A peek into the art of mortgage duplicity

Introduction

In many of Ameriquest Mortgage’s far-flung sales branches, employees outfitted break rooms or spare cubicles with the tools they needed to create fake tax documents and other paperwork required in the loan-approval process: Wite Out, X-Acto Knives, Scotch Tape. They dubbed these workspaces The Lab or The Art Department.

These fraud-enabling workshops made it easy for loan officers to qualify borrowers for mortgages they couldn’t afford. It was simple: Paste the name of a low-earning borrower onto a photocopy of a W-2 tax form belonging to a higher-earning borrower, run the cut-and-paste version through a Xerox machine and, like magic, you had a piece of paper that made a bad loan prospect suddenly look better.

This was the way of the home-loan industry during the America’s mortgage boom, circa 2002-2006. To make deals go through, many mortgage professionals engaged in a wide variety of fraud, including forging borrowers’ signatures on truth-in-lending statements that were supposed to let folks know exactly how much they’d be paying.

A former Ameriquest loan officer recalled that the company’s system of punishments and rewards made it clear that employees should use any means necessary to book loans: “Anyone who wasn’t doing bad things was getting replaced. The people who were doing the illegal things were the ones making the money and getting the promotions.”

Flash forward to 2010. Little, it seems, has changed. The new scandal that’s now rocking the mortgage business involves allegations of backdated documents and falsified affidavits. Attorneys general in 50 states are investigating whether some of the nation’s largest banks have been illegally foreclosing on homeowners.

Some defenders of the banks have dismissed the problem as nothing more than sloppy practices and clerical errors. “If you didn’t pay your mortgage, you shouldn’t be in your house. Period. People are getting upset about something that’s just procedural,” one Wall Street portfolio manager told Reuters.

Besides making light of what may be widespread perjury, that line of argument also ignores the recent history of the mortgage business.

Many borrowers are in desperate situations not because they bought McMansions but because they were trapped and gouged by unscrupulous mortgage brokers and lenders.

Others may have been pushed into default by what’s called “loan servicing fraud.” Lawsuits and government regulators have charged that some loans servicers – banks and other firms that collect monthly mortgage payments – have purposely recorded on-time payments as late and charged exorbitant late fees and insurance premiums.

In June, for example, Bank of America agreed to pay $108 million to settle servicing fraud charges leveled against two loan-servicing units it had acquired when it purchased Countrywide Financial Corp. The Federal Trade Commission claimed the servicers had gouged homeowners and misrepresented how much they owed on their mortgages.

All the shady behavior – duplicity in the selling and servicing of mortgages and, now, it appears, in the push for foreclosures – is evidence of a mortgage system that’s still broken.

Fraud, when unchecked, tends to beget more fraud.

This article was first published on the Political Bookworm blog at the Washington Post.