FDIC Pursuing Brokers for Mortgage Fraud Losses

Borrowers are looking to government regulators and law enforcement to protect their money, FDIC Chairman Sheila Bair told the National Association of Attorneys General today in Washington, D.C., according to a transcript of her prepared speech.Bair said lax enforcement of mortgage lenders was a significant factor in the credit crisis. Rivalries between federal and state regulators exacerbated the problem. But the FDIC chairman attributed many of the housing market problems to wholesale lenders that didn’t “scrupulously” manage their mortgage brokers. The inherent legal and reputational risks associated with third-party originations can cause substantial harm because broker activities are often indistinguishable from the lender’s. She also acknowledged, however, the benefit of mortgage broker production. “We know that using third parties can cut costs and provide services efficiently,” the transcript said. “Many banks use mortgage brokers and other third parties effectively and seamlessly in operating their business and meeting customer needs.”

FDIC photo of Sheila Bair

Bair told the attorneys general that they need to step up mortgage fraud prosecution activity in order to maintain safety and soundness for the banking industry and housing markets.“Mortgage fraud is now a very big priority for us,” Bair told the group, “as I’m certain it is for all of you.”

FDIC’s inspector general has brought hundreds of criminal mortgage fraud cases, according to Bair, while thousands of civil cases are being pursued on behalf of banks that the FDIC has been appointed receiver on.

Many of the mortgage fraud cases — which include flipped properties, inflated appraisals and stolen identities — are concentrated in recent high-growth areas such as South Florida and Southern California.

More than half of mortgage fraud investigations are initiated by referrals from the U.S. Department of Justice or the FBI.

Bair noted that FDIC’s professional liability group, which handles claims tied to failed banks, is preparing for a surge in civil cases against mortgage brokers and other third parties who defrauded the lenders. Legal actions are currently being taken on more than 100 mortgage fraud cases, while investigations are pending on another 4,000 cases.