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(By Joe Koletar and Jack Bigelow) The Federal Bureau of Investigation is easing its investigation of mortgage fraud. This is a topic receiving national attention after the recent release of a report by the Justice Department’s Inspector General. The Report covers the period of 2009-2011 and indicates the FBI has downgraded mortgage fraud as an investigative priority.
Mortgage fraud is a very serious problem, easily totaling billions of dollars a year. And it wasn’t all that long ago that it was seen as one upstream factor contributing to the financial crisis that brought the United States to near financial collapse. (Bad mortgages were bundled into what turned out to be bad securities that were “insured” but not underwritten.) So the obvious question is, “Why would the FBI do such a thing in light of the seriousness of the problem?”
“Mortgage fraud” describes a bad brew of fraudulent activities associated with mortgage sales, processing, and closings. Typical examples:
• The deliberate over-valuation of the properties in appraisals;
• Attorneys winking at unfair, unethical, and even unlawful transaction provisions;
• Misrepresentation of applicant information regarding loan servicing capabilities;
• Brokers’ fee-fishing by submitting applications from financially unfit buyers;
• Kickbacks to lawyers who proceed with deals appearing to be bogus from the outset.

The impact of these activities is not just financial. They are crimes violating state and federal laws enacted to protect an unsuspecting public—a public that was clearly unprotected. Who knows what the ultimate cost to that public, our economy, and our financial structures was, is, and will be? Those costs, as we mention above, run into the billions.

The FBI’s decision is therefore puzzling and requires analysis. We’ve identified at least five factors that we believe came into play in the choice to turn down the heat.

1. The FBI does not act on its own. No Federal agency does. Other governmental entities and institutions are entwined in the FBI’s decisions, recommendations, and policies. After all, it is a federal investigating agency and so its scope is broad. Most FBI priority decisions—to be effective—require concurrence by other agencies affected by those priorities.

2. The events of 9/11 changed everything. Not only our personal lives, but the priorities of the military and any number of law enforcement, intelligence, and other national securities agencies. Congress provided some budget assistance in reaction to this attack, but other programs were, of necessity, reevaluated and adjusted in the scale of post-attack priorities.

3. The language and structure of our criminal justice system at the Federal level is based on laws passed in the 1930s, and the FBI is dealing with a very different reality today.
4. The volume of mortgage fraud cases that meet the legal dollar threshold justifying investigation (based on the 1930’s laws) could overwhelm the resources of the FBI, a fact that demands some degree of priority-setting.
5. Mortgage fraud is a diffused problem. This diffusion complicates the priority setting because it consists of many, many, instances of fraud committed in many, many, different transactions. Were the perpetrators united in easily-targetable organizations, the investigations would be more easily assigned, conducted, and prosecuted with resources justifiably budgeted for greater impact. And yet the aggregate impact of all these diffuse fraudulent activities is immense.

Mortgage fraud is a wide-spread problem of significant financial impact and the FBI is apparently saying, “We have bigger fish to fry.” (Implied here is that “the bigger fish are easier to catch with the size of netting we are budgeted to use”.) But it is a type of white-collar crime. Our book, written with Sridhar Ramamoorti, A.B.C.’s of Behavioral Forensics (Wiley, 2013) focuses on corporate fraud, but we see mortgage fraud as driven by some of the same psychological factors described in A.B.C.s of Behavioral Forensics, and for that reason, in following posts, we will consider the FBI’s decision-making factors listed above in light of the realities of mortgage fraud.