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1 1 2 UNITED STATES OF AMERICA 3 FINANCIAL CRISIS INQUIRY COMMISSION 4 Official Transcript 5 6 Hearing on 7 The Impact of the Financial Crisis - Miami, Florida 8 Tuesday, September 21, 2010, 9:00 a.m. 9 Florida International University, Modesto A. Maidique Campus 10 College of Law, Rafael Diaz-Balart Hall 11 11200 S.W. 8th Street 12 Miami, Florida 33199 13 14 COMMISSIONERS 15 PHIL ANGELIDES, Chairman 16 HON. BILL THOMAS, Vice Chairman 17 BYRON S. GEORGIOU, Commissioner 18 HON. SENATOR ROBERT GRAHAM, Commissioner 19 HEATHER MURREN, COMMISSIONER 20 21 Reported by: Amber Cheek, Hearing Reporter 22 PAGES 1 - 229 23 24 25 2 1 2 P R O C E E D I N G S COMMISSIONER GRAHAM: This meeting of the 3 Financial Crisis Inquiry Commission is called to 4 order. 5 distinguished Phillip Angelides. 6 I would like to introduce our chair, CHAIRMAN ANGELIDES: Good morning. Thank you, 7 Senator Graham, and thank you each and every one of 8 you for being here this morning at this public 9 hearing of the Financial Crisis Inquiry Commission. 10 with no further adieu, I'd like to start off today 11 by asking Dean Alex Acosta to come forward and 12 greet us on behalf a Florida International 13 University, the College of Law. 14 Thank you, Dean. 15 DEAN ACOSTA: 16 Mr. Chairman, Mr. Vice President, and Members Thank you, Mr. Chairman. 17 of the Commission, welcome to Florida International 18 University's College of Law. 19 for the critical work you're doing. 20 of mortgage fraud is an important one. 21 I want to thank you Today's topic Prior to becoming Dean, I served as a United 22 States Attorney here in South Florida for five 23 years. 24 impact of mortgage fraud in our community and our 25 nation. I am far too familiar with the pernicious In 2007 I started a mortgage fraud task 3 1 Preliminary remarks 2 force combining federal and state authorities and 3 it was successful and it investigated and it 4 prosecuted mortgage fraud, and it continues to be 5 in force today. 6 That said, prosecutorial success is not the 7 answer. 8 happens in the first place is far more important 9 than prosecuting it after it happens. 10 11 Preventing mortgage fraud before it Prevention is better than prosecution. Now, as Law Dean, I see mortgage fraud from a 12 very different perspective. 13 upstairs a student approached me and asked to start 14 a foreclosure clinic. 15 losing their homes, he said, and we as law students 16 as future members of the Bar should help. 17 right. 18 Just yesterday Thousands of individuals are He's Here at FIU's College of Law, we started last 19 year a bankruptcy clinic. Our students are working 20 with the Florida Bar to help individuals who need 21 to file bankruptcy yet whose financial resources 22 are so limited, they can't afford to hire a lawyer. 23 Here at FIU's College of Law, we started this year 24 a small investment fraud clinic. 25 to help small investors, often retirees who have Our students were 4 1 Preliminary remarks 2 lost their savings due to misconduct by 3 broker/dealers. 4 so small that no lawyer will take their case even 5 on contingency. 6 there in large part because of the financial crisis 7 that your Commission is charged to investigate. 8 So as a former U.S. Attorney and now a Law 9 Yet these individuals have savings The need is there and the need is Dean, I ask that when you consider today's 10 testimony, please consider more than what is being 11 done to prosecute mortgage fraud. 12 what can be done to prevent this in the first 13 place. 14 today's state of affairs is not repeated in the 15 future. 16 Please consider Please consider what can be done so that Your job is far from easy. It is a bipartisan 17 commission. You have a special opportunity to 18 break through the gridlock. 19 opportunity to have far-reaching impact. 20 thank you for your work. 21 stands ready to assist you in your endeavors in 22 whatever way we can. So I FIU's College of Law 23 Thank you and welcome. 24 CHAIRMAN ANGELIDES: 25 You have an Thank you very much, Dean Acosta, and thank you very much for your gracious 5 1 2 3 Preliminary remarks hospitality and all the help of you and your staff. What I'd like to do now is turn this hearing 4 over to Senator Graham. 5 tremendous honor to be in his home state. 6 a tremendous amount of admiration for Senator 7 Graham. 8 civic life in this state and on the whole country 9 both as Governor and as a Senator in the United 10 11 And I will just say it's a We have He's obviously made a tremendous mark on States Senate. And so with no further adieu, I will hand this 12 gavel to Senator who I know knows how to wield it 13 judicially and well and this hearing is his. 14 COMMISSIONER GRAHAM: Thank you, Mr. Chairman 15 Angelides. 16 bring one of the hearings of this Commission to 17 Miami. 18 for it is that in many ways Miami is the center of 19 a serious national scandal of predatory practices 20 and mortgage fraud. 21 It is an honor that you have decided to Unfortunately, as we will learn, the reason Before continuing, I would like to quickly 22 introduce our guests who accompany me as members of 23 the Commission. 24 Ms. Heather Murren of Las Vegas. 25 Starting from my right is Thank you, Heather. 6 1 2 Preliminary remarks To my left is Phil Angelides, Chair, from whom 3 you will hear shortly, Mr. Bill Thomas from 4 California, and also from Las Vegas, Mr. Byron 5 Georgiou. 6 Thank you all for being with us today. 7 I would like to thank President Rosenberg who 8 accepted our initial invitation to come to Florida 9 International University as the site of this 10 hearing and then to Dean Acosta for offering the 11 beautiful facilities of the College of Law as our 12 venue. 13 As I indicated earlier, Florida is among the 14 states which have been most affected by the 15 mortgage meltdown. 16 Florida region, of every 111 homes, one is in some 17 stage of foreclosure. 18 as a whole where one out of 381 homes is in some 19 stage of foreclosure. 20 and to anyone who lives in this state. 21 As an example, in this South This compares to the nation A shocking statistic to me The losses to Florida's economy are directly 22 connected to the ongoing financial crisis. With an 23 unemployment rate of 11.6 percent, 2 percentage 24 points higher than the national average, Florida's 25 families and communities and its leaders are 7 1 2 Preliminary remarks struggling to find means to recover. 3 The testimony, interviews and documents 4 gathered by the Commission since Congress gave us 5 our mandate last year, we have learned that from 6 2003 to 2006, nationally the volume of higher-risk 7 mortgages made to borrowers more than doubled and 8 that by 2007 and 2008 in Florida, the reported 9 incidents of mortgage fraud and suspect lending 10 practices had also more than doubled. 11 that Florida leads all the 50 states in the number 12 of borrowers who misrepresented their incomes or 13 their ability to repay mortgages, according to the 14 Federal National Mortgage Association. 15 predatory practices emerged in the origination of 16 both new mortgages and the refinancing of existing 17 mortgage. 18 We now know Fraud and Today the Commission has invited experts to 19 this hearing who can help us understand the 20 connections between these unsavory lending 21 practices and the waves of mortgage defaults and 22 foreclosures in Florida and nationally. 23 forward to hearing from them today. 24 willingness to assist us in understanding these 25 important and frequently complex issues. I look I appreciate their 8 1 2 Preliminary remarks I want to thank my fellow commissioners 3 for traveling to my home community to be part of 4 this hearing and look forward to our -- to your 5 comments and answers to our questions. 6 I would now return the gavel, or at least the 7 podium, to Chairman Angelides for his opening 8 remarks. 9 10 11 CHAIRMAN ANGELIDES: day long. You've got the gavel all That's yours. So, first of all, thank you very much for 12 having us here in Florida. 13 some very brief comments, because I'd like to get 14 on with the testimony of the witnesses and our 15 questions to them today on this very important 16 issue. 17 And I'm going to make Just for perspective, this Commission, The 18 Financial Crisis Inquiry Commission, was formed in 19 May of 2009 with the passage of the Mortgage Fraud 20 and Recovery Act signed by the President of the 21 United States. 22 a bipartisan commission, with an important national 23 mission, and that is to examine the causes of the 24 financial and economic crisis that still grips this 25 country today. But we are a ten-member commission, 9 1 2 Preliminary remarks When we started on our journey, there were 3 many that said that by the time our report is 4 issued to the President and the Congress and the 5 American people by December of this year, 6 December 15th, that the financial crisis would be a 7 dim memory. 8 country, it is still very much with us and likely 9 to be for years ahead. 10 Unfortunately, for the people of this As we gather today in Florida, 27 million 11 Americans are out of work, can't find full-time 12 work, or have stopped looking for work. 13 million American families have lost their homes to 14 foreclosure. 15 the foreclosure process. 16 families are seriously delinquent on their loans. 17 Eleven trillion dollars of wealth of American 18 households has been wiped away like a day trade 19 gone bad. Two Another two million families are in And yet another 2 million 20 So as we meet today, this crisis is still very 21 much with us and we are charged with trying to help 22 the American people and policymakers have a better 23 understanding of what brought our financial system 24 to its knees. 25 with the resources we've had and with the time Over the course of the last year 10 1 Preliminary remarks 2 given us by the Congress, we've been hard at work 3 to try to do the work necessary to try to explain 4 this disaster, this financial disaster for our 5 country. 6 We've conducted over 700 interviews of people 7 in communities around this country, people who sat 8 at trading desks, people ahead of the major 9 financial institutions of our country and the 10 people who were charged with regulating and keeping 11 safe our financial system. 12 We have reviewed millions of pages of 13 documents, and in Washington and New York we held 14 14 days of hearings looking at issues like subprime 15 lending and the growth of derivatives and the role 16 of the credit rating agencies, and each and every 17 one of those hearings have investigated and asked 18 questions of the participants who are at the center 19 of this storm. 20 Over the last several weeks, we've gone across 21 this country to communities, hometowns of 22 commissioners, that have been hard hit by the 23 crisis. 24 home of the Vice Chairman, a place wracked by 25 double-digit unemployment and rampant foreclosures. We started in Bakersfield, California, the 11 1 Preliminary remarks 2 We went to Las Vegas, the hometown of Ms. Murren 3 and Mr. Georgiou, a community where 72 percent of 4 the homes are under water in terms of the home 5 value versus the mortgage. 6 Today we are here in Miami, and then on 7 Thursday of this week, we round up our hearings in 8 my hometown of Sacramento, another community that 9 is struggling very, very hard in the wake of the 10 11 financial meltdown. I'm looking forward to today's testimony. One 12 of the things that from day one that I thought was 13 central to our examination is to examine how the 14 nature of lending went so terribly wrong in our 15 country, how it came to be that toxic mortgages 16 were made and how it came to be that those toxic 17 mortgages infected our financial system. 18 very anxious for today's hearing to learn about 19 this issue of mortgage fraud and to learn about 20 what happened here in South Florida. 21 So I'm Mr. Chairman, thank you very much for having 22 us here today and I look forward to today's 23 hearing. 24 25 COMMISSIONER GRAHAM: Chair. Mr. Bill Thomas, Vice 12 1 2 3 Preliminary remarks VICE CHAIRMAN THOMAS: Thank you very much, Senator. 4 Pleasure to be with you once again 5 I have not spent a lot of time in Florida. I 6 grew up in Southern California, especially in the 7 '50s and the '60s and the '70s. 8 rapid growth and expansion, glancing over at one of 9 our first witnesses from the University of So in terms of 10 California, Irvine -- actually I knew it as the 11 Buffalo Ranch on the way to Bal Island on the 12 Pacific Coast Highway back then, and that was all 13 there was, was nothing but a Buffalo ranch. 14 it's a pleasure to have you as well. 15 So Most of my research and understanding of 16 Florida I've taken as my primary text, those 17 textbooks written by Carl Hiaasen, to fully 18 understand the intricacies of the way things work 19 in Florida, especially South Florida. 20 it's a lot of fun reading him, the job that we have 21 is a very serious one. 22 And although Obviously we have to explain what happened. 23 But in those areas of difficulty and explaining 24 what happened, I really think to a very great 25 degree is mortgage fraud, trying to isolate it and 13 1 Preliminary remarks 2 understand it. 3 the tools we have to measure fraud, however you 4 define that, and what we need to do perhaps to 5 sharpen those tools and probably make more aware 6 the real human damage done by those who were 7 involved in an industry, once again relying on Carl 8 Hiaasen and my experience in Southern California. 9 I'm interested in comments about That tends to put it in a perspective that 10 needs to be looked at much more carefully, and I 11 guess Miami is the best -- one of the best places 12 to be. 13 was pushing Medicare fraud out of the number one 14 spot. But I think Medicare has recaptured the 15 lead. Our hope is that as we learn what happened 16 and if we can do a good job of explaining what 17 happened, the area of fraud has no role in any 18 activities. 19 in which fraud was involved in the housing bubble 20 and the consequence collapse of that bubble, it is 21 something that we should never have to investigate 22 again to try to figure out what happened to whom 23 and when. I understand at its height, mortgage fraud But when you begin to examine the way 24 Thank you, Mr. Chairman. 25 COMMISSIONER GRAHAM: Thank you very much, 14 1 2 3 Preliminary remarks Mr. Thomas. I'm going to ask the witnesses to rise, as we 4 have each of our public hearings and will today, 5 we're asking each of the witnesses to be sworn. 6 Would you please raise your right hand. 7 Do you solemnly swear or affirm under the penalty of perjury that the testimony 8 you are about to provide the Commission will be the truth, the whole truth, and 9 nothing but the truth, to the best of your knowledge? 10 MS. FULMER: 11 MR. PONTELL: 12 MR. BLACK: I do. I do. I do. 13 14 (Witnesses sworn.) COMMISSIONER GRAHAM: All right. In front of 15 you, you see this small box. This is the timer. 16 Unfortunately, what you will see will be 17 three-colored signals of green which indicates you 18 are speaking on your time, a yellow which means 19 that you have one minute, and then red which means 20 that to please conclude your remarks. 21 will have five minutes for your openings statement 22 to be followed by questions from the members of the 23 Commission. Each of you 24 Thank you. 25 Our first panel is led by Ms. Ann Fulmer who 26 is the Vice President of Business Relations at 15 1 Interthinx and Co-founder of the Georgia Real 2 Estate Fraud Prevention and Awareness Coalition. 16 1 Opening - Fulmer 2 She will be followed by Mr. Henry Pontell, 3 Professor of Criminology, Law and Society and 4 Sociology at the University of California, Irvine, 5 and finally Mr. William K. Black, Associate 6 Professor of Economics and Law at the University of 7 Missouri-Kansas City campus. 8 9 10 11 Thank you to each of you for your participation today. Missouri. I'm sorry. University of Missouri, Kansas City. 12 Ms. Fulmer? 13 MS. FULMER: 14 Mr. Chairman, Mr. Vice Chairman, Members of Thank you. 15 the Commission, my name is Ann Fulmer. I hold a 16 Bachelor of Arts in Mass Media Communications and a 17 law degree both from the University of Akron. 18 have studied the mortgage fraud against lenders and 19 how to detect it and have worked diligently to 20 prevent it since 1966 when criminals began to 21 illegally flip houses in my neighborhood just 22 outside Atlanta, Georgia. 23 In this quest I have worked as a licensed 24 private detective, a county tax assessor as an 25 expert witness and briefly as a criminal I 17 1 Opening - Fulmer 2 prosecutor. I also co-founded the Georgia Real 3 Estate Fraud, Prevention and Awareness Coalition 4 whose mission includes bringing public awareness of 5 the crime and the damage it brings to communities. 6 For the past five years, I have been the Vice 7 President of business relations at Interthinx and 8 various analytic companies. 9 leading provider of automated fraud detection and 10 prevention technology to the residential mortgage 11 lending industry. 12 lecture on the topic at industry conferences and 13 have been called upon to provide training and 14 assistance to the federal law enforcement agencies, 15 including the FBI, the Secret Service, HUD's Office 16 of Inspector General and federal prosecutors. 17 Interthinx is a In that capacity, I frequently I think it's important at the outset to 18 clearly distinguish between mortgage fraud and 19 predatory lending, because those outside the 20 industry frequently use the terms interchangeably. 21 In predatory lending cases, the borrower is 22 the victim of the lender or broker's failure to 23 make proper disclosure of the terms and fees 24 associated with the loan or the loan containing 25 terms harmful to the borrower or failure to provide 18 1 Opening - Fulmer 2 a tangible benefit to the borrower. 3 of these cases are pursued in the civil courts, 4 most recently as a defense of foreclosure. 5 The majority In mortgage fraud cases, the victims are the 6 lender, the communities in which it is perpetrated, 7 and now, by virtue of the fact that more than 90 8 percent of loans originated today are purchased, 9 insured and guaranteed by the federal government, 10 directly or indirectly through Fannie's and 11 Freddie's conservatorship, the U.S. taxpayers. 12 Violations of mortgage fraud are prosecuted as a 13 criminal matter. 14 I was a stay-at-home mom in 1996 when I first 15 became aware of mortgage fraud against lenders. 16 Houses in my up-scale neighborhood that had been 17 sitting on the market for years were finally 18 beginning to sell. 19 that the purchasers were leaving the closing table 20 with large amounts of cash and neighbors began to 21 complain about unusual activities at these houses. 22 The new occupants actively avoided contact with our 23 neighbors. 24 didn't mow their yards or keep up the houses. 25 covered their garage windows with paper and others I soon began to hear rumors They did not seem to have jobs. They Some 19 1 2 Opening - Fulmer had a lot of late-night car traffic. 3 Then the neighbor told me that an IRS agent 4 and an investigator from the State Department of 5 Banking and Finance were investigating these sales 6 and he asked me to help them. 7 investigate, I discovered that a handful of people 8 were involved in all of the unusual sales in my 9 neighborhood; that they were buying and reselling 10 these houses on the same day with price increases 11 of up to $300,000; and that they were doing this in 12 communities throughout metropolitan Atlanta. 13 When I began to That's when I discovered illegal flipping. In 14 a typical flip, the perpetrator signs a contract to 15 purchase the property at the asking price, but 16 without making any improvements, he obtains an 17 appraisal that shows a value that can be as much as 18 300 percent higher than the actual value. 19 perpetrator then finds an end buyer or steals 20 someone's identify and fabricates critical 21 information on the mortgage application in order to 22 fool the lender who would be granting the loan. 23 The higher priced sale to the end buyer is closed 24 just before the perpetrator's actual purchase at a 25 lower price and the proceeds from the higher priced The 20 1 Opening - Fulmer 2 sale are used to fund the perpetrator's purchase at 3 the lower price. The excess funds are pocketed by 4 the perpetrator and shared with his collaborators. 5 Mortgage fraud is essentially bank robbery 6 without a gun. Its perpetrators include street 7 gangs, drug traffickers, real estate agents, 8 closing attorneys, appraisers, mortgage brokers, 9 bank executives, ministers, teachers and even 10 police officers. 11 in any community in every state at any price range 12 during rising and falling markets and it leaves 13 these communities devastated. 14 It can and does happen anywhere The variety seems to shift constantly 15 depending on market conditions, and flipping did 16 play a major role in the initial escalation of 17 housing prices which drew speculative investors and 18 more fraud into the market to the point where 19 houses eventually became unaffordable in many 20 markets. 21 This in turn led to the abuse of stated-income 22 and no-document loan programs, particularly through 23 the broker mortgage channel, in order to qualify 24 borrowers for mortgages that if they had been fully 25 amortized they could not afford to repay. 21 1 Opening - Fulmer 2 When the housing market began to cool in 2005, 3 the riskiest borrowers began to default in large 4 numbers in what came to be known as the subprime 5 mortgage meltdown. 6 became so pervasive that investors in residential 7 mortgage backed securities began to demand that the 8 originators repurchase entire pools of mortgage 9 loans. These defaults eventually 10 Since most lenders were originating mortgages 11 to sell on the secondary market, they did not have 12 the funds available to meet investor demand, and 13 when those lenders began to fail, it created a 14 liquidity crisis and ultimately led to the great 15 recession. 16 I will take your questions now. 17 COMMISSIONER GRAHAM: 18 Fulmer. 19 Mr. Henry Pontell? 20 MR. PONTELL: 21 Thank you very much, Ms. Thank, you Senator Graham, Chairman Angelides, and Members of the Commission. 22 VICE CHAIRMAN THOMAS: 23 mics are pretty unidirectional. 24 you. 25 MR. PONTELL: Okay. Pull the mic up. The Bend it towards Thank you. 22 1 2 Opening - Pontell Thank you very much for the opportunity to 3 present testimony to you today on the workings of 4 mortgage fraud and its effects of fraud. 5 Senator Graham, as a side note, I should 6 mention that about 20 years ago I testified in 7 front of you on a Senate Banking Committee Hearing 8 regarding the government response to savings and 9 loan fraud. 10 So it's nice to see you again. As a university-based criminologist, I have 11 studied white-collar and corporate crime for three 12 decades beginning with the first federally funded 13 study of medical fraud in the 1980s. 14 this I was a principal investigator over the U.S. 15 Department of Justice funded study of the causes of 16 the Savings and Loan Crisis and government 17 response, which produced the award winning book Big 18 Money Crime. 19 fraud in other major financial debacles, including 20 the 1994 Orange County bankruptcy, the 2002 21 corporate and accounting scandals and the current 22 economic disaster. 23 Following I have written about the role of My findings indicate that fraud has played a 24 significant role in causing the financial losses 25 that led to major debacles occurring over the past 23 1 Opening - Pontell 2 25 years. 3 future crises is to fully understand the nature and 4 extent of fraud. 5 "risky business" has resulted in highly destructive 6 policymaking and ever-larger financial crisis. 7 or practically non-existent government oversight 8 created what criminologists have labeled a 9 crime-facilitative environment where crime can 10 11 The only way we can effectively prevent Assigning major financial loss to Lax thrive. The major losses occurring through mortgage 12 frauds in Florida and throughout the country that 13 brought on the current economic crisis were not due 14 to scam artists, notwithstanding the fact that 15 their crimes have now become collectively quite 16 significant and warrant serious attention by 17 authorities. 18 produced by large lending institutions and Wall 19 Street companies that ran afoul of the law during 20 endemic waves of fraud typically because of 21 decisions that are made at the top that often 22 exploit perverse market incentives and essentially 23 turn the organization into a weapon with which to 24 commit crime; Lincoln Savings and Loan and Charles 25 Keating, Enron and Jeff Skilling and Ken Lay, Rather, the original losses were 24 1 Opening - Pontell 2 Countrywide and Angelo Mozilo, the list goes on. 3 All of these examples have one major factor in 4 common. 5 engaging in what is known as control fraud. 6 other words, controlling insiders had suborned both 7 internal and external safeguards and checks and 8 essentially looted their own companies. 9 Those in charge had enriched themselves by In For example, the problems experienced at 10 Countrywide Financial, the country's largest 11 mortgage lender, that at its height, financed one 12 out of every five American home loans -- and that 13 has already settled a large civil case in 14 Florida -- are illustrative of massive fraud in the 15 industry. 16 A senior Vice President for the company noted 17 in his 2009 book that its business model of a "new 18 system of loans and refis awarded to anyone with a 19 pulse, was, in retrospect, long-term madness driven 20 by short-term profit." 21 company's CEO and chairman, currently faces insider 22 trading and securities fraud charges for failing to 23 disclose the lax lending practices and the hyping 24 of the company when he knew it was going south. 25 Between 2001 and 2006 he took $400 million in Angelo Mozilo, the 25 1 Opening - Pontell 2 salary, stock options and bonuses from the company. 3 Moreover, the evidence seems damming on its face. 4 Mozilo's e-mails to insiders contain messages such 5 as, "In all my years in the business, I have never 6 seen a more toxic product," and "Frankly, I 7 consider that product line to be the poison of our 8 time." 9 Regarding the current crisis, one recent study 10 analyzed the responses of persons working in 11 brokerage, lending, escrow, title, and appraisal 12 offices documenting the rationalizations that were 13 used to explain their involvement in 14 mortgage-related crimes. 15 primary epidemic of control fraud which produced 16 echo epidemics consisting of those who purchased 17 the nonprime product. 18 of mortgage frauds in the subprime lending industry 19 that resulted from inadequate regulation, the 20 indiscriminate use of alternative loan products, 21 and the lack accountability in the industry. 22 Perpetrators commonly perceived many acts of 23 mortgage fraud, origination fraud, as inseparable 24 from conventional lending practices that are 25 necessary in any "successful" legitimate subprime These individuals fed the The findings detail accounts 26 1 Opening - Pontell 2 business. 3 of a common theme: 4 and getting our clients what they want. 5 usually happy I got the loan for them." 6 It came down to different manifestations "We are simply doing our jobs They are It's also instructive to look back on the 7 Savings and Loan Crisis to understand how fraud 8 permeates major crisis. 9 evidence, at least one thing is certain from this Given the best available 10 sad chapter in American history. 11 financial losses directly attributable to 12 white-collar crimes that were discovered and 13 recorded in official statistics on the Savings and 14 Loan Crisis represent only the tip of the iceberg. 15 The incredible In terms of the current crisis, three major 16 issues stand out. 17 compensation policies turned private market 18 discipline into perverse incentives encouraging 19 massive control fraud even at the least -- at the 20 most elite firms. 21 The first is that executive Second, the FBI reacted to its severe capacity 22 problems in a manner that failed to challenge Bush 23 administration policies that virtually guaranteed 24 that the FBI would fail to stem the tide of fraud. 25 Third and finally and central to the high 27 1 Opening - Black 2 incidence of subprime fraud was the fact that no 3 one involved in the process of evaluated credit 4 quality. 5 missed or allowed the widespread and severe nature 6 of these frauds. 7 8 9 10 Had they done so, they could not have I'm happy to answer any questions you may have related to my testimony. COMMISSIONER GRAHAM: Thank you very much, Mr. Pontell. 11 Mr. Black? 12 MR. WILLIAM BLACK: Thank you, Members of the 13 Commission, for your invitation. 14 appointment is in economics. 15 appointment in law. 16 criminologist and I'm a former financial regulator 17 active in regulating to prevent these kinds of 18 frauds and helping to bring about the successful 19 prosecution in the savings and loan context. 20 My primary I have a joint I'm a white-collar So what is different this time around? 21 Mortgage fraud is vastly greater than Medicare 22 fraud in terms of losses. 23 numbers on that. 24 estimate, they estimate that stated-income loans 25 became 49 percent of total originations, new And we have excellent If you look at the credit Suisse 28 1 Opening - Black 2 originations by 2006. 3 it's 43 or 49, but it became huge. 4 People can debate whether Those are liar loans. We also have excellent 5 information on liar's loans. Liar's loans, as the 6 industry's own expert said, warrant that phrase 7 "liar's loans" because they are, to quote them, an 8 open invitation to fraud. 9 seen fraud incidents with liar loans that starts in And we have consistently 10 the high 50s and goes to 100 percent literally of 11 the samples looked at. 12 about millions of fraudulent loans. 13 millions per year of fraudulent loans. 14 That means we are talking Now step back a moment. I repeat The Dean, in his 15 invitation, rightly talked about prevention. 16 industry historically in home mortgage lending for 17 all causes of losses, all causes, was able to keep 18 those losses under 1 percent. 19 about losses in the 40 percent range. 20 massively different has occurred. 21 This We are now talking Something And it can only come from the top and that's 22 what control fraud is all about. Someone had to 23 gut the underwriting. 24 loan flipping described is easy to stop. 25 competent lender with honest underwriting would Because, for example, the Any 29 1 Opening - Black 2 prevent all of those frauds that were described. 3 And we did so for 40 years. 4 Why then do we have this change? Because here 5 is the recipe for a lender to optimize accounting 6 fraud, reported income and, therefore, their 7 bonuses in the modern era, one, grow like crazy; 8 two, make really bad loans at a premium yield; 9 three, have extreme leverage; four, provide only 10 11 trivial loss reserves. If you do that, then both criminology, 12 regulation, and economics from the Nobel Prize 13 winning economist George Akerlof said you will 14 produce, to quote Akerlof, a sure thing. 15 follow the strategy, you will report record 16 profits. 17 get record compensation. 