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  Heads Will Roll, Part Two: Marvin Gaye's Question
The beat goes on. Following up on "Heads" Part One, lets check back in on the wild and wacky world of mortgage fraud. Aka "The Housing Boom's Dark Side". So called in the October 7, 2002 issue of Business Week Online. The article quotes the FBI: "Mortgage- and housing related swindles have risen 25% in the last year". One wonders, in relation to what? The FBI themselves have declared mortgage fraud widely under reported. In Rochester, New York, the trial of Robert Amico and sons, area developers charged in a major mortgage fraud case, has been covered in detail by the Rochester Democrat & Chronicle. Allegedly, the developers helped unqualified "straw" buyers obtain McMortgages on McMansions. Buyers' qualifications were falsified as were the values of the properties they purchased. After the initial purchases, the squeeze was put on some to take on yet more McMansions. Using more phony qualifications, including the inflated value of the original property. Eventually many of the properties collapsed into default. By and large, the buyers were not folks living in their cars or camping in a relative's living room. One was a physician, in debt due to a malpractice suit. He took on a $405,000 mortgage with a downpayment by check, which was returned uncashed by the developer. The doctor allegedly received a kickback. Later he brought his mother into the act. She bought rental properties built by the same developer, with dummied up mortgage qualifications and funneled the rents into her son's debts. No doubt she made a wonderfully responsible landlady. The Rochester trial has turned into a whodunit as developers, lenders, realtors, appraisers and buyers bounce the blame around, each saying the other knew the score. Perhaps the answer is to shoot the whole bunch into outer space. Some say off world real estate is the next big thing. Time to get in on the ground floor.

Speaking of the ground floor, anyone who's ever lived in a city with political machine traditions realize the dead vote. And at census time, stand up to be counted. But now they also invest. Even the grave doesn't hinder speculation. Though the dead may only be learning what the living already know. According to James Croft, Director of the Mortgage Asset Research Institute Inc.(MARI): "People have figured out that robbing banks is too hard. The real money is in real estate." Some of that real money is being funneled to folks getting mortgages based on data culled from the dead. The departed are also writing post mortem wills to boost mortgage qualifications for those left behind. But even the entombed don't smell as questionable as some other newcomers to the real estate game. Such as refugees from the securities industry (tech bubble, anyone?) who've reinvented themselves as mortgage brokers. Their past may be murky but their connections still cook. Another growing presence in the world of unreal real estate, according to Business Week Online, are professional criminals. Says an investigator with App-Intell, a mortgage fraud investigative agency: "You've got money laundering operations in Miami involving real estate and rings of thugs in California doing house-flipping scams." From sea to shining sea...

Considering how easy it is to get perfectly legit mortgage loans with just about no qualifications you have to ask, why bother raising the dead for i.d.? The answer is location location location. Mortgages for suburban McMansions generally require at least a show of eligibility. Distressed properties in undesirable areas demand less. Such properties are often handled by non profit real estate developers who can make arrangements for buyers not open to other developers. Much of the funding for non profit real estate ventures comes from the Department of Housing and Urban Development(HUD). Which has long standing and well documented problems with oversight of their housing and community opportunity programs. Susan Gaffney, ex Inspector General of HUD, delineated some of those problems in a March 2001 statement before the House Subcommittee on Housing and Community Opportunity. She described specific operational issues such as "inexperienced staff in critical HUD control positions" and "no clear operating policies...for Homeownership Center operations" plus broader policy issues such as an "emphasis on quantitative goals".

Inspector General Gaffney's 2001 testimony related to the condition of the Federal Housing Administration's (FHA's) Mutual Mortgage Insurance (MMI) fund. Ms. Gaffney acknowledged the health of the fund at the time, but expressed concern for the situation 2 or 3 years down the road. Particularly regarding potential fallout from the growth of loan origination frauds and property flips involving HUD owned, distressed properties. She described how flipping produces overvalued properties in communities with a "high volume of older, decaying properties and an eager group of potential, often unsophisticated, low income buyers anxious to achieve the American dream of home ownership. In many cases we find their dream...turns into a nightmare as their property begins to need major repairs and they discover the property's real value is only a fraction of its original purchase price".

