The FBI yesterday said its investigation into the subprime mortgage crisis is focusing on 14 companies suspected of accounting fraud, improperly securing loans and insider trading.
None of the companies involved were identified by the FBI, but Bear Stearns Cos., Goldman Sachs Group Inc. and Morgan Stanley separately acknowledged yesterday that government investigators were asking for information about their subprime lending practices.
Those acknowledgments were contained in annual reports the companies were required to submit yesterday to the U.S. Securities and Exchange Commission, although it was not clear last night if the SEC disclosures were directly related to the FBI probe. All three said they were cooperating with the government requests.
FBI officials said agents were looking into possible fraud during the many stages of mortgage securitization, adding that the ongoing investigation involved subprime lenders, housing developers and the many banks that packaged loans as securities.
“We’re looking at the accounting fraud that goes through the securitization of these loans,” said Neil Power, chief of the FBI’s economic crimes unit. “We’re dealing with the people who securitize them and then the people who hold them, such as the investment banks.”
Included in the investigation, he said, is an extensive, often labor-intensive review of the financial records and other documents generated by the firms that were forced into bankruptcy as a result of the mortgage crisis.
The FBI probe adds a new dimension to ongoing investigations by federal and state authorities into the home-loan industry, where wholesale mortgage failures have forced people from their homes and resulted in significant losses to investors — more than $130 billion in credit losses and writedowns.
The sharp increase in defaults and delinquencies by home buyers is causing concerns about the strength of the U.S. economy. Foreclosure rates on subprime loans — those given to buyers with lesser credit records — have more than doubled since 2006, directly affecting larger financial institutions that eagerly bought up high-risk loans in 2005 and 2006.
“We anticipate that another wave of adjustable rate mortgages will reset, and with that we anticipate the mortgage corporate fraud potential cases to increase based on our belief of potential accounting fraud, insider trading and other issues,” said Sharon Ormsby, the financial crimes section chief in the FBI’s criminal investigative division.
FBI agents are working with officials from the Securities and Exchange Commission (SEC), which is involved in more than 30 investigations in the subprime mortgage business. The bureau usually focuses on mortgage fraud cases involving more than $500,000. It currently has more than 1,200 cases pending, up 50 percent in the past year.
In May, the FBI said in a report that the top 10 mortgage fraud areas were California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas and Utah. Other areas significantly affected included Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee and Virginia.
The “2006 Mortgage Fraud Report” said there was a “strong correlation between mortgage fraud and loans which result in default and foreclosure,” adding that escalating foreclosures provided criminals with the opportunity to “exploit and defraud vulnerable homeowners seeking financial guidance.”
The FBI said at the time that it was “proactively working with the mortgage industry” in an effort to curb mortgage fraud crimes, adding that a risk-management solutions provider that administers an insurance product covering losses due to fraud and misrepresentation had calculated that losses attributed to mortgage fraud would most likely reach $4.2 billion for 2006 — the latest figures available.
Although no central repository collects all mortgage fraud complaints, the report said statistics from multiple sources showed that mortgage fraud was on the rise.
It said some industry explanations pointed to high mortgage loan origination volumes that strained quality control efforts, the persistent desire of mortgage lenders to hasten the mortgage loan process, the escalation of home prices in recent years, and the introduction of nontraditional loans that contain fewer quality control restraints.
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