18 You In the modern era, that means you will So how did they do this? They put people 19 below them on compensation systems as well, and you 20 got absolutely rich in this industry because they 21 didn't care about loan quality. 22 compensation would pay you at times $10,000 if you 23 would bring in a particularly high yield, which is 24 to say definitely fraudulent loan. 25 $10,000 doing that and they are -- then would not So the You could make 30 1 Opening - Black 2 look. 3 would not use their own professional appraisers. 4 They would not look for loan flipping. In fact, what did they do? They At Washington 5 Mutual, and others we know from the investigation, 6 Attorney General Cuomo, that they had a blacklist 7 of appraisers. 8 were honest. 9 But you got on the blacklist if you So I ask you this: Why would an honest lender 10 ever inflate or even allow to be routinely inflated 11 appraisal values? 12 but it is suicidal for an honest lender. 13 gut the underwriting, you do get all kinds of other 14 opportunistic frauds. 15 prison, but we need to put the people at the top of 16 the food chain in prison, and I guarantee you, no 17 one is going to put 6 million Americans in prison 18 for mortgage fraud. It optimized fraudulent income, When you And I'm happy to put them in 19 Thank you. 20 COMMISSIONER GRAHAM: 21 I am going to start the questioning and then Thank you, Mr. Black. 22 we will ask Ms. Murren, Georgiou, to be the lead 23 questioners for this panel. 24 25 Ms. Fulmer, you outlined particularly the flipping component of mortgage fraud. Since 2006 31 1 Q & A - Session 1 2 and '7 when this became so publicly available and 3 known, what has been the response of governments at 4 the state and federal level to restrain this 5 practice? 6 MS. FULMER: 7 COMMISSIONER GRAHAM: 8 MS. FULMER: 9 On flipping? Yes. Well, actually, the market has done most of the correction on the flipping itself, 10 because flipping really only works in a rising 11 market. 12 call flopping where short sale properties -- 13 properties that are being involved in short 14 sales -- the prices are being artificially deflated 15 in order to create that elicit profit margin. 16 I think that to some extent, although it The schemes now have shifted into what we 17 wasn't acknowledged as the purpose, the home 18 valuation code of conduct and separation between -- 19 the wall, I guess, between loan originators and 20 appraisers was a step that helped reduce some of 21 the pressure on appraisers to come in at these 22 values. 23 I think that one of the things that has slowed 24 fraud down generally is the elimination of the 25 stated and no-documentation loan programs and 32 1 Q & A - Session 1 2 lenders' much higher use of the 4506T which is a 3 form that a borrower signs that allows the lender 4 to go directly to the Internal Revenue Service and 5 verify income. 6 fraud down tremendously. 7 That has I think put -- slowed The concern that we have at Interthinx is that 8 because schemes are constantly shifting, lenders 9 don't always recognize up front what's going on, 10 and that's why we're seeing the shifts into REO 11 properties and these are being flipped, and then 12 also in the short sale market. 13 COMMISSIONER GRAHAM: Did you notice any 14 difference between new loan originations and 15 refinancings during this period? 16 '07 for the first time in recent history, 17 refinancing exceeded new financings and at one 18 point were over twice the number of new homes being 19 financed. 20 level of activities as between those two? 21 From '05 to Did you see a difference in the type or MS. FULMER: I don't have those figures from 22 our analysts, but one of the common schemes during 23 the boom was for a perpetrator to acquire a 24 property using a straw borrower to on paper grant 25 that borrower a loan from a company that in reality 33 1 Q & A - Session 1 2 was a shell and then to present that straw 3 borrower's application to the bank and then owner 4 occupied cashes out and refinances it, so that what 5 was actually a purchase transaction was shown to 6 the bank as an owner occupied cash-out refi, and 7 that was something that was I think started more to 8 towards the middle of the 2000s. 9 COMMISSIONER GRAHAM: Mr. Pontell, the scheme 10 that you have outlined depends upon somebody at the 11 end of the day being willing to buy these 12 mortgages, and typically they were firms that would 13 buy mortgages for purposes of syndication and 14 mortgage backed securities and other forms of 15 collateralized derivatives. 16 Why were those people unaware of the quality 17 and the process by which the mortgages that they 18 were purchasing were manufactured? 19 MR. PONTELL: If I understand your question 20 correctly, Senator, it's why were they unaware 21 these were -- 22 COMMISSIONER GRAHAM: Well, why did they buy 23 and pay market rates for what appear now to be very 24 much over-valued mortgages? 25 MR. PONTELL: Right. 34 1 2 Q & A - Session 1 Well, the short answer to that question has to 3 do with a couple of things. First, conservative 4 ignorance on the part of those who were buying 5 these loans. 6 they intentionally didn't look at the quality of 7 these loans. 8 loans to move up the food chain and there were 9 incentives going down. Conservative ignorance meaning that There was an incentive for those 10 So what I was talking about in my testimony, 11 my written testimony, was these echo epidemics of 12 fraud. 13 incentive for making these loans at the lower level 14 and securitizing them at the upper level. 15 had these perverse market conditions and people 16 willing essentially to evaluate the credit quality. 17 If they were, then they never would have put these 18 securities packages together. 19 And what happened was that there was an COMMISSIONER GRAHAM: So you Were there some warning 20 signals that were available, and had they been 21 followed, could have detected this level of fraud 22 earlier and avoided its rampant application? 23 MR. PONTELL: Well, there were warnings as 24 early as 2004. The FBI made those warnings public. 25 But the policy that was followed was not to do what 35 1 Q & A - Session 1 2 was done during the '70s loan crisis, which was to 3 immediately create a national task force, regional 4 task forces, that would put together regulators and 5 enforcement agents so that they could prosecute 6 these frauds early on. 7 into examining these mortgage frauds, which they're 8 doing now, the numbers have gone up. 9 By the time the FBI did get So you have incredible system capacity 10 problems that could have been abated if these 11 warning signs were taken seriously as early as 2004 12 when they were made public. 13 COMMISSIONER GRAHAM: You mentioned the 14 failure of the FBI. 15 they didn't have adequate personnel to enforce? 16 Were the laws ineffective against the kind of fraud 17 that was being practiced? 18 FBI was not able to rein this in? 19 MR. PONTELL: Was that a failure because What was the reason the Well, part of it had to do with 20 resource allocations. As the FBI has been working 21 on terrorism now obviously since 2000 -- since the 22 9/11 attacks, but -- it has to do with system 23 capacity problems, it also has to do with them 24 focusing -- essentially because they didn't have 25 these task forces, which were necessary to 36 1 Q & A - Session 1 2 prosecute higher level frauds, control frauds, 3 during the Savings and Loan Crisis, they partnered 4 with the Mortgage Bankers Association which 5 essentially looks at frauds against lending 6 institutions rather than frauds that might be 7 committed by lending institutions. 8 major problem for them. 9 So that was a It still is. But of course now we're looking at the effects 10 of this crisis and the rebound frauds that are 11 occurring in the current housing market and just 12 cleaning those up is a major issue for the FBI. 13 it's really doubtful -- I think it's doubtful that 14 they're going to be attacking the higher level 15 frauds with the kind of energy that they were doing 16 during the Savings and Loan Crisis just because 17 there was a much better system in place at that 18 time. 19 on by focusing more on the lower level frauds and 20 getting into the prosecution of these frauds a bit 21 later. 22 So So, again, a system capacity issue brought COMMISSIONER GRAHAM: Mr. Black, in listing 23 some of the steps towards being an ultra profitable 24 control fraud, you mentioned leverage. 25 issue that's come up in a number of different ways That's an 37 1 Q & A - Session 1 2 in our previous hearings. 3 word "leverage" as a component of a good step to 4 ultra profitability? 5 MR. WILLIAM BLACK: How were you using the It simply means having 6 very high debt in this context and that levers up 7 your return on equity. 8 9 10 COMMISSIONER GRAHAM: This is high debt in the mortgage originators? MR. WILLIAM BLACK: This is high debt at the 11 lender institution. 12 chain. 13 did use the SIBs to create leverage ratios that 14 were well beyond anything that lenders had 15 directly. 16 Europeans were even worse, the European banks. 17 But it follows up the food As you know, you can use the SIBs and they And as you probably already know, the COMMISSIONER GRAHAM: The Chairman, in his 18 open remarks, mentioned the fact that this 19 Commission is the product of federal legislation 20 which had as its title "Mortgage Fraud," indicative 21 of the priority that the Congress was giving to 22 this component of the number of factors that 23 contributed to the financial meltdown. 24 25 How effective do you evaluate the steps that the federal government has taken since this crisis 38 1 Q & A - Session 1 2 began to rein it in and hopefully avoid a 3 repetition? 4 MR. WILLIAM BLACK: As to the first, wholly 5 ineffective. 6 effective against the particular mechanisms that 7 brought this fraud. 8 9 As to the second, moderately. What do I mean by that? brilliantly originally. The FBI performed It realized and testified 10 publicly in September 2004 that there was an 11 epidemic of mortgage fraud and predicted it would 12 cause a financial crisis. 13 as it can possibly get. 14 I mean, that's as good The FBI did have severe limits. It lost 500 15 of its white-collar specialists in response to the 16 9/11 attacks, which we can all understand. 17 us don't understand why their requests to be 18 allowed to replace them was rejected. 19 happened. 20 substantially in this time period. 21 Many of But that So white-collar prosecutions went down What the terrible thing happened was that the 22 FBI got virtually no assistance from the 23 regulators, the banking regulators and the thrift 24 regulators. 25 the savings and loan practice. Two things are going on in contrast to 39 1 2 Q & A - Session 1 First, roughly 80 percent of liar's loans came 3 from nonregulated entities. 4 the mortgage bankers. 5 there to make criminal referrals period with regard 6 to that group. 7 All right. These are So the regulators weren't But even as to the 20 percent roughly that 8 came from the federally insured sector, it's just 9 incredible. The Office of Thrift Supervision and 10 the Office of Comptroller Currency, their official 11 spokesperson told the Huffington Post that they 12 made zero criminal referrals. 13 thousands of criminal referrals in the Savings and 14 Loan Crisis. 15 Zero. We made We as the regulators -- if I could put my old 16 regulator hat on -- we're the Sherpas. All right. 17 We do the heavy lifting and we do the guide 18 function. 19 expertise in each particular industry. 20 regulators disappeared and their role instead was 21 filled by the Mortgage Bankers Association which 22 created this absurd supposed all -- you know, gal 23 is divided in three parts. 24 fraud is divided into two parts. 25 them, guess what? Because the FBI can't possibly have the The But to them, mortgage And in both of They're the victims and their 40 1 2 3 Q & A - Session 1 CEOs are never criminals. That's completely contrary to all prior 4 history, Enron, Worldcom. 5 staff director for your predecessor commission that 6 looked into the Savings and Loan Crisis. 7 report says that the typical large failure fraud 8 was invariably present, and they meant at the top 9 of the food chain. 10 I was the executive So that hasn't happened. That They've looked 11 instead very low in the food chain. When you gut 12 underwriting, as I said, you do get massive fraud. 13 You create probably in the order of 6 million 14 homeowners and 10,000 perhaps, 50,000 perhaps, of 15 the flippers. 16 flippers. 17 top, you're never going to be successful in 18 prosecution with the kind of resources they would 19 bring to the task. Maybe a hundred thousand of the But unless you go at the people at the 20 COMMISSIONER GRAHAM: Ms. Murren? 21 COMMISSIONER MURREN: Thank you. 22 Mr. Black, if I could follow up on your last 23 line of discussion. When you look at corporations, 24 there is clearly a desire and a need for growth 25 going into the future and an ability to demonstrate 41 1 Q & A - Session 1 2 that. 3 that seem to have such tension between them which 4 is the desire to grow a company and yet the desire 5 to be able to be responsible, and at what point 6 does it cross the line into having an intention to 7 commit fraud? 8 why we haven't seen more prosecutions as 9 establishing the intention at a much higher level 10 11 So how do you reconcile these two things And I wonder if that's not really within the company. MR. WILLIAM BLACK: Yes. I mean, the issue 12 also is intent. 13 priority felony convictions in the savings and loan 14 industry. 15 zero in this crisis of the specialty -- the people 16 that specialized in makes the liar's loans. 17 large lenders, zero senior executives. 18 19 20 Let me say we got over a thousand Those are of elites. COMMISSIONER MURREN: There have been The And to what do you attribute that difference? MR. WILLIAM BLACK: Well, if you don't look, 21 you don't find. 22 adopted the definition of mortgage fraud -- you'll 23 see it repeated endlessly -- under which the lender 24 is never the fraud. 25 And they defined -- they literally And by the lender, let me be more precise. 42 1 Q & A - Session 1 2 It's not of course the institution. 3 individuals. 4 an honest lender would ever do things like 5 inflating an appraisal. 6 economics when you make liar's loans, you maximize 7 what we call adverse selection. 8 It's the And I repeat, there is no reason why More generally, in COMMISSIONER MURREN: But, Mr. Black, if I 9 could, in today's world where you're not holding it 10 perpetually in a place where you originate the loan 11 but then someone else assumes the risk of the loan, 12 is that true anymore? 13 MR. WILLIAM BLACK: Absolutely. Remember the 14 emphasis on the word "honest." 15 sell it, and these were sold under reps and 16 warranties, all right, that they were honest. And 17 can you imagine a business otherwise? I 18 make honest liar's loans? 19 didn't exist in the real world. 20 Because you have to It's an oxymoron that And if I could just real briefly. Right? Hello. This isn't new. This has 21 been forever. We killed 22 liar's loans in 1990 and 1991 as savings and loan 23 regulators, when they were becoming significant in 24 California savings and loans, and there was no 25 crisis. People have forgotten this even existed. 43 1 Q & A - Session 1 2 Why did we do that? 3 adverse selection. 4 expected value of making that loan is negative. 5 Because we knew it created That means definitionally the So this isn't a matter of growth. I would 6 love my competitor to make bad loans that had a 7 negative expected value. 8 me. 9 making a bad loan. All right. That would be good for I don't lose anything by not So, no, it isn't a pressure for 10 growth by making bad loans. 11 the industry. 12 where it optimizes your fraudulent income. 13 That never existed in It does exist in the perverse world And, again, this is not just a criminologists' 14 saying. I mean, we're kind of the Rodney 15 Dangerfields. 16 ever talked to a white-collar criminologist before 17 this day. 18 economist, George Akerlof, saying, Yes, this is 19 exactly what's happening. 20 from the discourse. You know? I doubt that many of you But this is Nobel Prize winning And that's disappeared 21 COMMISSIONER MURREN: Thank you. 22 Ms. Fulmer, if I could ask you a question. 23 You had referenced in your testimony a national 24 index of property value fraud risk, and I was 25 wondering if you could talk a little bit about what 44 1 Q & A - Session 1 2 that is. 3 fraud may be present in the system or monitoring 4 for such fraud, and is that something that was in 5 common use over the course of the last five to ten 6 years or is that a recent evolution? 7 Is there a way of measuring how much MS. FULMER: The mortgage fraud risk index 8 that I referred to is an index that we developed at 9 Interthinx. 10 To answer a step back in one level, it is 11 nearly impossible to measure the incidence of the 12 frauds that's out there because Suspicious Activity 13 Reports are the primary vehicle by which we have 14 the most comprehensive information. 15 filed with the Financial Crimes Enforcement 16 Network, but only about a third of the industry 17 that has any information is required to sell. 18 There is no safe harbor for people like mortgage 19 insurers or title insurers or appraisers or real 20 estate agents who are not regulated financial 21 institutions. 22 voluntarily reporting an incident that they 23 observe. 24 25 Those are They're not protected from So having said that, I have to distinguish what Interthinx does. We look at applications as 45 1 Q & A - Session 1 2 they're being submitted by lenders and we evaluate 3 and stratify their risk for fraud, low, medium and 4 high. 5 Property Valuations Fraud Index, is what we looked 6 at for the incidence of those kinds of indicators 7 in the loans that we were scanning at the time 8 going back to up to 2003. 9 COMMISSIONER MURREN: And the reference I talked to you about, the So what types of flags 10 would be raised in such an analysis? 11 would you determine if the property values 12 themselves were inflated if you couldn't do it 13 after the fact? 14 prospective way to do this analysis or is it 15 retrospective? 16 I mean, how In other words, is there a MS. FULMER: No, that's exactly what I'm 17 talking it does is we take the application, which 18 includes an appraisal information and value 19 information, and we pull together -- we have a 20 proprietary database. 21 information for states where sales prices are not 22 disclosed. 23 use multiple listings service data, and we combine 24 all that together. 25 don't have the math gene, so I cannot explain the We buy private sales We use automated valuations models, we And I got the verbal gene, I 46 1 Q & A - Session 1 2 mathematics that go into this. But they take all 3 of those factors and they evaluate that, look at 4 sales in the neighborhoods, look for things like 5 the same people selling constantly in the same 6 market, and there's a variety of elements that we 7 look at and compare which was presented to 8 determine whether the value is inflated. 9 look at the time lag between the last sale and the We also 10 proposed sales and the spread between those two 11 prices over time. 12 COMMISSIONER MURREN: This body of work that's 13 done, is this the type of thing that would be done 14 in the mortgage originator's office or in the bank 15 itself during the course of the crisis? 16 words, is this the kind of thing that should have 17 been done and someone was assigned to do it within 18 those institutions, but it was either not carried 19 out or it was not actually mandated for anyone to 20 do? 21 MS. FULMER: In other I joined Interthinx in 2005, so I 22 can't really speak to directly what was going on, 23 but I've been told that prior to that time, these 24 fraud detection and prevention tools were primarily 25 deployed by lenders in the post closing environment 47 1 Q & A - Session 1 2 as a quality control tool, which I suppose relates 3 to the fact that they were selling loans to Wall 4 Street and had those reps and warranties with 5 respect to quality and integrity of the loans 6 that they were originating. 7 started to be a much higher default rate that 8 started to occur in certain segments of the lending 9 market, then lenders began to prioritize using this In 2005, when there 10 tool as a prevention, but -- as a means of 11 prevention. 12 Because the secondary market and Moody's and 13 the other ratings agencies generally only requested 14 that about 10 percent of loans be sampled for 15 quality, the number of loans that are run through 16 these tools tend to be in the minority and it does 17 tend to be a sample. 18 think to prevent fraud would be to run all of these 19 loans, all originations, through these kinds of 20 tools in order to find the ones that are most 21 likely to have the most problems and then really 22 focus the intensive underwriting and most 23 experienced underwriters on dealing with those 24 loans. 25 to find and prevent fraud before the money goes out The most effective way I In my opinion, that would be the best way 48 1 Q & A - Session 1 2 the door and the bank is hurt and communities are 3 ruined. 4 COMMISSIONER MURREN: Thank you, Ms. Fulmer. 5 Mr. Pontell, perhaps you could comment on this 6 particular set of responsibilities that an 7 originator might have or a bank as it relates to 8 fraud within a corporation. 9 little bit about how the underwriting quality and Could you talk a 10 the processes through which these companies 11 evaluated the probabilities of their loans being 12 repaid was either fostered or hindered by the 13 corporate culture. 14 MR. PONTELL: I think the -- I guess the major 15 point I would make is the ethics in these companies 16 flow from the top down and that the ethical 17 standards will filter down to those below it. 18 people making these assessments at the lower levels 19 essentially could easily rationalize or neutralize 20 their work because of the support they were getting 21 from the top; that when they were not doing the 22 underwriting -- and, again, the originators, the 23 brokers, the loan processers, the underwriters, the 24 loan reps and the lender companies, the account 25 managers all were able to easily rationalize their The 49 1 Q & A - Session 1 2 behavior against doing what they were supposed to 3 be doing. 4 qualities of those loans. 5 Essentially evaluating the credit So in terms of corporate culture where you 6 have people at the top who are not adequately 7 training staff or showing staff the way and also 8 creating the incentives for them to produce as much 9 paper as possible, it's going to be very easily 10 neutralized. We have some evidence of that from a 11 recently published study of these folks that were 12 easily rationalizing their behavior. 13 COMMISSIONER MURREN: Thank you. 14 COMMISSIONER GRAHAM: Thank you, Ms. Murren. 15 Mr. Georgiou? 16 COMMISSIONER GEORGIOU: 17 18 Thank you very much, Senator Graham. You know, when I bought my first home in 19 Nevada, I went to Countrywide and I put down 20 20 percent, borrowed 80 percent, got a fixed fully 21 amortized 15-year loan, and I realized at the time 22 it was a little bit difficult to get to the quote 23 on the loan. 24 nobody's ever asked -- nobody ever asked for one 25 and I may be the only one who ever got one out of I guess it's probably because 50 1 Q & A - Session 1 2 Countrywide for all those years as I've learned 3 going through this process. 4 You know, I think your testimony is 5 exceedingly disturbing to all three of you really 6 with regard to this issue. 7 time -- I've spent most of the last decade civilly 8 prosecuting financial and securities fraud at 9 Enron, Worldcom and certain other areas, and one I've spent a lot of 10 thing I've learned in the course of this Commission 11 is that a lot of the market participants 12 essentially had no financial responsibility for the 13 consequences of their creation at every level of 14 the process from the mortgage originators to the 15 securitizers of the investment banks to the lawyers 16 who wrote up the prospectus as they audited, the 17 credit agencies, and they were all compensated at 18 the front end of the process for creation and with 19 essentially no financial consequence for the 20 failure of those either mortgages themselves or the 21 securities that the mortgage was packaged into; 22 mortgage-backed securities, CDAs, CDOs squared and 23 cubed, synthetic CDOs, and the like. 24 25 I don't think I've ever met a white-collar criminologist, Mr. Black, so it's interesting 51 1 Q & A - Session 1 2 that -- I don't know how many of you there are, but 3 I suspect there's not enough for a society to be 4 put together. 5 on this study that all of you have made that really 6 from the top, the responsibility for the whole 7 ethic of the building of this super structure that 8 brought so many institutions down, how we can get 9 at that. 10 But I guess I'd really like to focus I suppose prosecution is certainly one way. I 11 think the S&L crisis that to the extent that people 12 actually faced criminal prosecution was certainly a 13 deterrent to some extent. 14 when you create a system in which people don't have 15 to pay for the failure of their own creations and 16 they get compensated fully when they're created, 17 you're creating a system that's essentially doomed 18 to failure. 19 But it seems to me that Let me ask a question, if I could. Ms. 20 Fulmer, you advised mortgage bankers and others, I 21 take it, with your fraud detection work. 22 Is that right? 23 MS. FULMER: 24 COMMISSIONER GEORGIOU: 25 That's correct. Do you find receptivity on the part of your clients getting 52 1 Q & A - Session 1 2 this information? 3 you think they like to hear it or they'd rather 4 ignore it or they'd rather not hear it and just 5 fund the loans? 6 MS. FULMER: Just to be candid, I mean, do Well, fortunately the people that 7 I work with directly are the quality control people 8 and the risk management people and they're very 9 receptive and they -- you know, they have been 10 trying very hard to improve quality and to improve 11 process and to reduce the incidence of fraud, 12 especially those who I think have come to 13 understand the effect in communities. 14 When we first started trying to talk with 15 bankers back in 1996, they were absolutely 16 horrified to find out what was happening at ground 17 zero, because it seemed like fraud didn't happen 18 that much and it was basically an issue for a 19 profit and loss statement and that there was no 20 real victim other than financial. 21 that I work with, yes, are very concerned. 22 COMMISSIONER GEORGIOU: But the people Well, what's 23 interesting to me, do they ever have a prefunding 24 interview at the final hour or the hour when all 25 the previous work has been done with the borrower? 53 1 Q & A - Session 1 2 Does anyone have a practice of assigning a 3 particular person from the ultimate purchaser of 4 this loan to sit down, for an hour say, with the 5 borrower and confirm their tax returns that are in 6 the file, confirm their employment, confirm that 7 they're going to live in the home, confirm that 8 they're actually a qualified borrower? 9 Maybe we ought to try to incentivize people by 10 making that ultimate person who is the last step 11 before funding responsible for the failure of the 12 loan in some way. 13 the future if that particular loan defaults. 14 MS. FULMER: Maybe their pay gets docked in I do not know of any banks that 15 do that directly; however, that is theoretically 16 part of the responsibilities of the closing 17 settlement or escrow agent is to verify that the 18 this information contained in the application, 19 which would include things like intent to occupy, 20 value, borrower's income and things like that, at 21 the closing table. 22 Unfortunately, settlement agents don't always 23 see it that way. Some of them misunderstand some 24 of the consumer financial protection laws as 25 prohibiting them from even asking about that 54 1 Q & A - Session 1 2 information, and others who are at the closing 3 table are collaborators or corrupt. 4 COMMISSIONER GEORGIOU: But, you know, we all 5 have this great image, you know, of the local 6 thrift and loan that was immortalized in, you know, 7 the Christmas movie that we always watch about 8 somebody who actually knows their borrower only 9 lends to them with the expectation that they'll 10 actually pay it back and so forth, which obviously 11 bears the financial consequences of the failure of 12 that loan would pay a great deal of attention to. 13 I'm just wondering what it is that we can do 14 as a society on a go-forward basis to try to create 15 market mechanisms to enforce this kind of 16 discipline on a go-forward basis. 17 18 19 Mr. Black, do you have any thoughts in that regard? MR. WILLIAM BLACK: I have a number of 20 specific suggestions in my written testimony, but 21 directly apropos to what you've asked, here are the 22 two most obvious. 23 First, executive compensation is based 24 overwhelmingly on short-term reported accounting 25 gains, and since the crisis, the percentage of 55 1 Q & A - Session 1 2 executive compensation based on short-term has 3 increased instead of decreased. 4 and everybody knows that's insane; that it creates 5 the worst possible perverse incentives. 6 that. 7 Now, that's insane So change Similarly, compensation is used to suborn 8 professionals. Right. They were always able to 9 get a clean opinion from a top-floor audit firm. 10 They were always able to get Triple A from a 11 top-three rating agency for stuff that wasn't even 12 Single C. 13 appraisal that was in many cases inflated literally 14 a hundred percent in terms of value. 15 They were always able to get an So you have to deal with compensation of 16 professionals as well. One of the best things to 17 do there, I suggest for your consideration, is take 18 the hiring decision away. 19 assign the credit rating agency to you. 20 get to pick them. 21 competition. 22 successful are you as a credit rating agency. 23 you're successful, great. 24 yank your designation. 25 the rating industry context or the auditor context. In other words, we You don't You don't get to put them into And then we look and see how If If you're a failure, we And allow competition in 56 1 2 Q & A - Session 1 Appraisers, for example, we've known how to 3 do the appraisals right for 150 years, which is we 4 don't leak to them what the loan amount is, which 5 is done pervasively in this industry. 6 them and we don't put them on a bonus system based 7 upon volume but on the quality of the loans. 8 do that and you'll create the right incentive. 9 So we're all with you. And we hire You You have to change the 10 incentive structures. That's the message from 11 white-collar criminologist, from economists, from 12 competent regulators. 13 that, we're going to have recurrent crises and 14 they're going to get worse. 15 COMMISSIONER GEORGIOU: And unless and until we do I mean, I'm struck by 16 this notion that you -- obviously a lending 17 institution should have no incentive to make a loan 18 that they think is highly likely to fail, to be not 19 paid back, unless they have no ultimate 20 consequence. 21 individual parties within the system not bearing 22 the consequences of their creations when they file, 23 but even the institutions themselves, because 24 they've become for the most part too good to fail 25 and were ultimate bailed out by the taxpayers, even And we've seen not only are the 57 1 Q & A - Session 1 2 the institutions that didn't -- that didn't bear 3 the consequences. 