmosphere where fraud was rife and commissions were easy.”

And who created this “atmosphere,” and maintained it after it was clear that it created an industry where “fraud was rife?” Who designed those “commissions?”  That would be the banksters who grew wealthy from something else they designed – modern executive compensation.  The same banksters suborned the professionals, perverting “controls” into their most valuable fraud allies. 

Wagner Confirms that the Regulators Oppose Prosecuting the Banksters

You have to read between the lines, but Wagner’s testimony confirms the death of criminal referrals from the banking regulators (from over 30,000 by OTS during the debacle to zero in response to this crisis) and their minimal support for prosecutions.  The financial regulatory agencies during the S&L debacle were the leading proponents of vigorous, prioritized prosecutions and the leading source of aid for those prosecutions.  Now, when Wagner testifies about criminal referrals (SARs) he doesn’t even mention criminal referrals from the agencies.  He mentions only referrals from the banks.  CEOs, of course, will not make criminal referrals against themselves, so agency referrals are essential to the prosecution of elite white-collar criminals.

Wagner testified about the members of the original local financial fraud task force he helped form in 2007 – which did not include any of the federal banking regulators.  He then lists the current task force members and the only federal banking regulator listed is the FDIC’s Office of the Inspector General (OIG).  It is the examiners and enforcement attorneys who have the vital expertise about underwriting and financial fraud, not the internal agency auditors.

Conclusion: The Fraud Deniers Rule – and Disaster Results

In the S&L debacle the combined forces of 2,500 regulators, 1000 special agents, and roughly 200 AUSAs were hyper-prioritized on detecting and prosecuting the worst frauds, which were invariably mortgage frauds led by senior S&L officers.  This produced the most successful prosecution of elite white-collar criminals in history.  It also prevented the debacle from causing an economic crisis.  The ability to identify such frauds led to our ability to stop the nascent wave of mortgage fraud through liar’s loans in Orange County, California in 1990-1991 before it could even cause serious financial institution failures.

Hindsight is rarely “20:20.”  The current crisis was allowed to grow so large because anti-regulators like Greenspan and Bush were in charge who shared Wagner’s faith-based claim that senior bankers were never criminals.  They refused to stop the epidemic of fraudulent liar’s loans, refused to respond to the appraisers’ petition and stop the epidemic of appraisal fraud, and attacked their own staff for daring to point out that the large banks were making huge and growing numbers of liar’s loans. 

Now, Holder has made Wagner his top prosecutor for mortgage fraud because he too is a (serious) fraud denier.  His testimony to FCIC is one of the shameful examples of how he has set out to systematically mislead the public about mortgage fraud by picturing the mice as the amazingly clever villains who defrauded the unsophisticated fraud lions.  The paramount perpetrators have been recast by Wagner/DOJ as the virtuous victims who “did not have reason to audit their files for fraud” at a time when they were fraudulently originating over two million home mortgage loans annually.

<i> <p> Bill Black is the author of <a href="">The Best Way to Rob a Bank is to Own One</a> and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.</i> </p>


<p> <i> Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his <a href="">Social Science Research Network author page</a> and at the blog <a href="">New Economic Perspectives</a>.</i>


Follow him on Twitter:   @WilliamKBlack

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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