On the Trail of Mortgage Fraud

By The New York Times | Editorial

17 January 12

ueens has been harder hit by foreclosures than any other New York borough, and the Federal Bureau of Investigation believes it has found a culprit. Last July, the F.B.I. accused Edul Ahmad, a local broker, of a $50 million mortgage fraud, saying he lured fellow immigrants into subprime mortgages, inflated the values of their properties and concealed his involvement in deals that were ruinous for scores, if not hundreds, of borrowers. Mr. Ahmad pleaded not guilty, and posted $2.5 million bail. Now, according to court papers, as reported in The Times, he is plea-bargaining with federal prosecutors.

Whatever Mr. Ahmad did or did not do, one thing is sure: he did not act alone. The attention Mr. Ahmad has drawn highlights the relative lack of scrutiny of the big banks and their senior executives. Big banks created demand and provided credit for dubious mortgage loans, which they bundled into securities and sold to investors. If not for reckless lending and heedless securitizing, there would have been no mortgage bubble and no mortgage bust - and, in all probability, no Edul Ahmad.

There have been some prominent civil suits with settlements and fines, including the $550 million deal between Goldman Sachs and the Securities and Exchange Commission over the misleading of investors in a mortgage-backed investment. Bank of America, which bought Countrywide Financial in 2008, recently agreed to pay $335 million to settle a lawsuit by the Justice Department over Countrywide’s practice of steering black and Hispanic borrowers to subprime loans while similarly qualified white borrowers got better terms. But such cases have been narrowly focused and rarely name top executives.

What is needed is leadership by President Obama on this issue. He should form an interagency task force to investigate and pursue potential civil and criminal wrongdoing by institutions and people whose conduct in the mortgage chain had the greatest economic impact.

That would mean focusing on the large banks and their top echelons. The investigators would need to include the departments of Justice and Housing and Urban Development, the S.E.C. and the Internal Revenue Service, as well as bank regulators, with the formal co-operation of the most aggressive state attorneys general. The task force would need a leader with the impulses of a crusading prosecutor.

The investigations to date have not had this character. The Goldman Sachs settlement, for instance, was over one security and put the blame on a midlevel banker. When executives have been personally penalized, the fines have been a fraction of the wealth they amassed during the bubble. From 2000 to 2008, Angelo Mozilo, the chief executive of Countrywide, received total compensation estimated at $521.5 million; in 2010, without admitting or denying any wrongdoing, he paid $67.5 million to settle civil fraud charges brought by the S.E.C. The Justice Department, for its part, decided not to pursue a possible criminal case against Mr. Mozilo.

Lawsuits by state attorneys general, notably in Massachusetts and Nevada, may ultimately prove more revealing and helpful to wronged homeowners, because they tend to focus on foreclosure abuses by banks. New York’s attorney general, Eric Schneiderman, is building a comprehensive investigation of the mortgage chain from the origination and securitization of loans to banks’ foreclosure practices. That may lead to more actors in the system being held accountable for creating the mortgage crisis. Mr. Ahmad is accused of swindling naïve borrowers in Queens. There is more to the mortgage mess than that.