4 basically lacks accountability and market 5 discipline at every level in the process. 6 So we've created a system that MR. WILLIAM BLACK: Private market discipline 7 becomes perverse in the presence of accounting 8 fraud. 9 in his Nobel Prize winning article refers to it as The market -- and this, again, is Akerlof 10 the "Gresham's Dynamic". 11 bad ethics creates a competitive advantage. 12 ethics will drive good ethics out the marketplace. 13 Gresham's Dynamic is when Bad Two really brief examples from part of life to 14 show you how severe this can be. 15 China. 16 looks for that, so they put melamine in to spoof 17 the protein test. 18 no nutritional value for the part of the population 19 that most desperately needs nutrition and has 20 contaminant that kills six kids and 21 hospitalizes $300,000 infants and drives every 22 honest manufacturer of milk product out of business 23 in China for about nine months. 24 25 Infant formula in It's cheaper to put water than milk. China Now you have something that has And of course the other one here in Florida that's famous is Chinese drywall. 58 1 Q & A - Session 1 2 COMMISSIONER GEORGIOU: 3 Mr. Pontell, do you have any thoughts? 4 MR. PONTELL: 5 6 Right. No, I would essentially agree with what you've got, Commissioner. And I would also just say briefly in support 7 of Professor Black's comments that I think it's 8 very important to be able to relate -- to correctly 9 relate historically the nature of fraud in these 10 crises, and what we've seen in past crises is fraud 11 that exists in major institutions. 12 necessary to do. 13 not taken seriously, we're going to essentially, as 14 you correctly point out, if you review these 15 crises, as it turns out historically, we leave them 16 in greater and greater magnitude as time goes on. 17 So it's important from a preventative stance 18 to have effective regulations that understand the 19 nature of these types of frauds. 20 low-level frauds, but the higher level frauds which 21 derive a lot of the low-level frauds which inflate 22 bubbles and cause massive financial losses. And that's Because if it's whitewashed or And not just the 23 And then of course once you do have those 24 regulations that fully account for this type of 25 fraud, you need to have regulation. You need to 59 1 Q & A - Session 1 2 have enforcement. Having the laws on the books is 3 one thing, but from what we've seen in the current 4 crisis is that there was -- as Professor Black 5 correctly pointed out, there's essentially an 6 absence of enforcement regulators who essentially 7 did not believe in regulation. 8 massive failure because no one was essentially 9 looking. 10 CHAIRMAN GEORGIOU: 11 COMMISSIONER GRAHAM: And so you have Thank you very much. Ladies and gentlemen, I 12 apologize, but we are going to have to take a short 13 break at this time. 14 stay in their seats. 15 some problem with the audio for the web streaming 16 that is being used to communicate this hearing. 17 if we could take a short break to get that problem 18 fixed and then we will reconvene with Vice Chairman 19 Thomas asking questions. 20 21 I'm asking if everyone could Apparently there has been COMMISSIONER GERGIOU: questions disappeared into thin air? 22 MR. WILLIAM BLACK: 23 CHAIRMAN ANGELIDES: 24 25 Does that mean all my gap. (Break taken.) Not for lip readers. There was an 18-minute So 60 1 2 Q & A - Session 1 COMMISSIONER GRAHAM: Ladies and gentlemen, 3 our problem has been corrected and we will 4 continue. 5 of our witnesses, your testimony has been very 6 fulsome and has raised many questions beyond 7 those that we are going to be able to ask in the 8 limited time we have. 9 submit written questions, to give us your written Let me use this as an opportunity to ask Would you be willing, if we 10 response? 11 that, and those will be part of our official 12 records as your comments are here this morning. 13 14 Thank you very much. VICE CHAIRMAN THOMAS: MR. WILLIAM BLACK: 16 COMMISSIONER GRAHAM: Absolutely. CHAIRMAN ANGELIDES: 19 COMMISSIONER GRAHAM: 20 VICE CHAIRMAN THOMAS: 22 And he isn't in Missouri. 18 21 Did I see Mr. Black's head nodding? 15 17 We appreciate I knew this. All right, Chairman. Thank you very much, Senator. Just to kind of get a flavor of what's going 23 on, clearly what we would call criminal activity -- 24 and I think to a certainly extent some of the stuff 25 that maybe went on didn't quite reach the criminal 61 1 Q & A - Session 1 2 level, although if folks fixed their attention and 3 examined the full scope of the behavior, it would. 4 This is a question that any of you can answer, 5 and I guess we can start with Ms. Fulmer and go 6 across. 7 trying to get a profile. 8 Medicare fraud in terms of the total amount in that 9 short period of time was not the same as the So we have this criminal activity and I'm Because although clearly 10 mortgage fraud. The ongoing criminal aspects, 11 hopefully blunted as we begin to get some 12 regulations, to me is very similar; and that is 13 when your chances of getting caught are absolutely 14 minimal and that once you see what's going on, it's 15 not that difficult to pick up the scam and then 16 more and more people do it. 17 Did we see from any of your investigation or 18 any of your knowledge in terms of professors that 19 criminals moved into this area? 20 Now we like to think they would have to 21 take a real estate exam or some other kind of 22 credentials to participate in this area or require 23 some ability and training. 24 terms of virtually nothing but the incentives and 25 the compensation system of those who are already in 26 the system or did you see movement of individuals Was it homegrown in 62 1 Q & A - Session 1 2 who see an opportunity to carry out scams moving 3 into the mortgage area? 4 the other? 5 MS. FULMER: Any evidence one way or Commissioner, what I've seen is 6 primarily people who have moved -- either who did 7 not have a criminal background at all and get 8 sucked into things by a perpetrator -- 9 10 VICE CHAIRMAN THOMAS: MS. FULMER: Sucked into things? I mean, one of the favorite terms 11 during the boom, there's a misperception that 12 loans -- primarily that this was concentrated in 13 subprimes. 14 limited documentation loans and very risky 15 borrowers, that was true. 16 the prime borrowers were one of the primary targets 17 of perpetrators used through realty investment 18 clubs, through investment seminars, free seminars 19 at the hotels, looked for inexperienced people with 20 good credit ratings who were prime borrowers to act 21 as their straw buyers. 22 these incredible returns and no money down, cash 23 back at closing. 24 All you have to do is collect a check at the end of 25 the month. And at the end, clearly with all the But in the beginning, They promise, you know, We'll manage everything for you. 63 1 Q & A - Session 1 2 In addition to that, there have been a lot of 3 instances -- well, actually the first guy that was 4 operating in my neighborhood that was arrested on 5 mortgage fraud charges had been convicted several 6 years earlier in California on intent to -- 7 possession with intent to distribute within a 8 school zone, and he reportedly had banked his 9 illicit drug trafficking profits to start him up in 10 mortgage fraud. 11 And there were clearly -- there was a woman 12 who also was operating in my neighborhood who went 13 to jail who continued in Atlanta and she went to 14 the Marianna Prison down here in Florida. 15 continued to run her operation from her jail cell 16 and was recruiting people who were about to be 17 released to go in and act as fraud. She 18 A lot of times too these straw borrowers who 19 learned how to do it, they would go off and start 20 their own ring. 21 You chopped the head off one ring and there would 22 be several more that would spring up to take its 23 place. 24 25 So it was sort of like a hydrant. VICE CHAIRMAN THOMAS: Florida? And that was here in 64 1 Q & A - Session 1 2 MS. FULMER: 3 And often in Florida, before I forget -- 4 VICE CHAIRMAN THOMAS: 5 Yes. I assume there will be a Carol Hiaasen novel. 6 MS. FULMER: I'm sure there will be. 7 And I would be remiss to also recognize 8 that -- and this is my written testimony -- that I 9 think it was the Miami Herald did a survey, did a 10 study, and they found out that there were 11 5,000-something mortgage brokers and another 12 5,000-something loan originators who were not 13 regulated but who had criminal felony convictions 14 which included bank fraud and other types of fraud 15 who were originating during the boom. 16 VICE CHAIRMAN THOMAS: 17 MR. WILLIAM BLACK: Professor Black? You're right to focus on 18 entry, vias of entry. That's a major factor in why 19 you see these crises being so lumpy. 20 Savings and Loan Crisis, it was easiest to enter in 21 Texas and California and they had the weakest 22 regulation, the broadest asset powers. 23 like 70 percent of the total losses came from those 24 two states in that crisis. 25 Texas-rent-a-bank scandal before the Savings and And so in the Something There was a 65 1 Q & A - Session 1 2 Loan Crisis, and those that were not convicted in 3 that showed up again in the savings and loan 4 debacle. 5 You're quite right about the Miami Herald 6 piece that found thousands of frauds, and it was 7 because entry was so easy as a broker. It's very 8 easy to enter as an appraiser as well. And in the 9 past, it was -- there were virtually no barriers to 10 entry. 11 going to allow a very swift run-up in fraud. 12 Because, you know, in any particular industry, 13 maybe there are 5 percent sleaze-oids. 14 really easy to enter, then you can get an enormous 15 influx. 16 developers, for example, suddenly get new charters 17 for savings and loans, because of course it's a 18 perfect conflict of interest. 19 the right theme. 20 Wherever you have very easy entry, you're But if it's And we had hundreds of real estate MR. PONTELL: So you're on exactly And I would essentially agree 21 with that. During the Savings and Loan Crisis, as 22 history shows, the lack of regulations in Texas to 23 California created such a vacuum that it literally, 24 to use the word, sucked in a bunch of unsavory 25 business characters. It also allowed legitimate 66 1 Q & A - Session 1 2 folks to get into the industry as well with no 3 prior experience and saw the opportunity to make 4 great profits and they did so many times 5 illegitimately. 6 VICE CHAIRMAN THOMAS: It just seems to me 7 oftentimes that we're on the other side of looking 8 at the devastation of, quote/unquote, white-collar 9 crime as opposed to some kind of violent crime. 10 And you indicated, Professor Black, that the FBI 11 shifted its resources. 12 I just have to tell you that in my community, 13 there have been several people who have, I assume, 14 jokingly approached me in terms of being frustrated 15 in trying to get authorities and others to look at 16 what's happened to neighborhoods and communities 17 that have empty houses that get vandalized and the 18 damage that has done and suggested, again I assume 19 not seriously, that if they went around and bombed 20 a few of them, that they would get the legal and 21 community focus on exactly what was going on. 22 Is there still this -- when you watch any 23 movie or television show, oftentimes the 24 white-collar criminal is kind of a clever, cavalier 25 kind of a person, kind of fun, because there's no 67 1 2 Q & A - Session 1 real victims to it. 3 Is this an attitude that you've seen when you 4 talk, for example, Ms. Fulmer, with the people that 5 you indicated are the ones who are in a position to 6 do something about this; that there just doesn't 7 seem to be the urgency that other kinds of criminal 8 activity create in people? 9 MS. FULMER: 10 Absolutely. When I first put together the chart showing 11 these illegal transactions in my neighborhood and 12 myself and other members of the community 13 association went to the U.S. Attorney's Office, 14 he -- Look. 15 it had addresses. 16 showed how all these houses were all in these 17 transactions and they were all combined together. 18 And the U.S. attorney looked at me and said, Is 19 that all you have? 20 know, we don't need to have any kind of task force 21 here. 22 essentially implied that I was a pretty bored 23 housewife and I should get a better hobby. I mean, it was crude at the time, but It had names underneath. It I don't think we need -- you And he didn't come out and say it, but he 24 He then did in fact open a case which sat on 25 the desks of a U.S. -- an Assistant U.S. Attorney 68 1 Q & A - Session 1 2 for two years with little to no prosecution, and it 3 wasn't until I had submitted a letter to then 4 Governor Barnes on behalf of 15 neighborhoods that 5 had been severely impacted by fraud and had put 6 that also in the records with the U.S. Attorney's 7 Office. 8 McKenzie saw it and realized that there were real 9 victims; that it wasn't just financial crime. 10 The new Assistant U.S. Attorney named Gail Unfortunately, now it's even worse because 11 there are so many reported cases that it is my 12 understanding that U.S. Attorney's Offices 13 throughout the country have developed an informal 14 threshold where they will not look at a case unless 15 the aggregated damage to the lender is a million 16 dollars. 17 to waste its resources looking at cases that aren't 18 going to get prosecuted, they don't get prosecuted. 19 And of course since the FBI is not going VICE CHAIRMAN THOMAS: We heard some of that 20 testimony in Las Vegas along the same lines that 21 unfortunately as you accumulate, quote/unquote, 22 smaller amounts, the end amount is enormous, but 23 the incidental aspect is very small. 24 Last questions over to the professor. 25 As you indicated, these loans carry with them 69 1 Q & A - Session 1 2 some responsibility as to the viability of the 3 loan. 4 that Freddie and Fannie are holding a significant 5 percentage of these loans. 6 that Freddie and Fannie are now thinking about 7 taking action, going back to the sellers to try to 8 recoup. 9 And you had mentioned, and it's quite true, I saw in a news story Don't you think that would be one way at 10 reversing this compensation with no downside and 11 creating an awareness of the consequences? 12 it liable to go the usual direction, since after 13 all it's only the taxpayers who are left holding 14 the bag, it doesn't create that threshold of being 15 intensely focusing on the individuals who were at 16 the front of that food chain, notwithstanding the 17 fact the Freddie and Fannie were the buyers? 18 MR. WILLIAM BLACK: 19 to be in the pudding, right? 20 21 22 Or is Well, the proof is going VICE CHAIRMAN THOMAS: Because -It always is. There are very few pudding parties in Washington. MR. WILLIAM BLACK: Your Commission has gotten 23 some of the key testimony. I think it was a 24 Mr. Bowen, the CitiCorp. individual who said that 25 80 percent of what CitiCorp. sold was under false 70 1 Q & A - Session 1 2 reps and warranties and that it sold primarily to 3 Fannie and Freddie, and then if I recall the 4 testimony, that they sold roughly 50 billion a 5 year. 6 that stuff back to Citi? 7 8 VICE CHAIRMAN THOMAS: MR. WILLIAM BLACK: 13 Exactly. That's why I don't think it's going to happen. 11 12 As they say, do the math. 9 10 Well, is our Fannie and Freddie going to put VICE CHAIRMAN THOMAS: Yeah, and that concerns me. Last question, and not for your response now, 14 but in a written response as we go forward, given 15 your knowledge, involvement, especially the 16 historical perspective across the landscape, the 17 new law that's passed in terms of potential rates, 18 any hope -- is this going to create the awareness 19 and responsibilities in the officials who are 20 charged with these duties versus where we've been 21 recently? 22 23 24 25 That's not for response, but in a written form to the Commission. Thank you very much. CHAIRMAN ANGELIDES: Excellent testimony. Mr. Chairman, thank you. 71 1 Q & A - Session 1 2 Folks, thank you very much. 3 Some very quick questions here. I want to get 4 to it to an extent. 5 to be clear here essentially what I hear both of you 6 saying -- and I'll ask you, Ms. Fulmer -- is that 7 at the very least, the lending organizations 8 themselves created the climate in which rampant 9 fraud can exist at the minimum. 10 But before I do, I just want At the other end of the spectrum they 11 actually, as you would say, were perpetrating 12 controlled fraud by the nature of the system they 13 had set up. 14 they created the environment in which this fraud 15 can run rampant. But at the very minimum, you would say Correct? 16 MR. WILLIAM BLACK: 17 the logic sense of the word. 18 CHAIRMAN ANGELIDES: Yes, they're necessary in And, Ms. Fulmer, do you 19 agree with this? 20 MS. FULMER: 21 I think that part of the reason this happened Yes, but with a qualification. 22 was because originators were making loan products 23 that were designed to sell in the secondary market. 24 The secondary market was being told -- well, all 25 the lenders actually being told, especially around 72 1 Q & A - Session 1 2 2002, 2003, that people needed -- that everyone 3 needed to own home because it was the surest way to 4 wealth and were pushing lenders to make loans to 5 increasingly risky borrowers. 6 consumers at the same time wanted instant answers. 7 They wanted a loan right now. 8 have to pay a whole lot for it. 9 So I think -- and They didn't want to So to some extent, there was certainly market 10 pressures and there were also government policy 11 pressures that led the secondary market to say, 12 Well, we can't meet any of these demands unless we 13 lower the standards, and that was in fact in 14 response to both government and market demand. 15 CHAIRMAN ANGELIDES: Let me ask you, would you 16 all agree that liar's loans is where this all 17 happened? 18 elimination of documentation in term of income and 19 assets? 20 Was this the center of this; the It was the big door that opened? MR. WILLIAM BLACK: It was the biggest single, 21 but there were multiple doors, including commercial 22 real estate, which we haven't talked about at all, 23 where very similar processes occurred. 24 25 CHAIRMAN ANGELIDES: But in the residential sector, it was the biggest door that opened was the 73 1 Q & A - Session 1 2 elimination of documentation? 3 MS. FULMER: It exploded, but it was epidemic 4 in 2004 before that really took off. 5 I said, flipping started in 1996 and it was huge 6 back then. 7 CHAIRMAN ANGELIDES: I mean, like And, Mr. Black, let me 8 ask you a question. Because I guess it was either 9 your testimony or Dr. Pontell's testimony where it 10 said that, you know, 80 percent -- I think the FBI 11 noted that 80 percent of the fraud required some 12 inside participation. Was that -- 13 Whose testimony was that? 14 MR. WILLIAM BLACK: 15 CHAIRMAN ANGELIDES: It's certainly in mine. All right. So to what 16 extent -- and I know it's case by case -- but what 17 is the line, just to probe what Ms. Murren was 18 asking, between recklessness and criminality in the 19 organizations who are creating these products that 20 end up being fraudulent products? 21 MR. WILLIAM BLACK: Well, the key is you have 22 to look to know. And because the regulators have 23 been out of regulating, we've looked at about eight 24 places now. 25 look at the examination report. We've looked at New Century. You can That is completely 74 1 Q & A - Session 1 2 consistent with what I went through and how you 3 optimize control fraud. 4 WaMu. 5 optimize a control fraud. 6 bit at Aurora, the liar's loan outfit of Lehman 7 Brothers. That is completely consistent with how you 8 CHAIRMAN ANGELIDES: 9 MR. WILLIAM BLACK: 10 examiner. CHAIRMAN ANGELIDES: 12 MR. WILLIAM BLACK: 14 We've looked a little When you say we -That is the bankruptcy I mean as a system. 11 13 The Senate has looked at All right. I looked because I testified about that in front of the House. We've looked -- you've looked at CitiCorp and 15 you had this 80 percent number. 16 have civil investigations that have led to the 17 release of facts that, again, say they knew at the 18 top about the quality of the product. 19 CHAIRMAN ANGELIDES: Countrywide, we So -- So your basic point, I 20 understand, is that you will not understand that 21 line between recklessness and criminality unless 22 you look at the particulars and what executives 23 knew and why they allowed the products to move into 24 the marketplace? 25 MR. WILLIAM BLACK: Correct. But liar's loans 75 1 Q & A - Session 1 2 I think you're going to find every executive has 3 known for centuries lead to adverse selection and 4 negative expected value of a transaction. 5 CHAIRMAN ANGELIDES: All right. I want to ask 6 you a question about extent and impact. In your 7 testimony I think, Mr. Black, or Dr. Black, 8 whatever you go by, I think you did some quick math 9 and said, Well, there's 63,000 SARS. I can't 10 remember what year that was, but, you know, 11 obviously at a peak year, 2007, 2008. 12 per the mutual testimony here, you said 80 percent 13 of the lenders were not covered by that reporting 14 requirement. 15 You said two-thirds. You know, Let's just take the 16 two-thirds for minute. That would -- if you say 17 that -- you multiply the 63,000 by 3, you get 18 189,000 loans in one year where, had you had full 19 reporting, you would have gotten SARs. 20 And then I think you cited, Mr. Black, a New 21 York Times story that said that someone indicated 22 that the FBI had only about 20 percent of the loans 23 with fraud were detected as having fraud at the 24 front end. 25 MR. WILLIAM BLACK: That's correct. 76 1 Q & A - Session 1 2 CHAIRMAN ANGELIDES: So you'd come up to about 3 $845,000 loans a year by that math. 4 insubstantial. 5 Not Our own staff did some quick calculations, 6 which I asked them for, where I guess in 2009, if 7 you look at half a year, there's $1.6 billion in 8 losses from SARs. 9 it's 3.2. If you make that a full year, If you times that by 3 to account for 10 all the non-reporting entities, you get up to about 11 9.6 billion in losses. 12 7 percent of the SARs name a loss figure. 13 taking that into account, you'd come up with annual 14 losses of 137 billion. 15 But even then, only about I'm going to stop there. So A couple more 16 things, Mr. Vice Chairman. 17 at Fannie in charge of mortgage fraud has indicated 18 that their review of loan files from 2006 to 2008 19 indicate fraud in 70 percent of the files. 20 makes you wonder, by the way, Mr. Vice Chairman, 21 why didn't they check before they bought versus 22 now? 23 Apparently the person It But my question for you is what's the extent 24 of this? Are talking about a 5 percent problem? 25 Are we talking about a 10 percent problem? Are we 77 1 Q & A - Session 1 2 talking about a 30 percent problem? 3 dollar magnitude if you have any date on this? 4 know it's a long question, but I think it's central 5 to our inquiry about causes. 6 7 8 9 What's the And I'll start with you, Mr. Black, and Ms. Fulmer, and to you, Dr. Pontell. MR. WILLIAM BLACK: So to take your extrapolation, the thing you have to add to it is 10 it's fine to extrapolate from SARs if when they 11 find -- 12 I CHAIRMAN ANGELIDES: And by the way, for the 13 audience, SARs, Suspicious Activity Reports, are 14 required to be filed by only certain financial 15 institutions when they see -- when they suspect 16 financial crime. 17 MR. WILLIAM BLACK: Right. 18 But we know from the lumpiness of SARs 19 reporting that overwhelmingly insured institutions 20 which have a duty to report aren't reporting even 21 when they find fraud. Now, that should be 22 intensely suspicious. They should go to the 23 absolute top of the list. 24 to add that into your extrapolation. 25 All right. So you have When you do that, you get exactly what we get 78 1 Q & A - Session 1 2 when we look at it from the other direction. 3 take the number of liar's loans and you can take 4 the incidents of fraud in those liar's loans, and 5 you get in the range of at least a million 6 and-a-half per year during these peak years. 7 8 CHAIRMAN ANGELIDES: You A million and-a-half loans that have some form of fraud in them? 9 MR. WILLIAM BLACK: 10 fraud, that is correct. 11 That have some sort of Now, what you then do, that means that you 12 have just right shifted the demand curve enormously 13 for those of you who have an economics background. 14 The marginal buyer was the liar's loan, and that 15 means you made the bubble a lot worse as well. 16 And now the next point is you can deal with 17 your economist and they will tell you about at that 18 point we don't know whether losses are linear in 19 jargon or not. 20 increased bubble could produce a 20 percent 21 increase in losses or 3 percent. 22 the 20 is what I think your economists are going to 23 say. 24 25 In other words, a 5 percent But more likely If you take into account the bubble effect, then you start talking about numbers not of 79 1 Q & A - Session 1 2 $150 billion a year, which is about what you get 3 from this at an absolute minimum, but you start 4 talking in terms of trillions of dollars of market 5 value losses. 6 CHAIRMAN ANGELIDES: Do me a favor -- I'm 7 going to go to Ms. Fulmer -- would you in response 8 to the Chairman's question, would you provide us -- 9 10 11 12 MR. WILLIAM BLACK: request. CHAIRMAN ANGELIDES: MR. WILLIAM BLACK: 14 CHAIRMAN ANGELIDES: 16 Yes, on this one item of extent of impact. 13 15 Take that as a written Yes. Ms. Fulmer, extent of impact. MS. FULMER: It is incredibly difficult for 17 all those reasons to articulate on any kind of a 18 number, but Interthinx has been doing audits in a 19 context of the purchase demands and defaulted loans 20 and our analyst in San Francisco estimates that 21 based on a random sample, of the loans originated 22 between 2005 and 2007, he estimated that 13 percent 23 of all originations contain fraud which would be a 24 market value of -- there were 37 million loans 25 taken during the time and about $8 trillion so that 80 1 Q & A - Session 1 2 approximately $1 trillion worth of originations he 3 says are proven fraud. 4 If you talk to lenders, it depends on what 5 kinds of loan product that they were originating 6 and more when it was originated, but -- 7 8 9 CHAIRMAN ANGELIDES: What were those years again, the years again for your -MS. FULMER: 2005 to 2007. 10 CHAIRMAN ANGELIDES: 11 MS. FULMER: 2005 to 2007. But when you're ball parking and 12 you're at a quality control meeting or an MBA fraud 13 issues meeting and you're talking with people who 14 are in the front line looking at these things every 15 day, they estimate that as much as 60 percent of 16 loans originated, which would represent 4.8 17 trillion in market value, were fraud at the 18 origination between 2005 and 2007. 19 CHAIRMAN ANGELIDES: And that's from people 20 who are in the field? 21 MS. FULMER: 22 If I might go on just a bit little farther -- 23 CHAIRMAN ANGELIDES: 24 MS. FULMER: 25 That's correct. Yes, keep going. Based on what we've seen in the loans that we are auditing, approximately -- 81 1 Q & A - Session 1 2 CHAIRMAN ANGELIDES: And you're auditing these 3 on behalf of purchasers who are now putting them 4 back? 5 MS. FULMER: 6 CHAIRMAN ANGELIDES: 7 8 9 10 11 Correct. Okay. For purposes of reps and warranties. MS. FULMER: Or looking to see, you know, if they can defend against or refer this for fraud. CHAIRMAN ANGELIDES: Oh, okay. So you're doing analysis on both ends? 12 MS. FULMER: Yes. 13 And when you talk about loans that were 14 foreclosed, have actually gone into foreclosure, 15 the conservative, the very conservative estimate is 16 16 percent of the loans that went into foreclosure 17 contain fraud at origination and that's about 18 $170 billion worth of loans. 19 around -- 20 21 CHAIRMAN ANGELIDES: The maximum again Again, in the 2005 to 2007 -- 22 MS. FULMER: Correct. 23 CHAIRMAN ANGELIDES: 24 MS. FULMER: 25 And the maximum sort of -- period? Correct. 82 1 Q & A - Session 1 2 around-the-water-cooler estimation is about 70 3 which represents about 2.9 trillion in the loss 4 severities. 5 6 CHAIRMAN ANGELIDES: Again, around the water cooler, it's 70 percent of those in foreclosure? 7 MS. FULMER: Yes. 8 CHAIRMAN ANGELIDES: 9 MS. FULMER: Okay. And then if you look at the loss 10 severity, which is the amount a bank actually loses 11 based on, you know, the original loan amount versus 12 what they can recover through insurance -- and, by 13 the way, there is no insurance for identified fraud 14 or for selling the house out of foreclosure -- 15 range from 40 percent to 70 percent of the original 16 loan amount, which for that 2005 to 2007 17 origination spread would be 68 million to 18 119 billion roughly. 19 CHAIRMAN ANGELIDES: 20 Also in response to a written interrogatory, 21 could you provide us an answer -- 22 MS. FULMER: 23 CHAIRMAN ANGELIDES: 24 25 Stunning. Sure. -- and in a sense amplify on what you've written here. Dr. Pontell, I know I'm over my time, severely 83 1 2 Q & A - Session 1 over my time. 3 MR. PONTELL: I don't have much to add. I 4 don't have any particular numbers for you other 5 than to say -- 6 CHAIRMAN ANGELIDES: To spare me the ire of 7 the Chairman, I have many more questions, but the 8 magnitude is what I'm -- the magnitude and the 9 breadth is what I'm really seeking. 10 Thank you. 11 COMMISSIONER GRAHAM: 12 Thank you very much, Mr. Chairman. 13 I want to thank each of the members of this 14 panel. I had high expectations of what we would 15 learn, and you have exceeded those expectations. 16 You have probably, because you've done that, called 17 upon yourself to be asked for considerable written 18 responses to further questions. 19 MR. WILLIAM BLACK: 20 COMMISSIONER GRAHAM: No good deed. No good deed goes 21 unpunished and I appreciate your willingness to do 22 so. 23 We are now about 20 minutes behind schedule, 24 but we are going to take a short, and I would say a 25 seven-minute, bathroom break. We will reconvene 84 1 2 Q & A - Session 1 here at 11:00. 3 4 5 (Recess taken.) SESSION 2 COMMISSIONER GRAHAM: The Commission will 6 return to order. 7 have agreed to participate in our second session 8 which is uncovering mortgage fraud. 9 Miami. 10 11 I would like to thank those who It says in If you wish to go outside of that, to Florida and nationally, you're encouraged to do so. Let me first introduce the members of this 12 panel. 13 the D.J. Black & Company. 14 Gallagher, Captain and Executive Officer of the 15 Economic Crimes Bureau for Miami-Dade Police 16 Department. 17 JP Morgan Chase & Company, and I believe Mr. Rubin 18 is going to be focusing probably particularly on 19 the national issue. 20 Agent, Florida Department of Law Enforcement. 21 First, Mr. Dennis J. Black, President of Second is Mr. Edward Mr. Jack Rubin, Chief Underwriter of And Ms. Ellen Wilcox, Special I thank each of you for being here, and as we 22 did with our first panel and as we have done with 23 all panels during this Commission's activities, I'm 24 going to ask you to rise and be sworn. 25 26 Please raise your right hand. Do you solemnly swear or affirm under the penalty of perjury that 85 1 the testimony you are about to provide the Commission will be the 2 truth, the whole truth, and nothing but the truth, to the best 3 of your knowledge? 4 MR. BLACK: 5 MR. GALLAGHER: 6 MR. RUBIN: 7 MS. WILCOX: I do. 8 I do. I do. I do. (witnesses sworn) 9 COMMISSIONER GRAHAM: All right. I asked of 10 the previous panel a question that I will ask of 11 you. 12 going to provide will raise more questions than we 13 are able to ask verbally during this session and, 14 therefore, I would request your willingness to 15 respond to written questions in areas that we are 16 unable to fully cover this morning. 17 Would you be willing to do so? 18 ALL WITNESSES: 19 COMMISSIONER GRAHAM: 20 Mr. Black? 21 MR. DENNIS BLACK: 22 I will be speaking about appraisal fraud. 23 of the things I'm going to start out with, I'm 24 going to use the term "USPAP". 25 not familiar with that, the -- 26 COMMISSIONER MURREN: 27 I anticipate that the information that you're pull -- yes. Yes. Thank you. Thank you very much. Yes. For those of you Mr. Black, would you One 86 1 MR. DENNIS BLACK: Is that better? 87 1 Opening - Black 2 COMMISSIONER GRAHAM: 3 MR. DENNIS BLACK: Yes. We use the term "USPAP" 4 instead of the "Uniform Standards Professional 5 Appraisal Practice". 6 pointing out that the Uniform Standards requires an 7 appraiser to be independent, impartial and 8 objective, and essentially that has been the crux 9 of the appraisal fraud problem. And I want to start out by Appraisers who 10 refuse to be team players, who would not hit the 11 numbers for originators, would find themselves not 12 receiving repeat business. 13 stories of lender pressure against appraisers. 14 this is not something that appraisers have been 15 silent about. 16 There have been untold And In late 2000, a petition was begun signed, by 17 the time it was closed, by 11,000 appraisers 18 pointing out that they were being pressured to 19 inflate values and no repeat business would be 20 coming if they did not comply. 21 sent not only to Ben Henson, who at that time was 22 the Chairman of the Appraisal Subcommittee, but it 23 also was sent out to many members of Congress and 24 the news media leading up to the time they closed 25 that petition in 2007 for signatures. That petition was 88 1 2 Opening - Black So certainly the appraisal world, aside from 3 the professional organizations, independent 4 appraisers have been screaming the Clarion Call 5 that those who were not acting independently, 6 partially and objectively quite often were pushed 7 aside for those who would be team players and make 8 the deal move forward. 9 It is important to keep in mind, because in 10 order for a lot of mortgage fraud to move forward, 11 it also required appraisal fraud and it also 12 compounded the problem. 13 situation where you had a borrower who is not 14 committing mortgage fraud, there may have been 15 appraisal fraud involved and there was an 16 inaccurate valuation of the collateral. 17 So even if you had a And this was talked about by Commissioner 18 Georgiou in the prior session about the movie of 19 It's a Wonderful Life and knowing your borrower. 20 But in the world of what I was using the term 21 "financial hot potato," if you're not the holder of 22 this note, it doesn't become your problem. 23 So consequently gone are the days where the 24 lender would be very diligent in their selection of 25 an appraiser, because diligent appraisers did not 89 1 Opening - Black 2 move the financial hot potato forward. 3 unfortunately, as an appraiser profession, we have 4 seen many of the honest, hardworking, competent 5 appraisers leave the profession because they're not 6 the ones getting the work. 7 So, A lot of this was also evident for anyone who 8 wanted to look. If my 30 years of being an 9 appraiser, it has always amazed me the few times 10 that I have been contacted by lending institutions 11 about straightforward quality control work. 12 the prior session talked about those issues. 13 you're not looking, you're not going to find any. 14 And If And in situations where appraisals come to me 15 now for review, it is not uncommon for 70 or 16 80 percent of them to be easily identified as being 17 inaccurate, incompetent or unethically prepared. 18 And it doesn't take sometimes 15, 20 minutes to 19 realize that. 20 tools that are available to us, will show us a 21 wealth of information. 22 A little quick looking, using the I have provided in my written testimony eleven 23 examples of cases that I can speak about with -- 24 well, all first-hand knowledge, but in some I 25 cannot give you entire details because they are 90 1 2 Opening - Black still pending cases. But I want to talk about -- 3 Example one, there was a condominium complex 4 in Orlando where the developer was promising also 5 sorts of things, such as two years' worth of rent, 6 no homeowners' association fees, and things like 7 that, and consequently today's sale became 8 tomorrow's bad comparable and the appraisers were 9 not doing any due diligence, would not bring that 10 information forward. 11 So it just compounds itself. Another interesting case was the case that has 12 now been settled where a banker pled guilty to 13 fraud. 14 Florida in Bradenton. 15 property that he pled guilty to, the appraisal was 16 on a -- the subject was a 10,000 square foot 17 residential lot that looked into somebody else's 18 kitchen and the comparables came from -- in a 19 D-restricted community with a golf course behind 20 the house and lakes and all sorts of things like 21 that. 22 photograph, these are not comparable. 23 just gone looking, it was all there. 24 25 That is the failure of Coast Bank of Being that case, the It was apparent, despite an aerial If you had And I see the red light is on, so I could give you more example after more example of the same thing; 91 1 2 3 Opening - Black just no due diligence being performed or just hiding it. COMMISSIONER GRAHAM: Thank you very much, Mr. 4 Black. And I'm certain you're going to have a 5 chance to elaborate once we get into the 6 questioning period. 7 Next Mr. Edward Gallagher. 8 MR. GALLAGHER: 9 Mr. Chairman, distinguished members of the committee, I'm Captain Edward 10 Gallagher of the Miami-Dade Police Department and 11 Economics Crimes Bureau. 12 I have a statement here. The Miami-Dade Police Department has always 13 actively handled mortgage fraud cases even before 14 it became endemic. 15 received and investigated by Miami-Dade Police 16 Department Economic Crimes Bureau of investigators 17 whenever they were reported. 18 prosecuted under the State of Florida grand theft 19 statute. 20 Mortgage fraud cases were Such cases were However, from 2006, Economic Crimes 21 Investigators realized that reports of mortgage 22 fraud were on the rise. 23 personnel kept an eye on the emerging trend and 24 consulted with other law enforcement agencies to 25 determine if they had noticed a similar increase in Economic Crimes Bureau 92 1 Opening - Gallagher 2 reports of mortgage fraud within their 3 jurisdictions. 4 discovered a trend that appeared to be nationwide 5 in scope. 6 Much to their surprise, they Upon discussing the trend with law enforcement 7 from the State of Florida in 2007, ECB personnel 8 learn -- Economic Crimes Bureau -- personnel 9 learned that they had instituted a new state law 10 targeting mortgage fraud in an effort to contain 11 the growing trend. 12 personnel obtained a copy of the Georgia statute 13 and presented it to the Office of Mayor Carlos 14 Alvarez with a request to champion the creation of 15 a similar statute in the State of Florida. 16 Economic Crimes Bureau Subsequently, the 2007 session of the Florida 17 Legislature adopted and passed Florida Statute 18 Section 817.545, Mortgage Fraud. 19 signed the bill into law which became effective 20 October 1, 2007. 21 created a felony of the third degree for mortgage 22 fraud and provides that a person commits the 23 offense of mortgage fraud if, with the intent to 24 defraud, the person knowingly makes any material 25 misstatement, misrepresentation, or omission during The Governor The Mortgage Fraud Statute 93 1 Opening - Gallagher 2 the mortgage lending process with the intention 3 that the information will be relied upon by a party 4 in the mortgage lending process; uses or 5 facilitates the use of any material misstatement, 6 misrepresentation, or omission during the mortgage 7 lending process with the intention that the 8 information will be relied upon by a party in the 9 mortgage lending process; receives any proceeds or 10 any other funds in connection with the mortgage 11 lending process that the person knew resulted from 12 such misstatement, misrepresentation, or omission; 13 files with the clerk of the court for any county in 14 Florida a document involved in the mortgage lending 15 process which contains a material misstatement, 16 misrepresentation, or omission. 17 The law also provides that any mortgage fraud 18 violation is considered to have been committed in a 19 county in which the real property is located or in 20 any county in which a material act was performed. 21 Concurrently, the Miami-Dade Police Department 22 Command Staff were briefed on the alarming increase 23 in mortgage fraud reports that were being received 24 at the Economic Crimes Bureau in 2007. 25 Department Command Staff and Mayor Carlos Alvarez The Police 94 1 Opening - Gallagher 2 reacted by creating the Mortgage Fraud Task Force. 3 The Mortgage Fraud Task Force is a public/private 4 partnership created to reduce mortgage fraud and 5 prevent victimization of individuals and businesses 6 through effective education, legislation, 7 regulation, law enforcement and prosecution. 8 9 The Task Force consists of an executive board that is responsible for policy, decision-making, 10 vision and direction. 11 consisted of political figures, public sector 12 leaders, business leaders, law enforcement 13 professionals, and prosecutors. 14 The executive board The Task Force has five separate committees. 15 Each committee is responsible for an important 16 portion of the Mortgage Fraud Task Force 17 Commission. 18 The first one: The Law Enforcement Committee 19 is responsible for the detection, investigation, 20 apprehension and prosecution of mortgage fraud 21 subjects and enterprises. 22 The Legislative Committee is responsible for 23 enhancing current laws, creating new laws and 24 ordinances. 25 of the Task Force mission. All these efforts are in furtherance 95 1 2 Opening - Gallagher The Regulatory Committee is responsible for 3 enhancing and enforcing regulations on all parties 4 involved in the mortgage transaction. 5 The Business Partnership Committee is 6 responsible for the creation and transmission of 7 effective business practices to enhance cooperation 8 with law enforcement and the various professionals 9 involved in the mortgage transaction. The 10 Committee is comprised of banks, title insurance 11 companies, realtors, appraisers and mortgage 12 brokers. 13 The Education Committee is responsible for 14 creating public awareness through printed 15 literature, newspaper articles, and television 16 reports. 17 officials and media representative. 18 The committee is championed by elected The Mortgage Fraud Task Force is one of only a 19 few created throughout the United States. However, 20 the uniqueness of this Task Force is the 21 public/private partnership that is fostered. 22 mortgage fraud epidemic cannot be solved by law 23 enforcement alone. 24 attack mortgage fraud on all levels must be 25 undertaken. The A concerted global effort to The Mortgage Fraud Task Force changed 96 1 Opening - Rubin 2 the way business is done, prevents those who have 3 defrauded from ever being able to do so again, 4 educates the public to prevent victimization, and 5 swiftly arrests and prosecutes violators of 6 mortgage fraud. 7 On the law enforcement side, Miami-Dade Police 8 Department assigned 18 law enforcement personnel to the newly 9 created Mortgage Fraud Task Force. 10 And I see I'm running out of time. But 11 essentially we have created a task force to address 12 mortgage fraud and we have reported a number of 13 resources to address it. 14 15 COMMISSIONER GRAHAM: Mr. Gallagher. 16 Mr. Rubin? 17 MR. RUBIN: 18 19 Thank you very much, Senator Graham, thank you for the opportunity to appear here today. Chairman Angelides, Vice Chairman Thomas, and 20 Members of the Commission, my name is Jack Rubin. 21 I'm a Senior Vice President and Chief Underwriter 22 supporting Chase Home's Lending Division. 23 Chase Bank back in 1983. 24 at the firm, I've worked in a variety positions in 25 the mortgage origination business and have held I joined During my 26-plus years 97 1 Opening - Rubin 2 management positions in underwriting and 3 operations. 4 I understand that the Commission has asked me 5 to address primarily JP Morgan Chase's efforts to 6 discover and impede mortgage fraud. 7 focus on risk management, JP Morgan Chase commits 8 significant resources in the form of people, 9 training, tools and technology to the detection and 10 11 As part of its prevention of mortgage fraud. For example, in 2006, JP Morgan Chase hired a 12 senior fraud manager to expand the Fraud Operations 13 Department and bring in mortgage fraud expertise. 14 As JP Morgan strives to mitigate risk in the 15 mortgage loan origination process, it also makes 16 changes and improvements to its programs, products 17 and processes. 18 For example, in September 2007, the firm 19 eliminated the so-called no-doc and no-ratio loans, 20 and in the first half of 2008, eliminated all 21 stated-income and asset-loan products, which has 22 assisted JP Morgan Chase in curtailing mortgage 23 fraud. 24 25 As these examples show, JP Morgan Chase has recognized the critical importance of effective 98 1 Opening - Wilcox 2 risk management in mortgage originations, 3 consistently devoting substantial resources to 4 mortgage fraud detection and prevention and setting 5 a tone at the very top of the firm that encourages 6 prudent risk management across JP Morgan Chase, 7 including its Home Lending Division. 8 9 I look forward to providing the Commission with additional details regarding JP Morgan Chase's 10 mortgage fraud detection efforts and to answer any 11 of your questions. 12 Thank you very much. 13 COMMISSIONER GRAHAM: 14 Ms. Ellen Wilcox. 15 MS. WILCOX: Hi. Thank you, Mr. Rubin. Mr. Chairman and 16 distinguished Members of the Committee, my name is 17 Ellen Wilcox and I'm with the Florida Department of 18 Law Enforcement. 19 FDLE Special Agents investigate complex felony 20 cases that cross jurisdictional lines. 21 like to cover some of the problem areas that we 22 have encountered in investigating mortgage fraud. 23 I would Number one, our mortgage fraud investigations 24 are complex, paper intense and lengthy. The cost 25 and length of these investigations make them less 99 1 Opening - Wilcox 2 attractive to most investigative agencies and 3 prosecutors trying to justify their budgets based 4 on investigative statistics. 5 The FDLE case known as Florida Beautiful was 6 opened in 2005. 7 developed and worked by Tampa Police Department and 8 the Hillsborough County Consumer Protection Agency 9 for almost a year before FDLE became involved. 10 The case had already been During the five-year investigation, ten 11 investigators and two prosecutors contributed 12 significant time to this task force. 13 subpoenas were served resulting in tens of 14 thousands which were all reviewed and analyzed. 15 The investigation resulted in 18 arrests. 16 defendants ranged from the construction foreman to 17 the processor for the mortgage broker business to 18 the mortgage broker and up to a Vice President of a 19 national subprime lender. 20 have been convicted at trial or have pled guilty. 21 Our second problem is Statue of Limitations. Over 250 The Sixteen of the eighteen 22 Most mortgage fraud will not be reported until the 23 loan has gone bad, but the crime occurred when the 24 money was lent. 25 granting a mortgage loan in 2004, in Florida the So if there was a fraud in 100 1 2 3 Opening - Wilcox Statute of Limitations has already run. Need for a witness from the lender. The 4 witness must identify the document that was 5 critical to their lending decision. 6 must then testify that if he had known these 7 documents were fraudulent, he wouldn't have loaned 8 the money. 9 The witness We have spent an exorbitant amount of time 10 trying to find a witness for a now defunct lender. 11 When I find a former underwriter or account 12 manager, I explain to them that he needs to be 13 available to testify on behalf of a company that he 14 no longer works for. 15 be paying actual expenses plus a $5 witness fee. 16 trial subpoena requires their current employer to 17 release him to testify, but it does not require 18 that employer to compensate him for the time 19 missed. 20 people to testify on behalf of the State. 21 Then I tell them that we will A This doesn't leave a lot of incentive for Our fourth problem is a need for documentation 22 from both the lender and the title company. The 23 lender's file provides the information about the 24 lending decision and the documentation provided by 25 the borrower and/or the broker to support that 101 1 Opening - Wilcox 2 lending decision. 3 investigator to follow the money. 4 The title file allows the If the lender and the title company are out of 5 business, how can we find the records? Under 6 Florida law, the records retention for these 7 companies is not standardize, and if a company goes 8 out of business, most destroy their records. 9 most cases, a copy of the lender file can be In 10 obtained by contacting the loan servicer, but we 11 are now facing court challenges but for the use of 12 this file from a loan servicer. 13 Number five, no originals of the originating 14 information for the borrower. 15 on the loan application is false, how does an 16 investigator prove who put down that false 17 information? 18 broker, the lender representative? 19 If the information Was it the borrower, the mortgage One defendant has put forth the defense that 20 the information and the documentation passed 21 through so many hands that the State could never 22 prove exactly who put down false information and 23 provided the false supporting documentation. 24 25 Number six, in Florida, title companies are allowed to use mobile notaries to handle any 102 1 Opening - Wilcox 2 closings that do not occur in their office. A 3 mobile notary does not go over any documents being 4 signed. 5 must be signed. 6 where the borrower or an investor claimed that they 7 just signed the documents, a mobile notary was 8 used. 9 broker paid his employees to become notaries so He just points out where the documents In almost every investigation In the Florida Beautiful case, the mortgage 10 that they could handle the closing and control what 11 a borrower saw and signed. 12 Seven, our last problem, and it's probably our 13 biggest, is intent. 14 the investors were brought into the scheme to make 15 money from flipping houses. 16 that investor? 17 with submitting a false loan document, his first 18 offense is that he gave the correct information to 19 the mortgage broker and it was the broker that 20 passed on the information to the lender. 21 We have numerous cases where What do we do with If the State charges the investor A prominent defense attorneys stated that 22 there is a distinction between false documents and 23 fraudulent documents. 24 intent. 25 false information but did not have any intent to Fraudulent documents imply His client may have signed documents with 103 1 Opening - Wilcox 2 defraud that lender. 3 the client has not committed a crime. 4 Therefore, with no intent, These are the type of problems that we're 5 having to deal with and the mortgage fraud problem 6 is not stopping. 7 charging these investors with the mortgage fraud is 8 doing very little to defer future mortgage frauds. 9 It's just continuing. And Thank you. 10 COMMISSIONER GRAHAM: 11 Mr. Black, Thank you, Ms. Wilcox. 12 MR. BLACK: Yes, Senator 13 COMMISSIONER GRAHAM: reference your testimony on 14 appraisal fraud, you seem to say that the 15 marketplace has not shown the capacity to control 16 this problem; that is, that the ultimate users of 17 the information, the lenders, are not looking 18 behind the appraisal to determine its credibility. 19 MR. DENNIS BLACK: Well, they have a 20 little reading to do, because like the prior 21 session talked about, these people are paid based 22 on production. 23 based upon selling money, and an appraisal is only 24 a bump in the road. 25 26 Their compensation packages are So I once remember something coming out of Fannie Mae where they were talking about the fact 104 1 that the overwhelming number of the appraisals that 105 1 Q & A - Session 2 2 they see committed the sales price. It's an open 3 secret in the appraisal profession that you -- that 4 mortgage brokers and lenders would shop for an 5 appraisal until they got the one that supported the 6 number they needed and the other one they received 7 would just be tossed. 8 So of course the one that ends up being in the 9 secondary mortgage matched the sales price, because 10 that first originator shopped until they got the 11 number they needed. 12 herd, because any appraiser that didn't come up 13 with that number wasn't getting a call the next 14 time. 15 And they were also culling the COMMISSIONER GRAHAM: We held a hearing in New 16 York on the issue of the rating agencies where 17 there was somewhat the same criticism that a person 18 who is about to issue some publicly traded 19 instrument would shop among the three or four 20 rating agencies until they found one that would 21 give them the rating that they needed in order to 22 be successful in their marketing effort. 23 to a provision in the recently passed federal 24 legislation that essentially is going to now set up 25 a system wherein rating agencies are blindly This led 106 1 Q & A - Session 2 2 assigned to applicants for a rating for a 3 particular security, so the applicant won't be able 4 to shop around for the most favorable one. 5 6 7 Would something analogous to that be practical in the appraisal business? MR. DENNIS BLACK: I think it would be 8 disastrous, because not all appraisers are created 9 equal. One of the problems now is the home 10 valuation code on conduct essentially removes 11 originators from the selection process, but the 12 selection process became through a series of 13 appraisal management companies and they would go by 14 low bidder. 15 18 months of appraisers traveling a hundred miles 16 to come to another market to perform the valuation 17 of a property that they knew nothing about the 18 local market. 19 There have been stories over the past So blindly picking certified appraisers I 20 think can be a tremendous disservice and actually 21 becomes problematic. 22 becomes from the standpoint of, well, just the 23 stick, no carrot. 24 country need to be sufficiently funded so that 25 appraisers who step out of line find themselves on I think the correction The appraisal boards across this 107 1 Q & A - Session 2 2 the outside very quickly. 3 left with the people who are willing to hit 4 numbers, we are left with the honest, ethical, 5 competent ones. 6 lender chooses, because you're picking from a good 7 pile. 8 9 10 11 And so instead of being So it doesn't matter who the COMMISSIONER GRAHAM: Here in Florida what has been the record of the licensure agencies for appraisers? MR. DENNIS BLACK: Here in Florida it has been 12 exemplary. 13 qualifications, I also sat on a -- as a national 14 director for one of the appraisal organizations and 15 also on the National Professional Standards Board. 16 So I've had quite a bit of interaction with people 17 from the boards across the country. 18 One of the things that was in my Here in Florida, tremendous efforts. When 19 they have a solid case, they proceed forward and 20 the punishment that is meted out is quite 21 substantial. 22 been averaging 25 revocations or long-term 23 suspensions at each meeting, and they meet six 24 times a year. 25 the door. Over the past two years, they have So they're showing 150 people a year 108 1 2 3 4 Q & A - Session 2 COMMISSIONER GRAHAM: And what's the universe? What's the total number? MR. DENNIS BLACK: Well, the total number of 5 appraisers within the state of Florida at the 6 height was approaching 20,000. 7 probably down around 11,000. 8 through a renewal cycle December 1st and I believe 9 we will see more people dropping out. 10 That number is We're about to go Unfortunately, the people we're seeing drop 11 out are the people who can't make it in today's 12 world. 13 and I'm handling a lot of the litigation work 14 relating to those cases. 15 residential appraiser who was just trying to put 16 forth an honest opinion of value that was 17 supportable, too often the person does not get 18 called back for a second assignment. 19 I'm very fortunate because of my background But the typical COMMISSIONER GRAHAM: Mr. Gallagher, you talked 20 about the task force that's been established and 18 21 personnel assigned to enforce mortgage fraud, the 22 new state legislation. 23 been held let's say in the last three years in Dade 24 County on mortgage fraud? 25 MR. GALLAGHER: How many prosecutions have Prosecutions, I can't give you 109 1 Q & A - Session 2 2 that figure, but I can tell you how many people 3 we've arrested. 4 October 2007 was the inception of the task force -- 5 we've arrested 239 people for mortgage fraud which 6 represents approximately 91 individual cases. 7 take those cases to the State Attorney's Office, to 8 the statewide prosecutor, and to the U.S. 9 Attorney's Office. 10 11 We have arrested since 2007 -- We And we've had prosecutions in all three of those arenas. COMMISSIONER GRAHAM: One of our witnesses in 12 the previous panel, Mr. Black, talked about the 13 control fraud and the fact that many of these 14 fraudulent activities are the result of the 15 decisions made at the highest levels of financial 16 institutions. 17 have been arrested, did they meet that definition? 18 Are some of those 235 people that MR. GALLAGHER: I would say that the way we 19 work our cases is we generally -- we get a 20 complaint, and usually it's at the lower level, and 21 we work our way up. 22 reached into some banking institutions? 23 However, I don't know that any of our closed cases 24 have reached that level. 25 Do we have cases that have COMMISSIONER GRAHAM: We do. We'll probably be 110 1 Q & A - Session 2 2 following up with some written questions to get 3 more details about the state of prosecution. 4 Mr. Rubin, your institution has the reputation 5 of being one of the first who has desisted from 6 activities which had the appearance of facilitating 7 fraud. 8 Morgan saw and what did you find to be the most 9 effective, productive responses to those warning 10 What were the warning signals that JP signals? 11 MR. RUBIN: In terms of the warning signs, we 12 saw an expansion of an array of mortgage products, 13 including some products that we chose not to offer 14 such as negative amortization loans, which would 15 mean the principal would exceed at the time of 16 payment of the loan. 17 underwriting standards, as I mentioned, the no-doc 18 and no-income-check loans. 19 the third party lending by mortgage brokers where 20 we were not as the institution dealing directly 21 with a consumer, yet a third party was involved, we 22 saw problems in that book of business as we looked 23 back. 24 25 We saw a loosening of We certainly saw that So we quickly undertook to curtail and stop certain items. So there are about five 111 1 2 3 Q & A - Session 2 different items that I want to mention briefly. First are the program changes. We eliminated 4 back in '07 no-doc, no-ratios, as I mentioned. 5 eliminated stated-income and asset in '08. 6 discontinued our wholesale line of business in 7 January of '09 so that we do not originate with 8 third party brokers. 9 enhanced -- we substantially -- excuse me -- 10 enhanced our mortgage underwriting standards 11 returning to more traditional 80 percent 12 loan-to-value ratios entered by the borrower to 13 document their income. 14 We We This substantially We relate it to the appraisal comment. We are 15 very much in favor of appraisal independence. 16 We've limited the Chase communication to our 17 appraisers so we did not disclose, an example, who 18 the appraiser was to our originators. 19 disclose the loan amount to our originators to give 20 the opportunity for the appraiser to provide an 21 independent evaluation. 22 fraud tools so that we could provide tools to our 23 underwriters to detect fraud. 24 of all of our personnel, not just underwriters, but 25 loan officers as well. We didn't We installed automated We required training 112 1 2 Q & A - Session 2 And training was not a one-time thing. 3 ongoing training. 4 we are always looking at the latest things and we 5 actually take case studies from loans that went bad 6 and teach the underwriters, You see, here were the 7 warning signs, here were the things that you could 8 have done differently, and then we go ahead and put 9 in new policies. 10 We do it today. It's As an example, And finally, we've introduced very specific 11 performance monitoring to monitor the underwriters 12 and the loan officers on the quality of their book. 13 Not how many loans they originated, but how well 14 are the loans that they originated performing? 15 that is a part of their performance management 16 process, so that they know and we know that quality 17 is not nice to have, but is the most critical 18 element in the production of a loan. 19 to make sure that we're providing our buyers the 20 ability to pay and we want to make sure that all 21 staff at JP Morgan Chase, from underwriters to loan 22 officers, are adhering to that philosophy. 23 COMMISSIONER GRAHAM: And And we want In the previous panel, 24 one of the reasons given for the failure of people 25 up the chain of the mortgage business not 113 1 Q & A - Session 2 2 intervening aggressively was that their 3 compensation was in many cases based on the volume 4 of throughput and not the quality of what went 5 through the system. 6 What kind of compensation did you have for the 7 people who were making these decisions to shelter 8 yourself from these potentially fraudulent loans? 9 How did you reverse the incentive structure? 10 MR. RUBIN: I'll take that in two parts, one, 11 to describe what was done and then to briefly 12 describe what we're doing today. 13 At the time, we always maintained an 14 independence of operations so that the operations 15 and underwriting staff were always apart and 16 separate from the loan originators. 17 originators, their job was to take the application 18 and they got compensated based on the closed loan. 19 The back office, the underwriters and operations, 20 were instead compensated based on decisions. 21 whether they declined a loan, approved a loan, it 22 was really -- it was not indifferent. 23 indifferent to us. 24 they had the proper tools to do their job. 25 So loan So It was We wanted to make sure that To strengthen that, we've recently implemented 114 1 Q & A - Session 2 2 some additional criteria. So, as an example, for 3 our underwriters today, we have -- each underwriter 4 is measured on a score card which will look at 5 their performance on the basis of first payment 6 default, on early payment defaults, how many loans, 7 for example, went 60 days late within the first 8 months of operation. 9 in one of the panel's discussions, they asked does We do -- and I think earlier 10 any bank do prefunding reviews? 11 re-review a minimum of three loans per underwriter 12 per month that we grade and assess how well they're 13 doing. 14 their work that they do. 15 We actually And that's a very important component to But the bottom line is quality is the 16 pass/fail. If you don't pass quality, you get no 17 incentive. So that is, again, a critical mission 18 that if you ask any underwriter out there, quality 19 is number one in their head. 20 Thank you. 21 COMMISSIONER GRAHAM: 22 I am going to exercise the prerogative of the Thank you, Mr. Rubin. 23 chair and assign myself an additional one minute so 24 I can ask Ms. Wilcox a question. 25 Ms. Wilcox, under the 2007 state law that was 115 1 Q & A - Session 2 2 referred to by Mr. Gallagher, have you had 3 referrals by either law enforcement agencies or the 4 private parties to FDLE which have led to an 5 investigation into mortgage fraud? 6 MS. WILCOX: The cases that I've been involved 7 in, we have not yet used that statute. The 8 statute went into effect in 2007, so we can't 9 charge it unless the loan was originated after the 10 statute was enacted. 11 grant theft statute and the racketeering statute 12 and the organizing scheme to defraud statute in our 13 cases, because we're still looking at 2005/2006 14 loans. 15 16 17 So we are still using the COMMISSIONER GRAHAM: And you have not had any referrals to you under the 2007 -MS. WILCOX: We do have referrals, all kinds 18 of referrals all the time from -- a lot of our 19 cases are based on the SARs. 20 COMMISSIONER GRAHAM: 21 Ms. Murren? 22 COMMISSIONER MURREN: 23 24 25 Thank you very much. Thank you, Senator Graham. If I could begin with a question for Ms. Wilcox and Captain Gallagher about the way that 116 1 Q & A - Session 2 2 you focus your activities as it relates to mortgage 3 fraud. 4 too was that there is a lot of discussion about 5 mortgage fraud that is perpetrated by the person 6 who is the recipient of the loan as opposed to the 7 lender, the broker or the appraiser, and I was 8 wondering if you could comment on your desire or 9 capability to be able to explore fraud that may 10 Because one of the things that strikes me take different forms. 11 Would you like to begin, Captain? 12 MR. GALLAGHER: 13 Well, the Mortgage Fraud Task Force, the law Sure. 14 enforce component in our department is an Economic 15 Crimes Bureau. 16 So whenever someone comes and presents us with some 17 sort of scheme, whether it involved mortgage or 18 not, we're going to look at it. 19 from anything. 20 a look at it and we'll analyze it, and if it does 21 appear to us that there's some sort of crime, we'll 22 consult with a prosecutor -- again, it could be any 23 one of the three levels -- and we'll determine 24 whether there is merit to continue an investigation 25 into it basically looking at if the elements of a We deal with all kinds of fraud. We don't shy away Whatever they bring us, we'll take 117 1 Q & A - Session 2 2 crime exist. 3 we'll investigate it. 4 And if they do, we'll go ahead and We partner regularly with federal agencies and 5 state agencies. So if it's a question of 6 jurisdiction or something like that, if it's 7 out-and-out jurisdiction, out of town, obviously if 8 it's not Florida, we're probably just going to go 9 ahead and give it to the appropriate agency. But 10 if's something that has a link to Miami-Dade County 11 and it goes beyond our boundaries, we'll either 12 partner with the state or with the federal 13 government. 14 COMMISSIONER MURREN: We've heard testimony 15 previously from folks from different agencies who 16 have said that sometimes they choose not to pursue 17 certain things because the threshold dollar amount 18 may not be sufficient to warrant their attention. 19 That is not a limitation for you? 20 MR. GALLAGHER: No, no mortgage fraud case -- 21 we don't have a threshold for mortgage fraud as far 22 as dollar amount is concerned. 23 COMMISSIONER MURREN: And how about the 24 different parties involved? Is it your feeling 25 that you end up spending more of your time on 118 1 Q & A - Session 2 2 people that have taken a loan as opposed to other 3 people that have been involved in the process? 4 example, how many appraisers have you brought a 5 criminal investigation against? 6 MR. GALLAGHER: For I don't know exactly how many 7 appraisers, but I can tell you that we do end up 8 arresting a number of -- well, we have arrested a 9 number of mortgage brokers. We have arrested -- 10 it's the full spectrum. 11 attorneys and individuals who work at banks all the 12 way down to the guy who has been committing crimes 13 for the last 20 years of his life. 14 We've gone from getting So you have people of all walks of life 15 involved. We're going to focus on whoever is 16 involved. If the attorney is involved, we'll focus 17 on the attorney and we'll address that. 18 it's just a straw buyer who has no legitimate 19 standing in the real estate industry but they 20 committed the crime, we'll also focus on them. 21 it depends on what the case brings. 22 different. 23 COMMISSIONER MURREN: 24 Ms. Wilcox? 25 MS. WILCOX: And if But Every case is Thank you. The Florida Department of Law 119 1 Q & A - Session 2 2 Enforcement, by statute we have to look at cases 3 that are multi-jurisdictional. 4 bigger cases, the more lengthy cases that involve 5 the mortgage brokers, that involve a ring of 6 organized criminals trying to defraud the industry. 7 So we will include the appraisers, the mortgage 8 brokers, the realtors, the lenders. 9 in Florida Beautiful, we were able to get a Vice So we look at the Like I said, 10 President of the subprime lender in that case. So 11 we will try to address the higher levels and maybe 12 not necessarily charge individual borrowers, but 13 use them to make our case against the next level of 14 the perpetrators. 15 COMMISSIONER MURREN: Thank you. 16 I have a question now for Mr. Rubin. 17 could talk a little bit about your involvement 18 currently with the mortgage modification program. 19 I would think as the underwriting chief that you 20 would be knowledgeable about that, and perhaps if 21 you could comment a little bit on what's happening 22 with that process. 23 heard actually in the field hearings is related to 24 the fact that people, broadly speaking, have had 25 difficulty being able to utilize some of the If you A lot of the testimony we've 120 1 Q & A - Session 2 2 programs that have been put in place, and I was 3 wondering if you could talk about what your feeling 4 is about that. 5 MR. RUBIN: First, just by way of background, 6 I am the chief underwriter of our production shop, 7 which means when loans are originated from start to 8 when the loan funds. 9 of the modification program which I will address 10 which is your question, but I'm not an expert in 11 the modification space. 12 I have some limited knowledge We clearly focus our initial efforts on 13 providing affordable payments for those who want to 14 maintain their homes and have a reasonable ability 15 to make and sustain affordable monthly mortgage 16 payments. 17 We have Chase homeownership centers. Here, 18 for example, we have opened -- there are 11 in the 19 state of Florida, one here in Miami, where we 20 encourage borrowers who are having difficulties 21 either making their payments, need to talk to 22 someone, have counseling, can come in, meet with 23 our individual staff. 24 centers are located throughout the country so that 25 we can help and navigate a consumer through, what I And these homeownership 121 1 Q & A - Session 2 2 believe you're addressing, some of the difficulties 3 in completing the paperwork. 4 We have offered over 700,000 modifications to 5 struggling homeowners and completed over 110,000 6 permanent mods under what's called the HAMP 7 Program, the Home Affordable Modification Program, 8 and other modification programs offered by the GSEs 9 or by FHA and VA. 10 11 So these are programs designed for those who are struggling and can't pay. There are also programs on the origination 12 side, which I'm even more familiar with, the 13 Homeowner Relief Program. 14 modification programs, the no-cash-out finance 15 where borrowers have an ability to lower their 16 monthly payment. 17 many, many hundreds and thousands of loans so that 18 it's really both for those who are able to pay but 19 need the lower their payment and the future 20 difficulty as well as those who are having 21 difficulty through the modification program. 22 Some of the agency And we have originated many, COMMISSIONER MURREN: As an outside observer 23 of this process, it does seem as though there is 24 gridlock in the system for being able to modify. 25 Again, broadly speaking. Not specific to your 122 1 2 3 Q & A - Session 2 firm. As an insider who is familiar with the 4 process, what do you think is wrong? Do you think 5 that there are too many people that are going in to 6 have modifications at one time so that the 7 infrastructure that's in place is overloaded? 8 you think that people are not accustomed to this 9 process and have to learn it from someone who's at 10 the bank and on the outside? 11 that the bank's lack of financial incentive to 12 actually complete some of these transactions? 13 based on your knowledge of the industry. 14 MR. RUBIN: Or do you think it's Just Based on my -- to the best of my 15 knowledge, it certainly is not the latter. 16 our best interest at JP Morgan Chase to make as 17 many of the modification offers. 18 staying in their homes. 19 their monthly payments. 20 Do It's in We want customers We want people making I believe some of the difficulties are exactly 21 some of the points that you had made. We, for 22 example, I know needed to hire many staff. 23 have the exact number, but I know it was more than 24 double our staff to handle the influx of volume. 25 It's complicated. I don't There's paperwork involved. We 123 1 Q & A - Session 2 2 want to make sure that we are documenting the note 3 and documenting incomes so that we are sure there 4 is a need and that we're providing the 5 modifications to those who need it. 6 make sure that we don't repeat some of the other 7 lessons that we've learned in the past. 8 9 We want to But certainly this is an incentive for us to do it, and we are always looking to find ways to 10 enhance the process. And one of the reasons why we 11 opened these homeowner centers, we felt it was very 12 important for an individual to be able to reach out 13 and talk to someone and meet in person, 14 particularly in the impacted areas. 15 So I believe Chase has been a bit more 16 successful than others, but it's clearly a daily 17 struggle and we're always looking for ways to 18 improve and enhance to ensure that we're giving 19 modifications to those who are deserving of it. 20 COMMISSIONER MURREN: I'm not sure that I 21 understand what the incentive is for the banks to 22 modify the mortgages. 23 when a loan is modified, that there is an immediate 24 write-down that has to occur in the quarter that it 25 was taken. Because my understanding is Is that correct? Do you know if that 124 1 2 Q & A - Session 2 is true? 3 MR. RUBIN: I'm not familiar with accounting 4 treatment. 5 that is not performing, the customer is not making 6 their payments, is a negative consequence to both 7 Chase as an institution and our reputation as well 8 as if the loan were sold to whoever the investor 9 was. 10 But in terms of the incentive, a loan But, again, the way we think of it and I think 11 the way everyone really should be thinking about 12 it, regardless of whether originating a loan for 13 sale for our own portfolio, we did it. 14 it. 15 due diligence. 16 customer is paying. 17 do everything to we can to keep the monthly stream 18 in place. 19 except, you know, we're trying to do the right 20 thing first. 21 efforts, and I believe most of the other -- 22 certainly our peer groups 23 are doing the same. 24 25 We started We want to make sure that we have done all the So it's important that that If they're not paying, then we Foreclosure doesn't really help anybody And that's why we've dedicated our COMMISSIONER MURREN: All right. Thank you. I don't mean to pick on you on this subject, but 125 1 Q & A - Session 2 2 it's come up repeatedly as we've talked to people 3 in the community. Thank you. 4 COMMISSIONER GRAHAM: 5 COMMISSIONER GEORGIOU: 6 7 Georgiou? Thank you, Mr. Chairman. Captain Gallagher or Agent Wilcox, I want to 8 commend you both for your hard work in moving these 9 criminal prosecutions along. And of course I think 10 that work is extraordinarily important in ensuring 11 the integrity going forward in the marketplace. 12 But by the nature of criminal investigations and 13 prosecutions, you're working on cases that have 14 already occurred where mortgage fraud has already 15 happened and, you know, you have to do the extremely 16 taxing and demanding work to do the investigations, 17 document it, and try to establish intent and all 18 the other criteria that go into a criminal 19 prosecution. 20 Again, I commend you for your work. But I'm 21 trying to focus on private market incentives. 22 I want to turn to the other two of the panelists to 23 ask a question, a couple of questions in this 24 regard, to see what practices you believe 25 contributed to the decline in underwriting And 126 1 Q & A - Session 2 2 standards and the decline in quality of 3 originations of mortgages themselves and the other 4 stages in the process. 5 Mr. Rubin, I wonder if you could tell me in 6 your compensation structures what, if any, 7 disincentives, that is declines or clawbacks in 8 compensation or declines in the awarding of 9 bonuses, results from the various parties that you 10 supervise who underwrite and award and permit a 11 loan to be made that ultimately defaults to the 12 detriment of either your institution or the 13 ultimate purchaser of the loan. 14 MR. RUBIN: In terms of the underwriter 15 incentive, what I'm most familiar with, our current 16 plan today provides a base salary to an individual 17 and -- 18 COMMISSIONER GEORGIOU: I'm sorry. If you 19 could turn your mic a little more towards you if 20 you could please. 21 MR. RUBIN: I'm sorry. 22 COMMISSIONER GEORGIOU: 23 MR. RUBIN: Can you hear me now? Yes. In terms of those who I supervise, 24 the underwriting staff, each underwriter has a 25 salary and then an incentive basis. The way 127 1 Q & A - Session 2 2 incentive is derived, as I was mentioning earlier, 3 is specifically first and foremost quality of their 4 originations, meaning how well have those loans 5 performed and how well is the underwriter adhering 6 to the underwriting standards that we've set forth. 7 So -- 8 9 10 COMMISSIONER GEORGIOU: how they've performed? How do you evaluate How long a tail do you evaluate those loans? 11 MR. RUBIN: So we look at a variety of 12 factors. 13 the first 60 days. 14 mistake made up front as the underwriter wrote it, 15 we find out pretty quickly. We also look at them 16 from a longer term horizon. We look at -- over a 17 24-month period, we look at that -- during the last 18 12 months, did any of those loans go bad 90 days or 19 more? 20 incentive, but -- longer-term performance. 21 The first is payment default, which is So typically if there was a So, again, the implication of longer-term COMMISSIONER GEORGIOU: And what financial 22 consequence occurs to the underwriter if there is a 23 failure, if there is an early default, first payment default or a 24 subsequent default? 25 MR. RUBIN: Right. So if we look at each of 128 1 Q & A - Session 2 2 those and if it was something that the underwriter 3 could have, should have seen, done differently, 4 then certainly they would receive no incentive 5 bonus for that period. 6 If it's something, for example, a life event, 7 a life cycle event where someone unfortunately lost 8 their job and there was nothing that they could 9 have done differently that would have avoided that 10 particular default, then we would not have impacted 11 them. 12 to be reasonable to make sure that it was in fact 13 their fault. 14 But we also look at patterns and so we want But on the other hand, if there is a pattern 15 of excessive delinquency, we want to be able to 16 look at any excessive delinquencies that again 17 result in no incentives for an underwriter. 18 19 COMMISSIONER GEORGIOU: And this is -- these are loans underwritten directly by JP Morgan Chase? 20 MR. RUBIN: That is correct. 21 COMMISSIONER GEORGIOU: And how do these 22 standards -- you said "we have implemented new 23 standards". 24 Did you say 2007 or '8? 25 Those standards were implemented when? MR. RUBIN: The standards that I'm describing 129 1 Q & A - Session 2 2 right now are in place today in 2010. 3 don't know the exact time frame. 4 our underwriters on the basis of quality. 5 continued to make it more sophisticated. 6 past, we didn't take as long a term of view in 7 terms of looking at loans over a 24-month period. 8 It was a shorter period of time. 9 the exact details. 10 In 2000 -- I We always measure We have In the I don't remember But the basic concept of what I'm describing 11 of quality being from underwriter standpoint, their 12 main measurement and metric of success has been in 13 place -- I took this role in August of '08 as the 14 chief underwriter, and certainly at that time we 15 had strengthened -- began to strength the quality 16 component. 17 COMMISSIONER GEORGIOU: And of course by that 18 time, a lot of the bad loans had already 19 originated. 20 directly originated by JP Morgan Chase, not loans 21 that you might have purchased from other 22 originators? 23 And your focus is simply on the loans MR. RUBIN: Well, as I mentioned, we no longer 24 originate through third parties, the mortgage 25 broker business. We are no longer a part of the -- 130 1 Q & A - Session 2 2 COMMISSIONER GEORGIOU: 3 MR. RUBIN: January of '09 we discontinued our 4 wholesale line of business. 5 COMMISSIONER GEORGIOU: 6 When did that stop? But before that, you had a fairly extensive wholesale line? 7 MR. RUBIN: Yes. 8 So the wholesale business at that time, we 9 still -- we underwrote the loans that were done by 10 the brokers, third-party brokers, and we looked at 11 the documentation they provided and the underwriter 12 did what they -- they did their due diligence; but 13 it was clearly something that we felt we needed to 14 strengthen and ultimately eliminate because the 15 best underwriters can still be looking at an income 16 statement and a pay stub and think it's okay and 17 find -- and underwriting to that effect only to 18 find out later that it was a falsified document. 19 But just to -- knowing that risk and knowing the 20 delinquency, the decision we made to exit that 21 business. 22 COMMISSIONER GEORGIOU: And you say that their 23 up-side incentive is contingent on those standards. 24 Do they have any down-side incentive? 25 ever clawback that results from the origination of Is there 131 1 2 3 Q & A - Session 2 the underwriting of a loan that defaulted? MR. RUBIN: So, again, at the individual 4 underwriter level, these are our first-line, 5 second-line staff. 6 production for them at a senior level. 7 other incentive programs which I'm not expert on to 8 talk to on the underwriting side. 9 specific clawback for an underwriter. 10 So it's all based on current There are There is no But as I mention often to my staff, 11 performance management -- incentive is not a 12 substitute in performance management. 13 management is you're an underwriter. 14 you all the tools to do your job. 15 with the training and support. 16 underwriting and making bad decisions, you won't be 17 working here. Performance We provide We provide you And if you're 18 COMMISSIONER GEORGIOU: All right. 19 Mr. Black, you said that one of the 20 disincentives to high-integrity appraising was the 21 selective hiring by originators and others who 22 needed your appraisal services of people who didn't 23 engage in this high-integrity appraisal process. 24 Correct? 25 MR. GALLAGHER: Yes, sir. 132 1 2 Q & A - Session 2 COMMISSIONER GEORGIOU: Can you tell us as an 3 experienced appraiser and somebody who has been in 4 this business for how many years? 5 so years? Twenty-five or 6 MR. DENNIS BLACK: Thirty years. 7 COMMISSIONER GEORGIOU: 8 What market discipline would you apply to Thirty years. 9 govern the appraisal process, which obviously we 10 all know contributed fairly significantly to the 11 inflation in housing prices to unreasonable 12 inflation in housing prices? 13 MR. DENNIS BLACK: I think the best method is 14 to have those regulatory bodies in each state be 15 better funded and have more investigators and have 16 more attorneys that can provide disincentives for 17 not acting ethically. 18 COMMISSIONER GEORGIOU: I'm sorry? 19 MR. DENNIS BLACK: 20 The appraisal boards across the country are For not acting ethically. 21 overwhelmed, here in Florida particularly. 22 recollect, in 2008, they had 800 complaints in the 23 state of Florida, against for - approximately 15,000 24 appraisers. 25 If I They - overwhelmed. I don't think there is a market mechanism, 133 1 Q & A - Session 2 2 because too many of the origination side, they're 3 not interested in it. 4 situation where a lender -- in a civil case that I 5 was involved, the lender hired a review appraiser 6 to check on the original appraiser. 7 they hired had been an appraiser certified for four 8 months. 9 apprenticeship as a trainee prior to that and I do 10 11 And I can tell a story of a The reviewer Now, they had served a two-year want to talk a little bit about appraisal entry. January 1st, 2008, the qualifications for 12 becoming an appraiser changed dramatically as 13 compared to what happened prior to that. 14 person had been a certified appraiser for four 15 months and that's who the lender turned to to 16 review the quality of someone else. 17 funny thing is by the time I was involved in this 18 case 18 months later, that review appraiser had 19 already been disciplined and revoked by the State 20 of Florida. 21 But this Well, the So that I think state has to be that the 22 regulatory bodies are able to really demonstrate to 23 appraisers that there is someone watching them; 24 that if they step outside the bounds of good 25 conduct, they will not be long for this profession. 134 1 2 Q & A - Session 2 COMMISSIONER GEORGIOU: Is there -- can you -- 3 you don't think market mechanisms work or you can't 4 think of a market mechanism -- 5 6 7 MR. DENNIS BLACK: I can't think of a market mechanism. COMMISSIONER GEORGIOU: -- in which you would 8 attach in some way economic accountability to the 9 appraiser in terms of the quality of their 10 11 appraisals? MR. DENNIS BLACK: There was something done by 12 FHA back I believe it was 2005 or maybe 2006 that 13 they started to grade appraisers based upon loan 14 defaults. 15 with loan default necessarily. 16 testified, there could have been life events or 17 there would have been other things that happened 18 that the borrower did a liar loan. 19 may have been entirely accurately and honestly 20 prepared. 21 solution by tying appraiser performance to loan 22 performance. 23 Well, the appraiser has nothing to do As Mr. Rubin The appraisal So that becomes a problematic market COMMISSIONER GEORGIOU: What else would you be 24 able to tie it to? I mean, I suppose one could 25 argue that obviously the larger the appraisal, the 135 1 Q & A - Session 2 2 larger the loan, the greater the risk of default, 3 because the borrower is in a precarious position 4 regardless of the life changing event. 5 are some consequences. 6 likelihood of default created by a mortgage that's 7 inflated by an inflated appraisal. 8 9 MR. DENNIS BLACK: So there There is a heightened If it's created by an inflated appraisal, I agree one hundred percent. 10 But it may have -- the problem with default may 11 have been for an entirely separate reason other 12 than the appraisal being inflated 13 COMMISSIONER GEORGIOU: Right. 14 MR. DENNIS BLACK: - or improperly 15 16 prepared. I wish I could come up with a market mechanism 17 that would work because I would have people lining 18 up to buy my product. 19 about this. 20 that I could step to the majority of lenders and 21 say, You need this quality control. 22 ten years ago, I attempted to form a company full 23 of people who were certified instructors across the 24 country and to lenders. 25 certified faculty members of the appraisal 26 organizations within the country. I have thought long and hard I cannot think of a market mechanism Approximately These individuals were And there was 136 1 little interest in having appraisals reviewed by 137 1 Q & A - Session 2 2 people who were highly qualified. 3 what the market mechanism would be. 4 COMMISSIONER GEORGIOU: 5 case, if you know -- 6 Am I over? 7 8 9 10 So I don't know How often is it the Just one more minute. Just this question. How often is it the case in your experience that appraisers are advised of the target price that they're asked to return an appraisal on? 11 MR. DENNIS BLACK: 12 Fannie Mae requires in their regulations that Well, that’s a double edge sword. 13 appraisers be supplied a copy of the contract. 14 uniform standards also require that we analyze and 15 report any current contract. 16 standards is also very clear that it should not be or 17 intended to be a target. 18 informational purposes. 19 20 The But the uniform It is merely for COMMISSIONER GEORGIOU: Well, but these informational purposes are essentially used-- 21 MR. DENNIS BLACK: 22 COMMISSIONER GEORGIOU: Too often --- as a guide and not 23 for what the parties are expecting the appraisal to 24 come back as? 25 final MR. DENNIS BLACK: To often that is the case. 138 1 2 3 4 5 6 7 Q & A - Session 2 I agree. COMMISSIONER GEORGIOU: Thank you very much for your courtesy. COMMISSIONER GRAHAM: a little bit over. answer? I realize that we've run Can I just ask a question with a concise In that case that you 8 cited where the institution hired the four-months 9 person to be the overseer of appraisals, was that 10 11 institution a bank or some other lender? MR. DENNIS BLACK: If I recall correctly, it 12 was a mortgage brokerage firm. 13 COMMISSIONER GRAHAM: And was there any 14 sanction against the mortgage broker for having 15 hired such an apparently incompetent person? 16 MR. DENNIS BLACK: I don't know if they were 17 sanctioned, but I certainly can point out that I 18 told the attorneys who were involved in the civil 19 case that that might be another path for them to 20 investigate to demonstrate that there was lax 21 underwriting standards when you're going and hiring 22 somebody who's been a certified appraiser for four 23 months to be your quality control reviewer. 24 COMMISSIONER GRAHAM: 25 Thank you. Mr. Thomas? 139 1 Q & A - Session 2 2 3 VICE CHAIRMAN THOMAS: Thank you, Mr. Chairman. 4 You know, I've heard this story before. 5 your opinion, Mr. Black, what percent of the 6 certified appraisers -- is that what you call them, 7 certified appraisers? 8 MR. DENNIS BLACK: 9 VICE CHAIRMAN THOMAS: 10 MR. DENNIS BLACK: do. 15 just gave us an example. 18 I don't think I have VICE CHAIRMAN THOMAS: 14 17 What percent of them insight to that. 13 16 Yeah. are honest? 11 12 In Sure you do. Sure you You know who it was that was doing it. MR. DENNIS BLACK: You I gave you an example. I can answer -VICE CHAIRMAN THOMAS: 19 you give us? 20 percentage. How many examples could And then we could kind of get to the I don't have that much time. 21 Look, what you said was you need more 22 government to stop us from behaving badly. 23 what you just said; set up a government -- more 24 guys in government to oversee what you're doing. 25 That doesn't work. That's 140 1 2 Q & A - Session 2 Now, I understand the peer group pressure, and 3 normally the cliché is you don't want to be the 4 skunk at the garden party. 5 you don't want to be the alligator at the garden 6 party. 7 COMMISSIONER GRAHAM: 8 VICE CHAIRMAN THOMAS: 9 10 11 Apropos by location, Or the panther. Or the panther. guess we're getting a few more panthers. I We've had them for a long time and didn't kill them all off. You know, when they talk about bad doctors, 12 you know, you throw a figure -- I'm sure it's 13 improbable, but pretty close -- 10 percent of the 14 doctors commit 90 percent of the malpractice. 15 if you had reasonable peer group review, if you 16 really were fundamentally proud of your 17 profession -- I don't know. 18 the percentage. 19 one percent, or are you the Lone Ranger? 20 And That's why I asked you Three percent, two percent, MR. DENNIS BLACK: I can give you some insight 21 this way. Approximately 15 percent of the 22 appraisers who are certified in the country belong 23 to a professional organization. 24 first thing. 25 to belong to a professional organization. So that's the Eighty-five percent don't even want 141 1 Q & A - Session 2 2 To answer the question -- 3 VICE CHAIRMAN THOMAS: Is that because the 4 professional organization doesn't do anything 5 except collect dues and go to nice places outside 6 of Florida for -- well, I guess for conventions you 7 might want to stay here. 8 9 MR. DENNIS BLACK: This isn't a fact of the choosing of a quality appraiser. You will note in 10 my qualifications that I hold the highest 11 designation from three of the members of the 12 appraisal foundation. 13 that come into play when someone is asking about 14 hiring me. 15 They don't ask me a question about qualification. 16 Unfortunately, rarely does They ask me a question about price. VICE CHAIRMAN THOMAS: Okay. Just let me say 17 this and then I'll move on: 18 think you could find enough folk, even the crew of 19 the highest honored multiple rewarded people, to 20 start naming names. 21 MR. DENNIS BLACK: 22 VICE CHAIRMAN THOMAS: If you were serious, I As far as -If we could get the 23 doctors to do that, you would see significant 24 reduction in malpractice. 25 way to control it, but if the peers refuse to do Peer review is the best 142 1 Q & A - Session 2 2 what they bemoan about others from a professional 3 point of view, it will never happen. 4 have to respond, because I know this is a concept 5 that's really hard to understand. 6 MR. DENNIS BLACK: 7 VICE CHAIRMAN THOMAS: 8 MR. DENNIS BLACK: 9 VICE CHAIRMAN THOMAS: 10 11 You don't May I respond? Sure. All right. Apparently I have unlimited time. MR. DENNIS BLACK: Under the guise of creating 12 more government, that would be no different than 13 Captain Gallagher's task force. 14 VICE CHAIRMAN THOMAS: Actually, it is because 15 it would be you in the profession policing 16 yourselves. 17 MR. DENNIS BLACK: Well, those complaints 18 though are made to the licensing agencies in each 19 state, and appraisers and organizations such as JP 20 Morgan Chase regularly file complaints with the 21 Florida Real Estate Appraisal Board and the 22 Division of Real Estate for them to investigate and 23 move forward. 24 25 VICE CHAIRMAN THOMAS: What about running an ad in the real estate section of the paper naming 143 1 Q & A - Session 2 2 the appraisers who clearly have not been 3 professional in what they've done? 4 MR. DENNIS BLACK: Well, I think prior to an 5 adjudication of them being guilty of fraud or some 6 other crime, I think it would be slanderous. 7 VICE CHAIRMAN THOMAS: Do you know some that 8 it wouldn't be slanderous about? 9 be true? 10 MR. DENNIS BLACK: In fact, it would I think that's something 11 that needs to be proven in a court of law before I 12 want to stick my neck out. 13 VICE CHAIRMAN THOMAS: No, I just asked you. 14 Do you -- you don't have to -- you're not going to 15 give me names. Do you know some? 16 MR. DENNIS BLACK: 17 VICE CHAIRMAN THOMAS: 18 MR. DENNIS BLACK: 19 I suspect some. Well, I also have real -- if you want to speak during the lunch break. 20 VICE CHAIRMAN THOMAS: 21 is one of the real problems. 22 time. 23 You suspect some? Yeah, yeah. See, this I hear it all the Captain Gallagher, I'm looking at the evidence 24 that you show in terms of fraud. 25 one example of the sisters -- You've got the 144 1 Q & A - Session 2 2 MR. GALLAGHER: Yes. 3 VICE CHAIRMAN THOMAS: -- on the H-1 form. 4 They give the seller the HUD-1 form that says 5 1,050,000 and they submit to Wells Fargo another 6 HUD-1 that says 1,400,000. 7 MR. GALLAGHER: 8 VICE CHAIRMAN THOMAS: 9 10 11 That's correct. How much investigative resources were involved in -- I mean, that's stupid, isn't it? MR. GALLAGHER: But it's very common. It's -- 12 the thing about this is they leave a paper trial 13 when they commit the mortgage fraud. 14 part is usually finding the paper. 15 you do have lenders that have gone under and it's a 16 question of finding the documentation. 17 find the documentation, we're able to prove that 18 they essentially created two HUD-1s. 19 that one HUD-1 is for a larger amount. 20 VICE CHAIRMAN THOMAS: 21 MR. DENNIS BLACK: 22 23 The hardest Because, again, But once we You'll find Sure. And they'll split the difference amongst themselves. VICE CHAIRMAN THOMAS: So once you discovered 24 that that may be something that's happening, you'd 25 set up a routine comparison process or you've urged 145 1 Q & A - Session 2 2 this to be done? 3 it is is a match, and when you get a mismatch, 4 you've got the case. 5 6 7 8 9 Because that would simply -- all Have you set up a structure to do that or talked about laws to do that? MR. GALLAGHER: You mean in the private sector or are you just talking law enforcement? VICE CHAIRMAN THOMAS: Well, if they filed 10 it -- the HUD-1, you have to file it with some 11 government agency. 12 MR. GALLAGHER: 13 What happens is, if I'm not mistaken, you've 14 Well, yes. got the broker's office who's got a HUD-1. 15 VICE CHAIRMAN THOMAS: 16 MR. GALLAGHER: Yeah. You'll have the title company 17 who will have a copy of the HUD-1 and then you'll 18 have the lender who's got a copy of the HUD-1. 19 20 VICE CHAIRMAN THOMAS: So there's a lot of HUD-1s around. 21 MR. GALLAGHER: Correct. 22 And then the question is, you have to take a 23 look at all of them and see if there is any 24 discrepancies. 25 now you know you've got mortgage fraud. And when you do find a discrepancy, Then it 146 1 Q & A - Session 2 2 becomes a question of who is benefiting from the 3 discrepancy? 4 lender? 5 investigation comes in. 6 determine who created the discrepancy. Is it the mortgage broker? Who is it? And so there is where the And then you have to also 7 Again -- 8 VICE CHAIRMAN THOMAS: 9 MR. GALLAGHER: 11 VICE CHAIRMAN THOMAS: 13 Do the appraisers get a copy of the HUD-1? 10 12 Is it the I don't know. Okay. No, we do not. You're off the hook on that one. Jack Rubin, I'm trying to figure out how much 14 we should charge you for the commercial you've 15 delivered so far. 16 groups. 17 that you were referencing? You referred to your peer Who in your opinion are the peer groups 18 MR. RUBIN: 19 VICE CHAIRMAN THOMAS: 20 The other large national lenders. Oh, run off some names. Or are we not allowed to ask you that? 21 MR. RUBIN: Citi, B of A, Wells. 22 VICE CHAIRMAN THOMAS: Anyone here tried to get-- 23 we've had some people earlier who I knew, but I 24 can't see them now. 25 your loan and not been successful? Anyone here tried to modify Who are you 147 1 2 Q & A - Session 2 with? 3 4 AUDIENCE MEMBER: I'm a mediator. I do foreclosure mediations. 5 VICE CHAIRMAN THOMAS: 6 person who's gotten stuck. 7 hearings. 8 That's okay. 9 JP Morgan Chase is. No, I want a real We've had them at other You can give me third-party examples. I know you have them. But apparently 10 How long have you been JP Morgan Chase? 11 MR. RUBIN: I don't know the exact point when 12 JP Morgan and Chase merged. 13 date. 14 15 VICE CHAIRMAN THOMAS: I don't know the exact This century, the 21st Century? 16 MR. RUBIN: Recently. 17 VICE CHAIRMAN THOMAS: 18 When did you move from Chase to JP Morgan? 19 MR. RUBIN: Recently. I've been employed -- I started my 20 career at Chemical Bank in 1983 and later merged 21 with Chase and I've been a Heritage/Chase employee 22 for many, many years. 23 from a mortgage perspective was really the Chase 24 entity and the arm that continues to -- 25 And JP Morgan was really -- VICE CHAIRMAN THOMAS: Well, when did JP 148 1 2 3 4 5 6 Q & A - Session 2 Morgan pick up Chase? MR. RUBIN: I don't have the exact -- I can get it to you. VICE CHAIRMAN THOMAS: Well, you moved over from Chase to JP Morgan Chase. 7 MR. RUBIN: I didn't -- 8 VICE CHAIRMAN THOMAS: 9 MR. RUBIN: You don't know? My business card changed, but my 10 position stayed the same, where I sat stayed the 11 same, my phone number stayed the same. 12 VICE CHAIRMAN THOMAS: And the exemplary Five 13 Point Program that you've been involved in has 14 stayed the same? 15 party -- your rejection of third party origination 16 was in January of '09. No, it's changed. You have that date. 17 MR. RUBIN: 18 VICE CHAIRMAN THOMAS: That's correct. 19 some bad loans? 20 MR. RUBIN: 21 VICE CHAIRMAN THOMAS: 22 Okay. So you acquired Yes. How did you resolve it with those in the company that processed them? 23 MR. RUBIN: 24 VICE CHAIRMAN THOMAS: 25 Your third people? We closed down those operations. And what about the Was there a pattern in terms of some doing 149 1 2 3 Q & A - Session 2 it more often than others? MR. RUBIN: We looked at each of the 4 underwriters that were involved in those particular 5 loans, and when opportunities came up for 6 employment in other parts of Chase, those that 7 had -- that we believe were from a delinquency 8 point of view had poor quality production were not 9 offered any employment. 10 VICE CHAIRMAN THOMAS: 11 any employment. 12 MR. RUBIN: 13 VICE CHAIRMAN THOMAS: 14 15 They were not offered Let me be clear. You fired them or you moved them to a different division? MR. RUBIN: When we closed our mortgage broker 16 channel, we closed all of our offices, which means 17 all of those employees were let go. 18 19 VICE CHAIRMAN THOMAS: Okay. Last question. I've got four minutes left on my overrun. 20 Ms. Wilcox, you talked about multiple 21 opportunities for state law change initially in 22 terms of all the frustrations you've had in trying 23 to accomplish what you accomplished, but we had 24 noted the '07 law that was passed. 25 Did that close all of them, some of them, or 150 1 Q & A - Session 2 2 are you aware of major loopholes that have not yet 3 been closed by the '07 law? 4 MS. WILCOX: Yeah, we still have -- there are 5 still some areas that we could probably get some 6 new laws or changes to some laws that would help. 7 VICE CHAIRMAN THOMAS: So some of the 8 practices, notwithstanding being investigated by 9 law enforcement, have not been changed under state 10 law? 11 MS. WILCOX: No, some of them have not. Some 12 of them we are still trying to get some changes, 13 yes. 14 VICE CHAIRMAN THOMAS: Okay. So Carl Hiaasen 15 has a chance for yet another novel focused on 16 Floridian activity. 17 Thank you, Mr. Chairman. 18 COMMISSIONER GRAHAM: Well, we have made one 19 contribution to expanding the marketplace, I think 20 one for reading. 21 Mr. Chairman? 22 CHAIRMAN ANGELIDES: 23 Mr. Black, let me ask you about this 2007, Yes. Thank you. 24 this petition in December 2000 and signed by 11,000 25 appraisers. This was addressed to Executive 151 1 Q & A - Session 2 2 Director of Appraisals Subcommittee of? 3 MR. DENNIS BLACK: This Appraisal Subcommittee 4 is formed with the financial -- by way of a law 5 signed in 1998, the Executive Subcommittee was 6 created and it consists of a chair in the Federal 7 Reserve, the FDIC/OTS, national credit unions. 8 that is the Appraisal Subcommittee of the United 9 States Congress. 10 CHAIRMAN ANGELIDES: 11 MR. DENNIS BLACK: 12 VICE CHAIRMAN THOMAS: 13 MR. DENNIS BLACK: The Subcommittee of what? Of the U.S. Congress. No. The Appraisal Subcommittee 14 is the way it's always been referred. 15 comprised of those five entities. 16 CHAIRMAN ANGELIDES: 17 related to the Congress. 18 MR. DENNIS BLACK: 22 CHAIRMAN ANGELIDES: Correct. -- an entity was established in the federal government -- 24 MR. DENNIS BLACK: 25 CHAIRMAN ANGELIDES: 26 And they wouldn't be CHAIRMAN ANGELIDES: So what you're saying is subject to FIRREA - 21 23 It is MR. DENNIS BLACK: Well, it’s federal. 19 20 So appraisal standards? Correct. -- with respect to 152 1 MR. DENNIS BLACK: Yes. 153 1 2 Q & A - Session 2 CHAIRMAN ANGELIDES: All right. Well, I'll 3 either ask our staff or you if we can get some 4 clarification on the actual nature of the entity. 5 So just to be clear, this petition 6 was started in 2000 expressing concerns about 7 significant problems in the appraisal business; the 8 withholding of business, if there was a refusal to 9 inflate values, withholding of business if we 10 refuse to guarantee a predetermined value. 11 11,000 appraisers signed that you said from the 12 time it commenced prior to its closing for 13 signatures. 14 Do you remember when that closing was? 15 MR. DENNIS BLACK: 16 17 So I believe it to be a closure of signatures in 2006 or '7. CHAIRMAN ANGELIDES: Okay. So during that 18 six-year period, 11,000 appraisers took the time to 19 go on and essentially warn the federal government 20 about problems in the industry? 21 MR. DENNIS BLACK: Yes. 22 And a good percentage of people. For example, 23 I was signature I believe 647 and I signed it about 24 one month after its inception. 25 large percentage of those 11,000 were on board. So very quickly a 154 1 2 Q & A - Session 2 CHAIRMAN ANGELIDES: Were you aware of any 3 action taken be the Appraisal Subcommittee in 4 response to that petition? 5 MR. DENNIS BLACK: 6 CHAIRMAN ANGELIDES: No, I'm not. All right. I'm going to 7 ask our staff if we could follow up on that. 8 To what extent -- you know, I know 9 Mr. Georgiou asked you about some business model 10 questions and let me just follow up. 11 extent do you believe that the pressures you faced 12 were caused by the business model of the 13 origination to distribute model? 14 MR. DENNIS BLACK: To what I think a large percentage 15 of one, because it was that financial hot potato. 16 I originate this loan and I move the risk on. 17 collect my commission. 18 about whether or not the appraisal valuation and 19 the valuation of collateral was accurate and 20 honest. 21 CHAIRMAN ANGELIDES: So I'm not all that worried Was this lender driven -- 22 from your perspective lender driven or mortgage 23 broker driven? 24 train that pushed the envelope? 25 I Who at your level was driving the MR. DENNIS BLACK: I think all parties were 155 1 Q & A - Session 2 2 guilty, but if you get into the mortgage brokerage 3 world, the third-party originators were more apt to 4 go down that path as opposed to in-house 5 originators. Because they were clearly -- 6 CHAIRMAN ANGELIDES: 7 MR. DENNIS BLACK: 8 CHAIRMAN ANGELIDES: 9 MR. DENNIS BLACK: Compensation structures? Pardon me? Compensation structures? Absolutely. 10 CHAIRMAN ANGELIDES: Less control? 11 MR. DENNIS BLACK: 12 CHAIRMAN ANGELIDES: 13 Mr. Rubin, let me ask you this question: Yes. All right. You 14 talked about JP Morgan change and reform in its 15 practices. 16 you've obviously been with the institution for a 17 while. 18 industry even itself began to refer to as liar 19 loans? 20 people have told me, Well, technology advances, 21 rapidity of movement. 22 this to supply W2s and verification of income? 23 Really what's the rationale or justification for a 24 lender eliminating that essential credit check? 25 And internally when this was happening, give me your Let me just take you back, because What was the rationale behind what the What was -- you know, I know that some But I'm thinking how hard is 156 1 Q & A - Session 2 2 view. 3 eliminating '07, '08, with all due respect, after 4 the horse is out the barn. 5 Not so much about the fact that it was When did JP Morgan Chase go to this form of 6 loan to what share of the market was it in the 7 heyday and what was the rationale? 8 9 10 MR. RUBIN: I don't know the exact timing, but I do know we were relatively late to offer the no-doc loans. 11 At the time -- and this has gone back -- we 12 felt we were providing a loan that appealed to a 13 specific segments of borrowers that we believed 14 were creditworthy but didn't want to provide what 15 at the time may have been very complex 16 documentation. 17 So at the time when we started it -- 18 CHAIRMAN ANGELIDES: 19 20 Complex documentation being what? MR. RUBIN: So if you were a self-employed 21 borrower and had multiple tax returns, instead of 22 just providing the normal 1040, we would analyze 23 the business returns. 24 and asked for -- 25 I'm sorry. So if you went to a borrower 157 1 Q & A - Session 2 2 3 CHAIRMAN ANGELIDES: If you have an S-Corp, you provide the S-Corp or -- right? 4 MR. RUBIN: But many had multiple businesses. 5 So at the time -- and, again, this is -- you 6 asked me to kind of retrospectively look back. 7 That was the rationale that we thought there were 8 generally higher net worth borrowers that this made 9 sense for that didn't want to go through the 10 hassles of giving the paperwork. 11 certainly the rationale at the time. 12 process may have been another. 13 really more the creditworthiness is how we got into 14 it. 15 And that was Speed on the But honestly it was Unfortunately, as we all now know, it became a 16 tool for many enabling opportunities to those 17 interested in committing mortgage fraud to lie 18 about it, and we changed it. 19 certainly preferred to have changed it much earlier 20 than we had. 21 wasn't, Let's go in with a loan -- so it doesn't 22 have to disclose their income and let's give it to 23 them. 24 25 We would have But at the time we went into it, it It was totally -CHAIRMAN ANGELIDES: Well, I know it started with high-net-worth individuals generally, repeat 158 1 Q & A - Session 2 2 borrowers, so let me ask you. 3 time frame, what percentage of your residential 4 loans became some form of a no-doc-stated-income 5 loan? 6 7 8 9 10 11 MR. RUBIN: The 2005 to 2007 I don't have those figures as to when, but I can certainly get those to you. CHAIRMAN ANGELIDES: roughly? What was the magnitude Are we talking about one in ten, one in three? MR. RUBIN: I don't know. I really can't 12 venture a guess. 13 I can tell you. 14 but it started off slowly because of the type of 15 borrower we were targeting. 16 But I don't have the exact number. 17 18 19 It wasn't the predominant -- that It wasn't the predominant loan, CHAIRMAN ANGELIDES: But it got bigger. All right. Follow up and please get us that. The other question I have for you, just very 20 briefly -- I'm going to make a commitment not to go 21 over my time. 22 measures did you undertake in your shop with 23 respect to fraud protection? 24 25 MR. RUBIN: Just very briefly, what specific We, for example, did post reviews, so after the fact we have a quality assurance 159 1 2 Q & A - Session 2 department that would go back and -- 3 CHAIRMAN ANGELIDES: 4 MR. RUBIN: What about pre? Prefunding, we would get an 5 executed 4506-T which is a document that allows us 6 to go to the IRS to get the actual tax return. 7 would go ahead and -- for example, in the state of 8 Florida, that was one of our requirements that we 9 not only got it signed but executed, meaning we got We 10 copies of tax returns, compared it to what was 11 submitted, and if there was any discrepancy, then 12 we did not -- any material discrepancy, we didn't 13 do the loan. 14 15 That's one example. We did independent verifications of employment. 16 CHAIRMAN ANGELIDES: 17 or limited-doc loan? 18 MR. RUBIN: 19 CHAIRMAN ANGELIDES: 20 MR. RUBIN: 21 That was on every no-doc Every no-doc and -- yes. So you would then -- Excuse me. The 4506-T we did not implement until July of '08 is when we mandated -- 22 CHAIRMAN ANGELIDES: Yeah. Forget that for a 23 minute. I'm asking during the run-up. What did 24 you do in the '05 to '07 -- by '08 the market is 25 dead. So what did you do specifically in the kind 160 1 Q & A - Session 2 2 of '04/'05 run-up period? 3 measures taken by your shop to detect fraud? 4 MR. RUBIN: What were the specific So the training that we provided 5 our underwriters was one of our critical elements. 6 Providing them, you know, specific opportunities to 7 look at here's a Social Security Number here, a 8 Social Security Number there. 9 comparison. You need to do a For appraisals, you need to do a 10 comparison of are they using the right comparables? 11 So it was an intense training program for 12 underwriters to recognize what we call red flags in 13 the file. 14 employment and they are not present, that's another 15 red flag. 16 When you're calling a borrower's And so literally we looked at it by occupancy. 17 If someone is buying a property outside of the 18 marketplace and still intended to work there, that 19 should raise a red flag. 20 possibly be a primary residence if you're buying a 21 house that's 200 miles away? 22 only looking at the income piece. 23 to make sure that we understood who was the 24 primary -- who is intended to occupy. 25 of the things we were really trying to weed out was Well, how could this Because we were not We were trying Because one 161 1 2 Q & A - Session 2 the investment population. 3 CHAIRMAN ANGELIDES: Okay. I just violated my 4 rule. 5 procedures in place for fraud detection? 6 Very quickly, did you have a set of written MR. RUBIN: We had a credit policy, a written 7 credit policy for all of our underwriters to 8 follow. 9 five years ago if there was a specific fraud 10 11 I don't recall offhand back three, four, section. CHAIRMAN ANGELIDES: Will you please provide 12 us if you had any policies. 13 organizationally was this solely in the hand of the 14 underwriters or was there any sampling or 15 verification by a fraud detection unit who in a 16 sense backstopped, trained professionals who 17 actually know how to look for problems? 18 MR. RUBIN: Yeah. And then, secondly, Each of our underwriters 19 has the ability to refer. 20 just gave, they would turn it over to our fraud -- 21 we have a specific fraud group that are experienced 22 trained professionals that would take that and then 23 do whatever is necessary. 24 25 CHAIRMAN ANGELIDES: you make? So in the cases that I How many referrals did 162 1 Q & A - Session 2 2 3 MR. RUBIN: So, as an example, today a thousand a month. 4 CHAIRMAN ANGELIDES: Today. I want to go 5 back. I'm more interested in, you know, the period 6 when the fuse is burning towards the explosion. 7 What about the 2005/2007 period? 8 MR. RUBIN: 9 CHAIRMAN ANGELIDES: 10 I don't know. Would you have records of that? 11 MR. RUBIN: I really don't know. 12 CHAIRMAN ANGELIDES: Okay. I would assume you 13 would if you had a protocol and you had a reporting 14 process. 15 that to us. So perhaps we could ask you to provide 16 I'm over my time. 17 COMMISSIONER GRAHAM: 18 And I wish to thank this panel for their Good. Thank you. 19 excellent contribution to our understanding of this 20 problem. 21 be some follow-up questions in writing. 22 appreciate your willingness to receive and respond 23 to those. 24 25 As I indicated, I expect that there will It is now 12:30. I We will take a 15-minute lunch break and we reconvene at 12:45. 163 1 Proceedings 2 3 CHAIRMAN ANGELIDES: Indigestion in fifteen minutes. 4 5 And we'll be back with He's the task master. (Recess was taken.) SESSION 3 6 COMMISSIONER GRAHAM: I'll call the Commission 7 back into session. The third and final panel for 8 today will be on the regulation, oversight and 9 prosecution of mortgage fraud. Again, it says in 10 Miami, but we are going to be looking more broadly 11 than that. 12 panels, when I complete your introduction, I'm 13 going to ask that you stand and be sworn. 14 As we have done with the two previous Our first panelist will be Mr. Tom 15 Cardwell who is the Commissioner of the Office of 16 Financial Regulations for the State of Florida. 17 Mr. Cardwell, thank you for being here today. 18 Next is Mr. Wilfredo Ferrer, the United States 19 Attorney for the Southern District of Florida. 20 Thank you. 21 And, finally, Mr. R. Scott Palmer, Special 22 Counsel in Chief of the Mortgage Fraud Task Force 23 of the Attorney General's Office of Florida. 24 Thank you. 25 If you would please stand and raise your right 26 hand. 164 1 Proceedings 2 Do you solemnly swear or affirm under the penalty of perjury that 3 the testimony you are about to provide the Commission will be the 4 truth, the whole truth, and nothing but the truth, to the best of 5 your knowledge? 6 MS. CARDWELL: 7 MR. FERRER: I do. 8 MR. PALMER: I do. 9 I do. (witnesses sworn) 10 COMMISSIONER GRAHAM: 11 One other item. Thank you. I anticipate that we will not 12 be able to ask as many questions orally as we would 13 like and, therefore, we ask your indulgence 14 if we had written questions to be submitted later. 15 All: Yes/Of course/That would be fine. 16 Thank you very much. 17 Mr. Cardwell? 18 MR. CARDWELL: 19 Chairman Angelides, Vice Chairman Thomas, Thank you. 20 Senator Graham, Members of the Commission, my name 21 is Tom Cardwell and I am the Commissioner of the 22 Office of Financial Regulation in the state of 23 Florida, a position in which I have served now for 24 one year. 25 lawyer in private practice for longer than I care 26 to comment with the Akerman Senterfit firm, a Prior to assuming this position, I was a 165 1 500-attorney firm based in Florida, where I served 2 as Chairman and CEO and headed the Financial 3 Institutions Practice Group. 4 Relative to this appearance, I served on the 166 1 Opening - Cardwell 2 Florida Supreme Court Mortgage Foreclosure Task 3 Force which made recommendations to deal with the 4 crisis in our Florida courts regarding mortgage 5 foreclosures. 6 Senator Graham for many years. 7 And might I add, I have known The Office of Financial Regulation has 8 jurisdiction over the state-chartered banking 9 industry, securities industry, mortgage brokers and 10 other financial industries. 11 a budget of $43 million with which to carry out our 12 responsibilities for licensing, examination and 13 enforcement in all of these areas. 14 We have 453 employees, The real estate mania or bubble that overtook 15 much of the nation certainly manifested itself in 16 Florida. 17 opportunities for fraud and those who will avail 18 themselves of that opportunity and the mortgage 19 industry was no exception. 20 to the mortgage foreclosure crisis in Florida 21 revealed weaknesses in the statutory scheme and the 22 regulatory execution of that scheme. 23 been significant changes and improvements since 24 that time. 25 As in almost every bubble, there are The events that led up There have Among the statutory weaknesses were that many 167 1 Opening - Cardwell 2 persons engaged in originating the loans were not 3 required to be licensed, and for those who were 4 required to be licensed, background checks were 5 only required at the time of the initial licensing 6 and not on the renewal of licenses. 7 On the regulatory side, regulators were slow 8 to implement federal criminal background checks and 9 regulators were not as responsive to complaints and 10 practices that they heard from the public as they 11 could have been. 12 Florida has taken a number of steps to address 13 these weaknesses. 14 2008, the President signed the Secure and Fair 15 Enforcement for Mortgage Licensing Act, the acronym 16 for which is the S.A.F.E. Act. 17 As you may know, on July 30th, Florida is in compliance with that Act and has 18 in fact gone beyond its requirements. 19 requires that all persons engaged in the mortgage 20 origination process be licensed unless exempt. 21 This addresses the issue of unlicensed persons 22 dealing with the public. 23 Florida now Next, each licensee is required to meet a new 24 strict standard that include passing a detailed 25 criminal and credit history background, 168 1 Opening - Cardwell 2 demonstrating professional competency by 3 successfully passing national and state 4 examinations and having the background checks 5 repeated annually as a part of the license renewal 6 process. 7 Further, the background checking process has 8 been enhanced, and as one of the complaints was a 9 number of unsavory characters that were allowed to 10 participate in the mortgage business. Under new 11 Florida law, all participants are required to have 12 the yearly background checks and credit histories. 13 Now, individuals with certain credit -- 14 criminal records are now barred from the mortgage 15 industry and our license requirements are higher 16 than those that are required under the S.A.F.E. 17 Act. 18 turpitude can be a bar for participation, not just 19 financially related crimes. 20 imposes the same background checks that S.A.F.E. 21 imposes on individuals, on the officers and 22 directors of the businesses with whom those 23 originators were. For example, in Florida any crime of moral In addition, Florida 24 I think the S.A.F.E. Act is an important act. 25 I think there are some fundamental changes that in 169 1 Opening - Cardwell 2 both Florida and nationally will change the 3 mortgage origination business. 4 more professionalized. 5 educated. 6 consumer confidence and there will be much stronger 7 gatekeeping with respect to those criminal 8 backgrounds. 9 some significant way in addressing fraud in the 10 It will become much It will become better I hope this will allow an increase in And I think these changes will go origination process. 11 On the regulatory side, we have developed 12 rules to implement the restrictions of those having 13 criminal records from entering the business. 14 have tightened our procedures to make sure the 15 applications are processed timely and completely. 16 We have developed and implemented state-of-the-art 17 software for regulating mortgage brokers that let's 18 us make sure that any of the issues are less likely 19 to fall into the cracks and to look at all the 20 records in a single database which we were not 21 capable of doing before. 22 We Now, our agency does not have criminal 23 prosecutorial authority; however, when a complaint 24 leads to examination and fraud, we do partner with 25 an agency that does, many of these here, and we are 170 1 2 3 4 Opening - Cardwell a resource to other agencies. COMMISSIONER GRAHAM: Mr. Cardwell, if you would summarize. 5 MR. CARDWELL: I shall. 6 And I'd like to speak just very briefly about 7 the world of mortgage regulation in the future. 8 And to that I would say the financial crisis has 9 framed the question to the regulatory community 10 "What could we have done better?" 11 challenges for all regulators I think are to get 12 ahead of the curve. 13 And the It's the story of Wayne Gretzky. What he did, 14 he would skate to where the puck was going to be 15 and not where it is. 16 have not done that as well as we should, and I 17 think that is the challenge for us going forward. 18 19 And I think in regulation we I see that my time has expired, so with that, thank you. 20 COMMISSIONER GRAHAM: 21 Mr. Ferrer? 22 MR. FERRER: Thank you very much. Good afternoon, Ladies and 23 Gentlemen of the Commission. My name is Wilfredo 24 Ferrer and I've had the pleasure of serving as the 25 U.S. Attorney for the Southern District of Florida 171 1 Opening - Ferrer 2 for the last four months. 3 inviting me and I'm very pleased to be here to 4 assist you in your fact-finding process. 5 I want to thank you for As you know, the mission of the Department of 6 Justice and of all the U.S. Attorneys’ Offices 7 across the country is to enforce our nation's laws 8 by investigating, prosecuting and punishing those 9 who commit crimes, including financial crimes and 10 fraud. 11 Justice and the U.S. Attorney's Office for the 12 Southern District of Florida have waged an 13 aggressive campaign to help stem the tide of 14 mortgage fraud that has tarnished our communities 15 and our nation. 16 And in this context, the Department of But our prosecutorial efforts, no matter how 17 aggressive and focused, are defined and limited by 18 our role in the justice system, and our role is to 19 bring to justice those who have committed or have 20 conspired to commit fraud. 21 that often means that the fraud has already been 22 committed and the harm has already been done by the 23 time we become involved. 24 our prosecutions, and the resulting punishment, 25 help prevent fraud by deterring others from Now, unfortunately, Still, we believe that 172 1 2 Opening - Ferrer committing similar crimes in the future. 3 Now, despite our District's increased scrutiny 4 and continually rising prosecutions, mortgage fraud 5 continues to be a serious problem in my hometown 6 and here in South Florida. 7 South Florida benefited from tremendous growth 8 during the real estate boom. 9 however, we were hit particularly hard with the 10 11 Earlier in the decade, But as a result, market's eventual fall. In 2009, for example, the Miami-Fort 12 Lauderdale metropolitan area was ranked by 13 RealtyTrac, the year-end report, among the top ten 14 U.S. metropolitan areas for foreclosure rates, with 15 1 out of every 14 homes facing foreclosure 16 proceedings. 17 Florida number one in loan origination fraud in 18 2008 and number three in 2009. 19 FinCEN and the Department of Treasury, California 20 and Florida led the nation in the number of 21 mortgage fraud loan subjects reported in their 22 Suspicious Activity Reports, also known as SARs, 23 for 2009. 24 Institute, known as MARI, ranked Florida number one 25 for mortgage fraud for the four straight years In addition, Fannie Mae ranked And according to In addition, the Mortgage Asset Research 173 1 2 3 Opening - Ferrer prior since 2006. Recent figures estimate nationwide mortgage 4 fraud losses for 2009 are approximately $14 5 billion. 6 cases reflect that mortgage fraud breeds other 7 crimes. 8 other serious crimes, such as identify theft, money 9 laundering, credit card fraud and even arson, just In addition to staggering losses, our We continue to see mortgage fraud tied to 10 to name a few. 11 technology to receive and process loan applications 12 is increasing and that makes the fraudsters 13 anonymous and easier to hide. 14 The use of the Internet and related Our prosecutions reveal that the perpetrators 15 of mortgage fraud have infiltrated every level of 16 the loan industry. 17 who pose as legitimate purchasers to corrupt 18 mortgage brokers, appraisers, complicit title 19 agents, attorneys and bank loan officers. 20 We're talking from straw buyers Now, to address the mortgage fraud problem in 21 South Florida, in September of 2007, our office, 22 the U.S. Attorney's Office, announced its Mortgage 23 Fraud Initiative. 24 of that Initiative and we created a Mortgage Fraud 25 Strike Force comprised of experienced federal Then we built upon the success 174 1 Opening - Ferrer 2 prosecutors and state and local agents, officers 3 and financial analysts dedicated exclusively to 4 investigating and prosecuting mortgage fraud cases. 5 Using this model -- which, by the way, was a 6 model for the nation -- of federal, state and local 7 cooperation, law enforcement is working together, 8 efficiently and quickly in sharing information and 9 focusing on common goals. 10 Our Mortgage Strike Force has yielded 11 substantial results. 12 actually yesterday, from the time we started our 13 initiative in 2007, we have prosecuted 401 mortgage 14 fraud defendants at all levels of the mortgage 15 process responsible for almost half a billion 16 dollars in fraud. 17 Fraud Enforcement Task Force, established in 18 November of 2009 by the President, has helped shed 19 a national spotlight and renewed multi-agency 20 emphasis on mortgage fraud investigations and 21 prosecutions. 22 As of September 20th, And more recently, the Financial This leads me to my final point. While 23 prosecutions play an important role in deterring 24 mortgage fraud, prosecutions are not the solution 25 to the mortgage fraud problem. We can very well 175 1 Opening - Ferrer 2 double our prosecutions and still not slow down the 3 tide of fraud. 4 answer, and in that regard, private industry, law 5 enforcement and regulators must join forces, 6 communicate and coordinate to better prevent the 7 fraud on the front end. 8 9 Prevention, that is the real This is where the President's Financial Fraud Enforcement Task Force comes into play and it has 10 its greatest impact. 11 law enforcement about emerging frauds, learning 12 from victims at town hall meetings, educating the 13 public on how to avoid becoming the victim of 14 fraud, sharing lessons learned, and spearheading 15 national projects like we did in June of this year 16 which is called Operation Stolen Dreams, the 17 Financial Crimes Enforcement Task Force provides a 18 crucial tool to combat financial fraud. 19 20 21 22 By educating the industry and Thank you very much for inviting me once again and I look forward to your questions. COMMISSIONER GRAHAM: Thank you very much, Mr. Ferrer. 23 Mr. Palmer? 24 MR. PALMER: 25 On behalf of Attorney General Bill McCollum, I Yes, sir. 176 1 Opening - Palmer 2 wish to extend our thanks to the Commission for 3 being invited here to testify about how the Florida 4 Attorney General's Office has addressed the 5 mortgage fraud problem in Florida. 6 I'm Scott Palmer. 7 Attorney General and I'm also head of an internal 8 mortgage fraud task force. 9 Florida State University Law School. 10 11 As you noted, I'm special counsel to the And I also teach at I teach white-collar crime. When I arrived back at the Attorney General's 12 Office in 2007, mortgage fraud was already on the 13 radar screen. 14 Office only has the authority to prosecute mortgage 15 fraud civilly under the Florida Unfair and 16 Deceptive Trade Practices Act. 17 Deceptive Trade Practices Act allows the Attorney 18 General to seek damages, penalties, restitution, 19 dissolution and other equitable remedies. 20 Historically, the Attorney General's The Unfair and Since the late 1980s, the Office of Statewide 21 Prosecution has been indeed housed within the 22 Attorney General's Office and they have the ability 23 to pursue multi-jurisdictional cases that would 24 involve the crimes that are involved in the 25 mortgage fraud. 177 1 2 Opening - Palmer Now, in the summer of 2007, we, the Florida 3 Attorney General's Office, had a citizen services 4 consumer hotline, and they began to receive 5 complaints about something we call mortgage rescue 6 fraud. 7 questionable real estate deals and complaints about 8 lenders. They also began receiving complaints about 9 As a result of these complaints, we formed our 10 internal task force and we had to use investigators 11 and attorneys that had actually other duties and 12 volunteered to be on this task force. 13 these cases and then we either prosecuted them 14 civilly or referred them to local prosecutors 15 criminally. We triaged 16 Now, I've described the most egregious cases 17 that we found in my written testimony and I won't 18 go over that here. 19 And another thing that we did is we did form a 20 small unit to analyze various property transfers 21 based on tips that we received in the citizens 22 services hotline. 23 properties that were listed, for example, for 24 $400,000 one day and then relisted for $600,000 the 25 next day and then there was an immediate sale. And what we saw primarily were 178 1 2 Opening - Palmer Now, we used this type of information as 3 information to open cases and to subpoena records 4 from title companies and other various people to 5 investigate these cases. 6 filed is described in my written testimony as the 7 American Heritage case. 8 9 One such suit that we We also of course received complaints about lenders. We received most complaints about 10 Countrywide. 11 investigation into Countrywide. 12 Countrywide didn't even follow their own 13 underwriting standards. 14 industry underwriting standards. 15 borrowers into loans that they couldn't afford. 16 They failed to properly disclose the loan terms. 17 They placed borrowers in inappropriate mortgages 18 and they compensated underwriters with bonuses that 19 were based on volume instead of quality and all 20 things I'm sure you've heard before. 21 Countrywide, we launched an We found out that They didn't follow They placed At same time that these civil prosecutions 22 were pending, our Office of Statewide Prosecution 23 was also prosecuting cases criminally. 24 Agent Wilcox mentioned the Argent Mortgage case and 25 that was one of the cases and many others And I think 179 1 2 3 Opening - Palmer prosecuted by our Office of Statewide Prosecution. One of the things we discovered was 4 shortcomings in our laws. 5 appraisers couldn't be included in our civil suits 6 because under the Unfair and Deceptive Trade 7 Practice Act, they were statutorily excluded on the 8 theory that regulatory agencies needed to take 9 corrective action against them. 10 11 First, realtors and Sometimes they did and sometimes they didn't. Second, even though the Attorney General had 12 the power to investigate and file civil 13 racketeering cases, the proceedings were basically 14 under state law in rem proceedings. 15 filed against property. 16 looking at, the property has been dissipated, and 17 under Florida law, you didn't have a racketeering 18 case because you had no property to file against. 19 Under federal law, the civil racketeering -- you 20 can file a civil racketeering case against the 21 person and then seize substitute property, and 22 that's not the case in Florida law. 23 were tied there. 24 25 They had to be The cases that we were So our hands And of course in the Countrywide case, that was taken over by Bank of America. Under Florida 180 1 Opening - Palmer 2 law, we can't investigate federally chartered 3 banks, so we had to file suit against Countrywide 4 the day before they were purchased by Bank of 5 America. 6 case. 7 Otherwise, we would have lost the entire Now, we accomplished some statutory reform, 8 and with the passage of the Florida Statute 9 501.1377, we basically made it illegal to take any 10 type of up-front fee in any kind of mortgage 11 modification. 12 business. 13 And that pretty well shut down the Also, as Mr. Cardwell has noted, under the 14 S.A.F.E. Act now, a mortgage -- any type of 15 mortgage modification person has to be licensed 16 under the State of Florida. 17 have really brought down the incidence of mortgage 18 risk and fraud. 19 And those two things Also, in response to the fact that our laws 20 have shortcomings, we formed an inter-agency task 21 force which put together the Attorney General's 22 Office, the Office of Financial Regulation, the 23 Florida Department of Law Enforcement and other 24 local law enforcement agencies so we could triage 25 cases and refer them appropriately. 181 1 2 Opening - Palmer And I see I'm out of time. But what I would 3 like to say also in closing is that mortgage fraud 4 is a very unique crime, because in most instances 5 the victims are also the perpetrators and the 6 perpetrators are the victims. 7 victims of the mortgage rescue scheme invariably 8 commit the serious felonies of misrepresenting the 9 assets or other things when they obtain the 10 Those who are the mortgage in the first place. 11 Lending institutions that suffered these 12 unfathomable losses were often guilty of predatory 13 lending practices and sometimes even encouraged the 14 commission of felonies beseeching mortgage brokers 15 to write mortgages through any means necessary so 16 that they would have a portfolio to sell on Wall 17 Street. 18 19 COMMISSIONER GRAHAM: Would you summarize please. 20 MR. PALMER: 21 And mortgage brokers and others were also 22 Yes. involved. 23 So in case, in closing, the recent dramatic 24 increases in the private criminal prosecution of 25 mortgage fraud perpetrators at all levels is 182 1 Opening - Palmer 2 commendable and necessary. 3 U.S. Attorney in that the best way to do it is to 4 develop systems that will detect mortgage fraud at 5 the time it's occurring and not prosecute people 6 after it has occurred. 7 Thank you. 8 COMMISSIONER GRAHAM: 9 But I agree with the Thank you very much. In one way or the other, you've 10 all touched on the issue of prevention as being the 11 superior strategy to chasing after the event. 12 your experience, what have you found to be the most 13 effective measures, either using government 14 regulatory enforcement measures or using the 15 marketplace? 16 preventive tactics against mortgage fraud? 17 From What have been the most effective MR. PALMER: The most effective preventative 18 tactics revolve around having sufficient 19 intelligence about what's going on and then acting 20 quickly to stop the problem. 21 prosecution -- A criminal 22 COMMISSIONER GRAHAM: 23 MR. PALMER: 24 A criminal prosecution takes a long time to 25 develop. Pull your mic -- Oh, I'm sorry. You can hit -- if you develop a case that 183 1 Q & A - Session 3 2 has -- that you can prove, say, to the 3 preponderance of the evidence instead of beyond and 4 to the exclusion of every reasonable doubt, you 5 might be able to go in and hit the people in frauds 6 with a civil injunction to stop the activity from 7 occurring and then refer it for criminal 8 prosecution. 9 do. 10 And that's what we were attempting to COMMISSIONER GRAHAM: Mr. Ferrer, any thoughts 11 on what you found to be effective preventive 12 tactics? 13 MR. FERRER: I think that what we are doing 14 now nationwide with the President's Financial Fraud 15 Enforcement Task Force, that is a great example of 16 an effective prevention tactic, and that is because 17 we are now elevating the problem nationwide. 18 June of this year, we announced the takedown on 19 Operation Stolen Dreams where in a three-month 20 period here in the Southern District of Florida, we 21 indicted 86 defendants who were responsible for 22 $76 million in fraud, in loans that were issued by 23 fraud. 24 25 In By elevating that, having press conferences, every time you have a mortgage fraud case, we issue 184 1 Q & A - Session 3 2 a press release letting the public know what the 3 schemes are that we are seeing and how to prevent 4 it and what to look out for. 5 I have also just -- I've been on the job for 6 four months. 7 Assistant Attorney General, Tony West, to the 8 National Hispanic Prosecution and Bar Association 9 nationwide, and we talked about mortgage fraud in a panel. 10 Two weeks ago I went with the And what I think is very effective is 11 when the regulators sit down with us and they hear 12 from us as to what we're seeing in our cases so 13 that they see lessons learned, in other words, and 14 know what to look out for from here on into the 15 future and what we're seeing in our cases. 16 think that's been very effective. 17 COMMISSIONER GRAHAM: 18 MR. CARDWELL: And I Mr. Cardwell? I think this panel touched 19 on the most important aspect of prevention earlier 20 this morning. 21 system to create frauds are the most pervasive and 22 serious problem. 23 fraud. 24 have an economic bubble like this, it is going to 25 attract people into fraud. I think that the incentives in the A bubble is an incubator of It really starts with that. Whenever you If the money is 185 1 2 3 Q & A - Session 3 there, the people are going to be there. In my experience, I saw the amount of money 4 poured into the housing market by the banks and 5 investors. 6 the lax of accountability throughout the system 7 that you all discussed this morning. 8 out-and-out greed. 9 number of people. I saw the lax lending standards. I saw I saw I saw economic illiteracy by a And all of those created, if you 10 would, here in South Florida a perfect storm to 11 have a great deal of fraud. 12 regulator can help by controlling who gets into the 13 industry and while Mr. Ferrer and Mr. Palmer can 14 work on prosecuting it, those are in the sense 15 activities that we all engage in that are shutting 16 the barn after the horses have fled. 17 And while we as a And so if the topic is prevention, I firmly 18 believe that you're going to have to deal with the 19 market incentives and policies which create 20 conditions in which fraud is rife. 21 COMMISSIONER GRAHAM: Mr. Ferrer, I am going 22 to raise a somewhat sensitive topic, but you 23 referred to the fact that you had recently attended 24 a meeting of Hispanic prosecutors. 25 anything about this issue that is different in a Is there 186 1 Q & A - Session 3 2 community such as this one with a high degree of 3 diversity vis-a-vis a community that is more 4 homogeneous? 5 MR. FERRER: Actually, what I have seen, Mr. 6 Commissioner, Senator Graham, is that because of 7 the diversity that exists in the Southern District 8 of Florida, we fall -- the population here is more 9 vulnerable. I have seen one of the cruelest 10 schemes which is when two defendants went after the 11 Haitian-American community purportedly for 12 immigration services and they asked them to come 13 forward to get assistance in their immigration 14 proceedings, their housing, government programs. 15 And what they did was they stole their identities. 16 The fraudsters took advantage of language barriers, 17 cultural differences, the fact that they were in 18 need of other services, and they stole their 19 identity, and then they got mortgages based on 20 those stolen identities and then they sold homes 21 and flipped them based on the identities of these 22 victims. 23 I think that in a population of diversity, 24 which is our greatest strength, also makes it very 25 vulnerable and fraudsters to come and take 187 1 2 3 Q & A - Session 3 advantage. COMMISSIONER GRAHAM: Mr. Ferrer, I'd like to 4 pursue something that was said at the first panel, 5 and you eluded to it in your remarks, and that is 6 the level of prosecution. 7 there were a thousand or more people prosecuted as 8 a result of the Savings and Loan Crisis of 20-or-so 9 years ago, that there have been no prosecutions 10 11 12 It was stated that while during this current financial crisis. Now, you indicate and I think you gave the number of 401 cases. Is that correct? 13 MR. FERRER: Yes, Senator. Yes. 14 Actually, that could be -- I mean, at least in 15 this district, that could be no further from the 16 truth. 17 alone from 2007 when we started our Initiative 18 until yesterday, we've prosecuted 401 defendants 19 who were responsible for almost half a billion 20 dollars in fraudulent loans. 21 I mean, we actually in the last three years Mortgage fraud is not new to our district. 22 have been prosecuting these cases since the 23 beginning of the decade, even beforehand. 24 for example, just as a quick example, we brought 25 down a substantial case. We In 1999, It was called Operation 188 1 Q & A - Session 3 2 Flipper and it involved 250 properties, more than 3 that actually, more than 250 properties, that were 4 illegally flipped. 5 was a 19-month investigation. 6 They were responsible for $36 million in fraud. 7 And then we had Operation Flipper Part 2 in 2001 8 which involved more than 50 properties. 9 And we did that in 1999. That Nine defendants. So we've seen the fraud here in South Florida 10 and our office has effectively and aggressively 11 prosecuted those cases. 12 you that there is expected more to come. 13 pending investigations as do the law enforcement 14 agency that we work with. 15 COMMISSIONER GRAHAM: So -- and I will also tell We have In that same panel, 16 there was a lot of discussion about what is 17 referred to as control fraud, which is where the 18 institution, such as a mortgage originator or a 19 bank, is part of the fraudulent activity by 20 allowing conditions to exist which promote fraud. 21 Have you seen here in South Florida evidences 22 of this so-called control fraud, fraud from the top 23 of the financial food chain? 24 25 MR. FERRER: Well, the way we work our cases is that we follow the evidence wherever it leads 189 1 Q & A - Session 3 2 us. 3 District of Florida is -- and we have prosecuted 4 insiders from the bank, from the financial 5 institutions, such as bank managers, loan officers 6 and the such. 7 What we have found so far in the Southern Again, this is an area where we are continuing 8 to investigate. 9 evidence. We will always follow the We have in the past on other matters -- 10 this month -- I mean, this year, for example, on 11 Wachovia, you remember that we filed an Information 12 against the bank for not having an anti-money 13 laundering program. 14 So we are following the evidence, and right 15 now what we have brought so far to date have been 16 bank insiders, such as managers and loan officers, 17 but not institutions. 18 COMMISSIONER GRAHAM: Mr. Palmer, you indicate 19 that in Florida, the Attorney General can either 20 directly prosecute mortgage fraud and the similar 21 cases or can refer it to a local State's Attorney 22 for prosecution. 23 MR. PALMER: 24 COMMISSIONER GRAHAM: 25 MR. PALMER: Did I hear correct? We can civilly prosecute. You can not criminally? We cannot criminally prosecute. 190 1 Q & A - Session 3 2 That can only be done by either the statewide 3 prosecutor or the local State Attorneys. 4 COMMISSIONER GRAHAM: Do you know how many 5 referrals you have made for criminal prosecution of 6 mortgage fraud to either State's Attorneys or the 7 statewide prosecutor? 8 MR. PALMER: 9 10 I don't have a number with me, but I'll be happy to provide that. COMMISSIONER GRAHAM: All right. You also 11 suggested that there might be some further changes 12 in the Florida law which would facilitate 13 prosecution of these cases. 14 MR. PALMER: That's correct. 15 COMMISSIONER GRAHAM: Maybe in written form 16 could you give us what you think some of those 17 changes should be. 18 MR. PALMER: Certainly. 19 COMMISSIONER GRAHAM: Mr. Ferrer, you 20 mentioned SARs reports. In the -- again, in that 21 earlier panel, a statement was made that only 22 one-third of the persons who potentially might 23 become aware of a suspect activity were today 24 covered by the SARs statute, whereas I guess banks 25 that are under some regulatory regime, their 191 1 Q & A - Session 3 2 employees are required to report suspicious 3 activities. 4 you see suspicious activity, I believe they are 5 outside the SARs net. 6 But if you are a mortgage broker and Is that a serious issue in terms of your 7 ability to get eyes onto the activities that may be 8 a precursor of fraud? 9 MR. FERRER: You're correct, Senator. My 10 understanding is that SARs, only banks files these 11 SARs. 12 However, I do want to point out that we get 13 cases referred to us from many, many sources. 14 have victims, bank insiders who cooperate with us. 15 Even defendants sometimes will come forward to 16 reduce their exposure. 17 us information about others who are committing 18 crimes. 19 types of sources. 20 opportunity or any changes that would, you know, 21 bring us more referrals. 22 Other brokers who will give So we get referrals from all different And even -- and we welcome any COMMISSIONER GRAHAM: Do you think that the 23 SARs law should be amended to widen its 24 applicability? 25 We MR. FERRER: Well, I wouldn't happen to have 192 1 Q & A - Session 3 2 the expertise, I'm sorry, Senator, to opine on 3 that. 4 COMMISSIONER GRAHAM: I will accept that, 5 although I respect your judgment and opinion and 6 maybe we might pursue that. 7 MR. FERRER: Absolutely. 8 COMMISSIONER GRAHAM: Mr. Cardwell, under the 9 new laws at the state and the federal level that 10 have passed relative to mortgage brokers, what's 11 your assessment of the current level of enforcement 12 of those inside Florida? 13 of ferreting out the charlatans and those who 14 should not be preying upon our people? Are we doing a better job 15 MR. CARDWELL: Yes, we are. 16 In terms of timing of that, the actual systems 17 of implementing -- and I won't go into the details 18 of it -- but really take effect on October 31st of 19 this year. 20 the changes that were passed -- the 2008 federal 21 legislation came into effect. 22 passed the implementing of legislation. 23 actually being implemented. 24 25 And then beginning the 1st of the year, In 2009, Florida 2010 it's I expect that we will be able to do this seamlessly. I expect this to have a strong 193 1 Q & A - Session 3 2 salutary effect on the mortgage origination 3 business, because you're going to have to 4 significant educational requirements to get into 5 the business or you're not going to be allowed to 6 interact with customers directly. 7 to have extensive criminal background checks 8 frequently followed up. 9 obviously have no statistics on this yet, but I 10 truly think it is going to professionalize this 11 business. 12 And we're going And I have no -- we During the run-up of the problems that we have 13 now, everybody and their brother got into the 14 business. 15 that applications -- that the number of active 16 mortgage brokers in 2002 in Florida was 30,000 17 plus. 18 become active mortgage brokers in the state of 19 Florida. 20 should not have been in the business. 21 So I think that the S.A.F.E. Act They raced to it. Our statistics show And by the 1967, it was 81,000 people had And a lot of that was probably people who 22 implementation of that will have a very positive 23 effect on getting a -- what's the right word to 24 use -- a more professional grade of person in the 25 business. 194 1 Q & A - Session 3 2 COMMISSIONER GRAHAM: Let me ask one last 3 question. Do you -- some of the regulatory 4 agencies in Florida are self-financing; that is, 5 those persons who are regulating pay are what 6 support the activity of the regulatory agency. 7 Is that a case with mortgage brokers? 8 MR. CARDWELL: 9 Having been the former Governor of the state of Florida, you may know the answer to 10 that. 11 industries pay go into trust funds which are for 12 the purpose of executing that regulation. 13 have to say in full candor that occasionally the 14 legislative process has been known to reach into 15 those trust funds, and so we do not always have the 16 full benefit of the fees that that industry has 17 paid in self-regulation. 18 The answer is that the fees that the COMMISSIONER GRAHAM: I would I won't ask you to 19 answer this question today, but my concern is that 20 as we increase the standards of enforcement, we're 21 likely to drive down the number of people who are 22 in the industry as those who shouldn't be are 23 exiting. 24 a dollar assigned to them in terms of what it costs 25 to implement; that we could have strong standards But those new enforcement standards have 195 1 Q & A - Session 3 2 on the books with strong enforcement, but if we 3 don't have the resources to make them real, we have 4 created another form of fraud on the people. 5 So I would like maybe to ask you by written 6 question to give me some assessment of how 7 financially capable the agencies are going to be to 8 carry out this new responsibility. 9 10 MR. CARDWELL: All right. COMMISSIONER GRAHAM: I shall do that. The Vice Chair has got 11 some other commitments and has asked if he could go 12 second, and after a long period of consideration, I 13 have decided to grant him that request. 14 The floor is yours, Mr. Thomas. 15 VICE CHAIRMAN THOMAS: 16 17 Thank you very much. And I will only take my time and maybe even less. I guess I can find this out in another way, 18 but since we've got Floridians here that understand 19 the way in which your government is structured and 20 the state governments are structured in a lot of 21 different ways. 22 Mr. Cardwell, the jurisdiction of the Office 23 of Financial Regulation, frankly from a Washington 24 point of view, would be envied because you do have 25 a degree of scope. You indicated that there were 196 1 Q & A - Session 3 2 some activities not under you, but my gosh, you've 3 got a good cross-section. 4 5 6 7 8 9 10 11 12 13 14 Is the Office of Financial Regulation under the Governor? MR. CARDWELL: Independent. It's an independent agency. VICE CHAIRMAN THOMAS: It's an independent agency. MR. CARDWELL: The head of which is appointed by the four elected state officers. VICE CHAIRMAN THOMAS: Oh, okay, okay. I'm familiar with that model on other arrangements. And, Mr. Palmer, obviously the Attorney 15 General is elected separately. 16 coordinated effort with the Office of Financial 17 Regulation. 18 MR. PALMER: 19 VICE CHAIRMAN THOMAS: But you indicated a That's correct. Let me ask Mr. Cardwell 20 first, because he's been around longer. How is the 21 coordination ordinarily between independent 22 agencies and key state government functions like 23 the Attorney General's Office normally carried out 24 versus the current arrangement? 25 personalities or is it a function of jurisdiction Is that more 197 1 Q & A - Session 3 2 or the scope of the problem that you're trying to 3 deal with? 4 MR. PALMER: 5 VICE CHAIRMAN THOMAS: 6 I think -You can't choose all of the above. 7 MR. CARDWELL: 8 I think there is no formalized structure by 9 Right. which coordination is implemented. We have very 10 good working relationships both with the Attorney 11 General's Office, with the federal offices as well. 12 It is a matter of initiative. 13 area of mortgage foreclosure, there has been a lot 14 of cooperation, and I will say in part because of 15 the heat of the issues that have been raised. 16 VICE CHAIRMAN THOMAS: In this particular I was a little 17 surprised at your example in terms of what you 18 ought to do versus what happens using the great one 19 and an ice hockey illusion in Florida. 20 most duck hunters and they'll tell you if you shoot 21 at the duck, you won't be having duck for dinner. 22 You'll have to lead them. 23 Talk to My only problem is with decades of 24 experience -- and I'm sure the Senator will 25 reinforce it -- normally when you have government 198 1 Q & A - Session 3 2 go in and examine, it is a reaction and not an 3 action. 4 would have been gone to the ice hockey player who 5 initially struck the puck that was on its way 6 rather than try to go to where it's going to go. 7 And I think that's frustrating among a lot of us 8 and I've heard those comments that it's much better 9 to get out front and try to prevent the potential 10 for fraud rather than trying to move back through 11 the structure, detect it and then carry out some 12 kind of law enforcement initiative. And what government would have done, it 13 I'd love to hear your idea as to how you do 14 that, especially if it requires laws passed by a 15 state legislation or Congress. 16 to get them to pass laws on a reaction basis let 17 alone in an anticipation basis. 18 MR. CARDWELL: It's tough enough I think it's an institutional 19 framework. In our office, we have started asking 20 the question, What do we see coming down the road? 21 A quick example with the loan modifications, 22 we saw people who had been originating the loans, 23 then turning around and going into the loan 24 modification business with the same loans that they 25 had originated were failing. And we put together a 199 1 Q & A - Session 3 2 task force at the beginning of this year internally 3 to look at it. We've issued a number of cease and 4 desist orders. We have also, in addition to that, 5 tried to publicize these. 6 in with us so that people would know that this is 7 going on. 8 9 We've gotten the media There is no statutory formula for it. We sit at staff meetings and say, What do we see coming up 10 next? 11 view, the recent passage of the Financial 12 Regulatory Reform Act with respect to its systemic 13 risk approach, however that works, is an idea that 14 gives -- is an attempt to flush out, pushing 15 regulators into a place where frankly, you were 16 correct, they're not always very comfortable. 17 It is extremely difficult. VICE CHAIRMAN THOMAS: I think in my Well, and historically 18 it's been so divided and broken up, I would think 19 that your ability to sit and think about what's 20 next is in part due to the scope of activities 21 covered by the Office of Financial Regulation in 22 Florida that may not be available to many others. 23 I want to ask a question just because I'm not 24 from Florida. I do recall having gone through an 25 earthquake in California, getting on an airplane 200 1 Q & A - Session 3 2 and then landing at Dulles and surprised to find 3 that there were cameras and interviewers asking the 4 passengers getting off the plane if they were going 5 to go back to California. 6 earth moved in California, and of course those of 7 us who grew up getting knocked out of bed from 8 earthquakes not very frequently wondered why people 9 on the east coast would ask that question when they Because after all, the 10 not only get knocked out of their beds, especially 11 in this area of the U.S, but get knocked out of 12 their homes on a fairly periodic basis. 13 course Florida in recent years suffering massive 14 and repeated damage. 15 So here's my question: And of Did anybody detect any 16 of this mortgage fraud over those periods through 17 insurers or others who were dealing with fairly 18 significant disruptions in the housing market both 19 in terms of sales, damage, insurance activities? 20 Did anyone look at any of that and was anything 21 evident from some of the patterns? 22 MR. CARDWELL: I am not aware of those 23 patterns being there now. Remember, I was in 24 another place and a regulator at the time. 25 what I think what we all saw is what everybody saw But 201 1 2 Q & A - Session 3 in the nation -- 3 4 VICE CHAIRMAN THOMAS: But what did you know and when did you know it, I guess? 5 MR. CARDWELL: Right. 6 I think we all knew that there was a 7 tremendous growth in housing values and that none 8 of us wanted to admit -- and by us, I mean the 9 public at large beyond the regulatory community but 10 certainly within it -- that this potentially was 11 going to be a problem. 12 heads on TV and all that things are going to be all 13 right. 14 and say, I can't believe that anybody would pay 15 that amount for that house. 16 We heard the same talking And we would walk around our own streets Now that I'm a regulator, one of the things 17 that I have come to realize is that one of the 18 hardest things to do is to recognize the nature and 19 extent of a problem while you are in the middle of 20 it. 21 that's really the best answer that I can give to 22 you. 23 The retroscope is a wonderful device, but VICE CHAIRMAN THOMAS: I know it's difficult, 24 but you need to know that in our New York hearing, 25 we asked much the same question of someone who has 202 1 Q & A - Session 3 2 a reputation of being ahead of the curve, Warren 3 Buffet, and he said that they hadn't anticipated; 4 that obviously there's books out now with the very 5 few who were swimming against the stream, but 6 that's why there is a book out about it, because 7 there were very few of them. 8 9 Obviously some areas in California have been similarly hit. I do think that the scope of your 10 ability to look at an industry and not look at it 11 segmentally is very valuable, and I'm going to take 12 a look at what you've done in Florida and see if we 13 can try to create some structure. 14 in the long-run, creating task forces after the 15 fact simply isn't going to deal with this issue. 16 And although a lot of us like to think that this 17 won't repeat itself, you've been around long enough 18 and I'm beginning to have been around long enough 19 in California to note that as well. 20 that we learn from this particular crisis, because 21 there are an awful lot of people out there who are 22 hoping that it doesn't happen again. 23 Thank you, Mr. Chairman. 24 COMMISSIONER GRAHAM: 25 Mr. Thomas. Because frankly, We just hope Thank you very much, 203 1 Q & A - Session 3 2 Ms. Murren? 3 COMMISSIONER MURREN: 4 5 Graham. Thank you, Senator Thanks to all of you for being here today. I wanted to follow up on some of our questions 6 earlier specifically relating to how it is that 7 fraud cases or instances of fraud come to your 8 attention. 9 And I think, Mr. Ferrer, you had eluded to it 10 in your commentary, but I wonder if you could also 11 comment on how it is that you make determinations 12 about which cases you will advance. 13 obligation to look at each one of them as they come 14 in, and then at what threshold do you use to make 15 decisions about that going forward? Do you have an 16 MR. FERRER: Yes, Madam Commissioner. 17 As I said before, we get our cases from a 18 variety of sources, from our law enforcement 19 partners, in other words, federal law enforcement 20 agencies that are reviewing and looking at these 21 cases, our state and local partners as well. 22 created a federal and state law enforcement task 23 force. 24 referrals. 25 We've So that's how we get a lot of the In addition, as I said before, victims, folks 204 1 Q & A - Session 3 2 who are left with a home that they can no longer 3 afford, now they look back and realize that the 4 appraisals were artificially high. 5 referrals from insiders from the industry who want 6 to cooperate with us and expose some fraud. 7 We get And when the cases are referred to our office, 8 first they go to the agencies that are the 9 investigative agencies and they start an initial 10 investigation. 11 to the U.S. Attorney's Office, they come to us. 12 have a procedure, and I like to call it a flexible 13 intake procedure, and we look at it case by case. 14 Because we want to make sure with our resources 15 that we have that we put the -- that we prosecute 16 the matters that make the best use of resources and 17 have the greatest impact in our community in terms 18 of punishment, deterrents and then education. 19 Which goes back to the prevention question from 20 Senator Graham, what of those kind of cases are 21 going to have the greatest impact given what we 22 have to work with? 23 Once that's ready to be presented Then we look at to see also the types of 24 cases, the nature of the victims, the types of 25 targets. What are the roles of those targets in We 205 1 Q & A - Session 3 2 the industry? 3 make a case much more impactful. 4 Are they insiders? That's going to Safety is something that we look at. You 5 know, as I said in my testimony, these crimes breed 6 other crimes. 7 attempted arson, where there were two public 8 adjusters who saw a house under water and decided 9 that they were going to just torch the house and We had a case where there was arson, 10 then file false insurance documents. 11 were able to thwart that. 12 cases that we jump on first. 13 Thankfully we Those are the kind of We also prioritize by looking at cases that 14 are fraud-for-profit and opposed to 15 fraud-for-property. 16 are basically flipping the properties just to line 17 their pocket. 18 there. 19 mortgage. 20 Fraud-for-profit are those who There's no intention of living There's no intention of paying the The fraud-for-property are those 21 single-mortgage cases where someone does lie and 22 commit fraud, but they really -- they intend to 23 live in the property and intend to make the 24 mortgage payments. 25 because of our resources, we focus more on the That's still illegal, but 206 1 2 3 4 5 Q & A - Session 3 fraud-for-profit. There is no threshold amount to answer your last question. There are cases -- again, it depends on -- 6 fraud amount and the loss is a factor. It is a 7 factor, but it is not the only factor. And so we 8 have cases ranging from thousands to over a million 9 dollars. 10 COMMISSIONER MURREN: So you do feel that for 11 people that may not have a huge dollar amount 12 associated with being victimized by fraud, that 13 they still have some resource in the system as it's 14 currently received? 15 MR. FERRER: 16 I would tell them, Come forward, call us. 17 beauty of having a federal state task force is that 18 if a case is better suited to go to the state, we 19 will do so. 20 the federal authorities, we will do that as well. 21 22 23 Absolutely. The And if it's better suited to come to COMMISSIONER MURREN: Mr. Palmer, would you like to add anything to that? MR. PALMER: Well, just that the Attorney 24 General's Office is in quite a different position 25 because we prosecute cases civilly. And so what we 207 1 Q & A - Session 3 2 look for is cases where a civil suit or an 3 injunction would make an immediate impact and stop 4 the illegal activities. 5 limited resources available to do this. 6 had as many as 5,000 complaints in a single week 7 regarding mortgage fraud, and we don't even have 8 the personnel to read them all or to analyze them 9 all. 10 We have very few -- very We have We once applied for a $6 million grant with 11 the federal government to try to beef up our 12 Mortgage Fraud Task Force and that was declined. 13 So we're a little bit under the U.S. Attorney's 14 office. 15 COMMISSIONER MURREN: In your testimony though 16 you mentioned as a result of a change in the 17 regulatory structure as it related people being 18 able to engage mortgage modifications, that there 19 was a significant decline in complaints -- 20 MR. PALMER: 21 COMMISSIONER MURREN: 22 23 There was. -- after that was passed. Do you see other opportunities for that type 24 of action or do you feel like the current state of 25 the regulatory structure is where it needs to be? 208 1 Q & A - Session 3 2 MR. PALMER: With the type of criminal 3 activity that has been going on, the state of the 4 regulatory structure is where it needs to be right 5 now. 6 predictor of the future, so I don't know what's 7 going to happen. 8 9 But, you know, the past is not much of a COMMISSIONER MURREN: To follow up on the cooperation between the various agencies and 10 regulators, some of the commentary that we've heard 11 previously from people who have testified relates 12 to either an inability to cover all of the ground 13 that needs to be covered because of the way that 14 the different agencies may be siloed in terms of 15 their authorities or an inability to cooperate 16 because of barriers to communication. 17 Do you feel like the federal and the state 18 laws and regulations are currently covering all of 19 what needs to be covered or do you feel like they 20 present any kind of impediment to you being able to 21 do your jobs and do you feel like they did at any 22 point in time in the past? 23 MR. PALMER: Well, as far as state and federal 24 laws to prosecute mortgage fraud, I think we have 25 more than enough laws; fire fraud, mail fraud, 209 1 Q & A - Session 3 2 theft, racketeering. 3 laws to be able to prosecute mortgage fraud. 4 we need is more resources. 5 I don't think we need more What In my interactions with other agencies, the 6 only thing that has been a limiting factor really 7 is not their ability or their desire to prosecute 8 cases or to take cases forward. 9 of resources. 10 COMMISSIONER MURREN: 11 MR. FERRER: It's been a matter Mr. Ferrer? Yes, I agree with Mr. Palmer in 12 terms of the laws. 13 actually using the laws on the books. 14 actually, we have now more tools, because last year 15 the Financial Enforcement Recovery Act of 2009 gave 16 us more. 17 mail fraud cases that deal with financial 18 institutions went up. 19 for wire fraud and mail fraud cases dealing with 20 financial institutions also increased from 20 to 30 21 years. 22 We've been very successful And, The Statute of Limitations in wire and Statutory maximum penalties I think we're well equipped in that sense. Resources, I would welcome more resources, 23 because we just have so much of mortgage fraud here 24 in South Florida. 25 have in our office dedicated more than a quarter of But we've been successful. We 210 1 Q & A - Session 3 2 our economic crimes Assistant U.S. Attorneys just 3 on mortgage frauds. 4 addition to mortgage fraud -- and Senator Graham 5 I'm sure knows this. 6 fraud capital of the country. 7 So we're stretched thin. 8 hard. 9 asking for more. And, remember, we're also in We're also the healthcare We're working very And I know that the President's budget is They're asking for more Assistant 10 U.S. Attorneys to deal with white-collar crimes and 11 more FBI agents to deal with white-collar crimes. 12 So I hope that this goes through. 13 COMMISSIONER MURREN: Just one final question 14 for Mr. Palmer. You had mentioned in your written 15 testimony that no category of perpetrator should be 16 ignored. 17 MR. PALMER: 18 COMMISSIONER MURREN: 19 20 Yes, ma'am. Is there one that you feel is being ignored? MR. PALMER: If there is one that's being -- 21 well, I think there may be some ignoring from the 22 prosecution of straw buyers, the people that 23 initially fill out the applications for the 24 fraudulent loans. 25 chain, if there has been bank involvement, for And then when you get up the 211 1 Q & A - Session 3 2 example, in soliciting these loans or soliciting 3 felonious types of applications, I think those 4 aren't being looked at. 5 COMMISSIONER MURREN: Thank you. 6 COMMISSIONER GRAHAM: Georgiou? 7 COMMISSIONER GEORGIOU: 8 9 Thank you, Mr. Chairman. Mr. Cardwell, obviously there's a focus in 10 your testimony -- it almost goes without saying -- 11 that ex-felons previously convicted of financial 12 fraud ought not to be permitted to originate 13 mortgages. 14 too low a bar, if you will, for the review of 15 people in that business. 16 reference to Wayne Gretzky, obviously not too many 17 public official regulators have the skill of Wayne 18 Gretzky to know where the puck is going to be 19 rather than where it is. 20 But I think that is really two steps And, you know, your So I've been focusing to some extent on 21 this -- in these hearings on trying to identify the 22 lack of market discipline and accountability that 23 may have contributed to the financial crisis, and 24 in this particular hearing to the generation of 25 mortgage fraud. 212 1 2 Q & A - Session 3 You were the General Counsel of the Florida 3 Bankers Association. You spent your private career 4 in Akerman Senterfit, which is one of the -- I 5 guess the largest firm based in Florida. 6 its Chair and CEO. 7 experiences in the private sector. 8 asking you to disclose any confidences with your 9 clients, can you tell us what particular areas you You were So you had a full variety of And without 10 think that the person who actually financed these 11 loans, who enabled the money to be available for 12 mortgage loans, failed in their duties to avoid the 13 generation of fraudulent loans? 14 MR. CARDWELL: It's a very-good and it's a 15 very broad-and-difficult-to-answer question. I 16 heard I think one of our speakers earlier this 17 morning talk about the topic that the attitudes and 18 the ways in which large organizations behave 19 themselves comes down from the top. 20 from my outside view, not having been in any of 21 these large corporations, a willingness at times in 22 some fairly public examples to tolerate or to turn, 23 if you would, a blind eye to practices which, even 24 if not strictly illegal, bordered on conduct that 25 most of us, perhaps at another time, had said, as And I think 213 1 Q & A - Session 3 2 my mother used to tell me, decent people don't do 3 that. 4 I think that the market -- 5 COMMISSIONER GEORGIOU: 6 be? 7 And what would that Could you identify a couple of them. MR. CARDWELL: I think that it comes -- I 8 don't know that I have a specific example. But the 9 idea of the drive for short-term profits is whether 10 the discipline, the underwriting discipline, would 11 be an example of the sort of thing where it has 12 been very difficult in the banking industry -- 13 Well, let me give you an example of a problem 14 that I don't know the cure for, but it touches on 15 this. 16 lending in the commercial real estate area for a 17 long time. 18 They would look at the loan and they would say to 19 them, you know, This isn't a good loan and this 20 project doesn't look good and I'm not going to loan 21 you the money on it. 22 the street to the banker down the street who might 23 decide to make the loan, and it was essentially 24 what some have described as a race to the bottom. 25 Bankers have told me that they've been The long-time customer would come in. So the person would go down And none of the loans were illegal. They were 214 1 Q & A - Session 3 2 matters of a judgment call. But the interest that 3 people had to gain, the economic benefit of making 4 the loan, perhaps turned a blind eye to the risks 5 that were involved. That's what I'm trying to articulate. 6 COMMISSIONER GEORGIOU: 7 But of course it's really not in the interest 8 of a lender to make a loan that's not likely to be 9 paid back, is it? 10 MR. CARDWELL: Understood. As an abstract statement, that 11 is one hundred percent true. 12 borrower in front of you, sitting with a 13 possibility of getting a loan origination fee at 14 the front end of it, considering the possibility 15 that you may sell the loan off, considering the 16 fact that maybe you can really talk yourself into 17 the fact that one more hotel down the street is 18 going to work. 19 COMMISSIONER GEORGIOU: 20 MR. CARDWELL: 21 Sitting with a Right. And what I've seen is people talk themselves into it. 22 COMMISSIONER GEORGIOU: Right. 23 But of course part of the problem is that the 24 negative consequences of the failure of those 25 various loans and the securities built on them, 215 1 Q & A - Session 3 2 really the system didn't visit those consequences 3 on any of the participants who were incentivized to 4 originate them, but without really financial 5 consequences to themselves for their failure. 6 MR. CARDWELL: 7 COMMISSIONER GEORGIOU: 8 And of course we took that all the way up to 9 I would agree with you. Yeah. the institutional aspect where the institutions 10 that sent -- in many institutions that failed as a 11 result of either originating or purchasing products 12 that turned out to fail ended up having their own 13 failures, you know, having been cushioned from the 14 otherwise market impact that their failures would 15 have on their financial future. 16 there is any particular area -- any other areas that 17 comes immediately to mind that your former clients, 18 if you will, took responsibility for their role in 19 this process. 20 21 22 MR. CARDWELL: And I wonder if Well, I don't think I'm in a position to talk about my former clients in here. COMMISSIONER GEORGIOU: Yeah, I don't mean -- 23 I guess that's probably -- that was an unfair 24 question. 25 clients. I didn't mean to identify particular But as a general aspect of the industry, 216 1 Q & A - Session 3 2 have you had any discussions where bankers felt 3 that they -- you know, that they a role in the 4 permission of this mortgage fraud epidemic that we 5 found in South Florida and elsewhere? 6 MR. CARDWELL: I have never been a part of a 7 conversation in which anybody confessed. As you 8 know, confessions are very rare in life. And 9 having been a lawyer, you have for many years, very 10 few people on the stand say, you know, I did it. 11 COMMISSIONER GEORGIOU: Yeah, I agree. 12 Well, I think maybe I should turn back to the 13 prosecutors and see if I can -- I want to commend 14 both of you for all your work. 15 opportunity, U.S. Attorney Ferrer, to hear also 16 from the U.S. Attorney of the district of Nevada, 17 Daniel Bogden, the week before last on the 18 extensive prosecutions there. 19 prosecutions are extraordinarily important. 20 I mean, we had an And these And I guess I would highlight and ask Mr. 21 Palmer to continue the focus up the chain. It seems 22 to me that if we are to have a deterrent effect 23 from these prosecutions, it really has to -- you 24 really need to follow the prosecutorial leads all 25 the way up to the people who enabled them really, 217 1 Q & A - Session 3 2 and I wonder if you could describe, you know, where 3 are the highest levels that you're reaching in your 4 prosecutorial discretion, at this point? 5 MR. FERRER: Well, at this point, as I had 6 stated before, we've gone pretty high up. Just last 7 week, I think it was -- oh, last month -- I'm 8 sorry -- we indicted one of our first commercial 9 loan mortgage fraud cases. That's the new -- 10 that's one of the emerging schemes. 11 a loan officer who was involved, and a CPA as well, 12 for $12 million that was fraudulently and 13 deceptively -- Wells Fargo was deceived and the y 14 issued a $12 million equity line. 15 We've gone up the chain. And there was We have indicted 16 straw buyers, brokers, real estate agents, bank 17 managers, and loan officers, as I stated before. 18 So we've -- we're prosecuting cases up and down the 19 line. 20 COMMISSIONER GEORGIOU: Mr. Palmer, did you 21 hear the earlier testimony of Mr. Black about 22 control fraud? 23 MR. PALMER: 24 COMMISSIONER GEORGIOU: 25 that? Yes, I did. Were you here for 218 1 Q & A - Session 3 2 MR. PALMER: I heard part of it. 3 COMMISSIONER GEORGIOU: And what's your view 4 of what impact control fraud had in the mortgage 5 originations here in South Florida? 6 MR. PALMER: Well, I think it had a 7 substantial impact on it, because the motivation 8 for issuing these mortgages was the immediate sale 9 and securitization of the mortgages, and I don't 10 think that anyone in the organization really cared 11 whether the mortgages would be paid back or not. 12 know I heard what you just said. 13 that you would issue a mortgage that wouldn't be 14 paid back. 15 2006 and 2007, it was entirely logical to issue 16 mortgages that weren't going to be paid back, 17 because they were going to be immediately sold to 18 Wall Street, securitized and resold again 19 misrepresented along each chain of distribution. 20 21 COMMISSIONER GEORGIOU: Thank you. Thank you for your participation today. COMMISSIONER GRAHAM: 23 CHAIRMAN ANGELIDES: 25 It's illogical But under the system that was here in 22 24 I Mr. Chairman? Yes, thank you, Senator Graham. So let me start with this: If you look at the 219 1 Q & A - Session 3 2 historical record, there were a number of warnings, 3 indications that mortgage fraud was on the rise. 4 Clearly, nationally and in regions across the 5 country, the number of Suspicious Activity Reports 6 rose dramatically from 2000 on. 7 In 2003, MARI surveyed its members, and of the 8 respondents, 60 percent said they saw a moderate to 9 significant increase in mortgage fraud. 10 FinCen, in April of 2003, had issued a 11 Notice of Proposed Rule Making to subject title 12 attorneys, realtors, mortgage brokers -- title 13 companies -- excuse me -- realtors, mortgage 14 brokers to SARs reporting. 15 In 2004, of course, there is a warning by 16 Assistant Director for Criminal Investigations, 17 Chris Swecker, that mortgage fraud has, quote, the 18 potential to become an epidemic. 19 In 2005, the warnings continued. 20 In 2006, MARI delivers what's its eighth 21 report to the Mortgage Broker Association 22 indicating that, quote/unquote, competitive forces 23 were leading to a greater use of products that had 24 a potential for fraud. 25 In May of 2006, MARI does a sample of a 220 1 Q & A - Session 3 2 hundred loan files and finds that 90 percent have 3 their incomes exaggerated by 5 percent, but more 4 troubling, 60 percent had their incomes exaggerated 5 by more than 50 percent. 6 Now, I want to ask each of you, in the light 7 of all these warnings, Mr. Ferrer, you were at the 8 U.S. Attorney's Office, and particularly in the 9 light of the warning in 2004 by the FBI's Assistant 10 Director, what did you guys do to respond, amp up 11 your efforts, in a sense move to where the puck 12 clearly had moved? 13 MR. FERRER: Yeah. First of all, in 2004, I 14 was in the office. I was working on healthcare 15 fraud cases and then I moved on to public 16 integrity. 17 as precisely of what we were doing in 18 mortgage fraud cases in particular. 19 However, I will tell you this: So, unfortunately, I wouldn't be aware As I said, 20 mortgage fraud is not new to South Florida. We 21 have been systematically and aggressively 22 prosecuting these cases. 23 the case I mentioned, over 250 properties. 24 it in 2001 in another major case. 25 again from our perspective, because we're -- it's We did it in 1999 with We did What did change, 221 1 Q & A - Session 3 2 frustrating because we're at the end of the game. 3 You know, we get the cases after the fraud has been 4 committed. 5 What we saw is a dramatic increase in the 6 referrals of cases which started in 2007, and at 7 that point, we responded to the number of increases 8 in the level of fraud and the number of cases 9 referred to us; therefore, we created the 10 Initiative in 2007. 11 success and created the Federal State Mortgage 12 Fraud Task Force in 2008. 13 our office has responded to the cases that's been 14 referred to it. 15 Then the office built on that CHAIRMAN ANGELIDES: And so, in other words, Could you do this for me, 16 would you please go back and as part of a follow-up 17 to the Commission -- 18 MR. FERRER: Yes. 19 CHAIRMAN ANGELIDES: -- indicate what steps 20 were taken in 2003 on before the 2007 step that you 21 referred to. 22 MR. FERRER: 23 CHAIRMAN ANGELIDES: 24 25 Glad to. Mr. Palmer, were you at the AG's Office during that time frame? MR. PALMER: No, I wasn't. I was happily in 222 1 2 3 Q & A - Session 3 private practice during that time. CHAIRMAN ANGELIDES: Have you done any 4 assessments in the Attorney General's Office in 5 terms of that time frame and what the office did 6 do, should have done, might have done? 7 MR. PALMER: 8 CHAIRMAN ANGELIDES: 9 No, I have not. All right. And I guess, Mr. Cardwell, I know you're new to it. But as you 10 came in, obviously there was significant changes 11 made, not only federal legislation, but then the 12 state licensing legislation. 13 Did you do a retrospective examination of your 14 agency to look at how it did or did not respond and 15 why it did or did not respond to the rise of 16 mortgage fraud? 17 MR. CARDWELL: Nothing formal in the sense of 18 any kind of formal study in there. 19 case, we are not a prosecutorial agency. 20 did do was see a rise in complaints. 21 these on to agencies which had the ability to 22 prosecute them. 23 I think in our What we We passed But, no, you know, I have not frankly gone 24 back and done a retrospective as to what the agency 25 knew and was aware of. A lot of the kinds of 223 1 Q & A - Session 3 2 issues that you've raised here are the things that 3 they know or really things are a little better 4 known in industry -- not to excuse us for now 5 knowing it -- but are better known in the industry 6 circles than they are with us. 7 What we tend to see on our end is after the 8 problem has hit, the complaints arise at the time 9 that the instruments start to fail. In other 10 words, nobody says they've been defrauded until 11 they -- until the issue actually arises. 12 13 CHAIRMAN ANGELIDES: Mr. Ferrer, are you seeing a high correlation between -- 14 I'm going to ask you this also, Mr. Palmer, 15 about both you and your investigations, criminal 16 and civil. 17 Are you seeing a high correlation between the 18 fraud cases and the, quote/unquote, liar loans, 19 no-doc loans? 20 21 22 23 MR. PALMER: definitely. I'll answer that yes, most I don't think the -- CHAIRMAN ANGELIDES: Any sense of proportion -- 24 MR. PALMER: No. 25 CHAIRMAN ANGELIDES: -- of the number of fraud 224 1 2 3 Q & A - Session 3 cases that are no-doc loans? MR. PALMER: Overwhelming? Well, I can tell you this: 4 fraud case that we've looked at was linked to 5 no-doc loans. 6 CHAIRMAN ANGELIDES: 7 MR. PALMER: 8 9 10 Every All right. Or income-stated loans. Or low-doc I guess is the -CHAIRMAN ANGELIDES: Low-doc, minimal-doc, no income stated? 11 MR. PALMER: Yeah. 12 And when they were low-doc loans and, for 13 example, the bank statements and the employment 14 were often forged and falsified, and when the banks 15 got these, they never looked behind them. 16 just accepted them as they were. 17 CHAIRMAN ANGELIDES: 18 MR. FERRER: All right. Same here. They Mr. Ferrer? What we've seen more 19 than anything else is fraud committed in -- when 20 they bring forward the application, their I.D.s. 21 lot of fraud in the loan origination and the 22 applications in cases that we've seen have been, as 23 Mr. Palmer was stating, simplified mortgage 24 applications, very little verification or 25 documentation to back up the identity or the source A 225 1 2 Q & A - Session 3 of the applicant. 3 CHAIRMAN ANGELIDES: All right. So I want to 4 press this -- in my remaining time, I want to press 5 this issue again, Mr. Ferrer, with going up the 6 chain. 7 don't -- and if it was ladder, it doesn't seem like 8 you're many steps up it. 9 brokers. 10 You know, when you describe the chain, you I mean, there's mortgage There's realtors, title company folks. I guess, you know, back to Mr. Black's 11 statement, if you don't look, you will not find, to 12 what extent have you focused -- I mean, given that 13 this was -- there were systemic elements to this, 14 products were put in the marketplace that were 15 easily abused, I know you've identified some bank 16 loan officers, but have you looked at systemic 17 levels of fraud by institutions? 18 MR. FERRER: We are looking. As I said, we 19 follow the evidence wherever that evidence takes 20 us. 21 institutions if the evidence supports that. 22 it with Wachovia just this year. 23 We are working aggressively. 24 25 Our office does not shy away from prosecuting We did We're looking. And, again, this has been a big problem in South Florida. We've prosecuted the most 226 1 Q & A - Session 3 2 defendants in the whole country, our office did, 3 last year. 4 Attorneys, dedicated exclusively to mortgage fraud 5 and we're working very closely with our state and 6 local partners. 7 pursue it. 8 9 10 We have AUSAs, Assistant U.S. If the evidence is there, we will CHAIRMAN ANGELIDES: Mr. Palmer, I know that you pursued Countrywide and other institutions. Give me your perspective on this. 11 It does seem to me -- I just want to pick up 12 on this. 13 to me that the focus of efforts across the country 14 have been highly on the relationship between 15 borrower, originator in whatever form, and very 16 little about the systemic breakdown here that led 17 to such widespread fraud. 18 It's just on observation. MR. PALMER: It does seem And that might be the difference 19 between the mortgage fraud, as Mr. Ferrer has been 20 describing, that happens early on, because there's 21 always been people lying to get mortgage loans back 22 probably until Jimmy Stewart and It's a Wonderful 23 Life. 24 different now is because of the systemic problem 25 that you're talking about. But what's happened, the reason it's Because no one is 227 1 Q & A - Session 3 2 looking at the applications. 3 loans. 4 all this to happen. 5 6 7 No one is keeping the So that just provided that opportunity for CHAIRMAN ANGELIDES: No looking, no keeping. I mean, very fundamental changes. MR. PALMER: And I will say, if you look at 8 the chart that's in my written testimony, if you 9 look at the lending institutions, by the time you 10 file suit, I don't think any of the lending 11 institutions were there anymore. 12 had -- they were the ones that were issuing the 13 liar loans and just they simply didn't survive. 14 there wasn't much a point in suing them. 15 CHAIRMAN ANGELIDES: Because they All right. I yield the 16 balance of my 17 seconds. Thank you very much. 17 COMMISSIONER GRAHAM: Thank you very much, 18 Mr. Chairman. 19 the Commission for being here today and to 20 Mr. Thomas. 21 So Thank you to the other Members of I also would like to thank all of you who have 22 participated today as parts of our panel or as 23 parts of our audience. 24 to each of you. 25 witnesses that have taken the time and effort to The Commission is grateful We are especially grateful to the 228 1 Q & A - Session 3 2 come and share with us their experience and 3 understanding. 4 I would like to thank the members of the 5 public and the people of Miami, some of whom 6 have joined us personally and some have joined us 7 electronically by viewing these proceedings 8 on-line. 9 inquiry by submitting written testimony about how You, the public, can participate in our 10 the financial crisis has effected you or your 11 community. 12 it will become part of our final report. 13 to fcic.gov, that's fcic.gov, where you will find 14 instructions on how to provide a written submission 15 to this hearings under the "Contact Us" tab. 16 If you submit that to the Commission, Please go We'd also like to thank FIU President 17 Rosenberg and Dean Acosta for their generosity in 18 hosting the Commission today. 19 Mr. Dean, have an outstanding staff and we have 20 noted their many contributions, including 21 specifically Ms. Nilda Pedrosa, Deborah Sheridan, 22 Frantz Pierre and the IT staff and all of those who 23 have served us through the catering department. 24 25 You, Mr. President, A huge thank you to our staff of the Commission and the ground coordinators for helping 229 1 Q & A - Session 3 2 on the logistics of this field hearing. 3 specifically like to thank Chip Burpee who keeps me 4 organized and helped keep us organized today. 5 Thank you to each of you. 6 All right. And I'd If there is no further business to 7 come before the Commission, I thank you for coming 8 to our community to give us an opportunity to talk 9 about not a happy subject, but a subject which we 10 will be better for the understanding that this hearing 11 has given us and hopefully the motivation that will 12 come from this to avoid a repetition. 13 Thank you, Mr. Chairman. 14 CHAIRMAN ANGELIDES: Thank you very much, 15 Senator Graham, and thank you, Commissioners, and 16 thank you, members of the public for being here. 17 Thank you very, very much. 18 19 20 21 22 23 24 25 26 COMMISSIONER GRAHAM: The meeting is adjourned. (Time noted: 2:19 p.m.)
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