Heads Will Roll Part One, opened with a quote from a friend in the Czech Republic describing how officials in his country respond to disaster: "Whenever disaster may hit, you may rely on an immediate and total response of one kind of damage control-- the kind that indicates that actually, it's no one's responsibility". A variation on that theme is being rung in Rochester, New York as each player in the Amico mortgage fraud case, claims everyone had a little piece of responsibility. A not unfamiliar claim in all manners of fraud. Spreading participation around gives more people a stake in covering and makes unraveling tougher. In cases of mortgage fraud, the difficulty is compounded by the increasingly layered nature of mortgage transactions-- the farther a transaction gets from its point of origin the more difficult it becomes to scrutinize. Some posit that the bundling and resale of loans as mortgage backed securities have been an important factor in the growth of mortgage fraud, as have online and automated mortgage procedures. Plus, it's common for mortgages issued by one company to end up being bought by a string of others. Some companies take advantage of the opportunities this presents for fraud. Records of payments get "lost" or payments are misapplied, resulting in fees and in some cases, foreclosure. It's another form of flipping: the mortgage company gets the equity and property and puts the home back into the money making pipeline. Individual homeowners with tight budgets find it difficult to fight an out of state mortgage company. Particularly the ones who've raised obfuscation to an art form.

As the amount and sophistication of housing and mortgage frauds grew, regulators and law enforcement were largely caught napping. Hindered partly by the fact that responsibility for detection and prosecution is spread across a number of agencies, on the state and federal level. There is no one regulatory agency. Law regarding lending is not uniform between states, nor are licensing rules for brokers and appraisers. There is no central government agency that keeps records on mortgage fraud. But concern about the seriousness of the problem is growing, even within the real estate related industries. Of course others give lip service while moving the swag out the back door. But a degree of justice is not impossible. Or else there wouldn't be so many high profile mortgage and housing fraud cases being pursued in so many courts. Civil and criminal. Federal and state. From sea to shining sea.

Various reforms are also in the wind. For instance, in early January of this year, Freddie Mac, the Government Supported Agency (GSE) which along with Fannie Mae is the largest buyer and seller in the secondary mortgage market, declared it will stop helping lenders create securities out of bundles of mortgages containing ones obtained via predatory lending practices. The predatory ones must be weeded out by the lenders in order for the other mortgages to be acceptable. Indubitably Freddie Mac has a plan in place to check the remainders. In April of last year, the state of Georgia passed the Fair Lending Act; aimed at curbing predatory lending, particularly in relation to refinancing scams that target the elderly. The law allows borrowers to seek punitive damages from lenders and anyone else down the line who buys the loan or a security that covers the loan. After the Fair Lending Act was passed, 26 lenders pulled out of Georgia, Standard & Poor's decided to stop rating the mortgage backed securities covered by the act and Freddie Mac has announced it will not be buying high interest loans in Georgia.

As mentioned both Freddie Mac and Fannie Mae are Government Supported Agencies. A designation which exempts them from certain Securities and Exchange Commission (SEC) regulations, but not from all. SEC of late, has been making its own stabs at reform, driven by fallout from Enronitis. One such effort is a rule requiring that when companies report financial results on a "pro-forma" basis, an explanation how such reporting differs from standard accounting practices must be included. The pro- forma rule is meant to address one of the practices that led to the collapse of Enron. Pro-forma accounting differs from Generally Accepted Accounting Principals (GAAP) in that pro-forma involves reporting profits while not including certain costs. In the late 90's, pro-forma accounting was popular with tech and telecommunications companies.

Pro-forma accounting is not being banned by the SEC. Nor are positive results forbidden from being included in profit reports. The reform simply requires greater clarification about what accounting method is being used in reports and what information that method includes. Yet in an a December 17th, 2002 letter to the SEC, Fannie Mae sought exemption from the new rule, saying: "prohibiting a company from disclosing certain key financial performance measures on which it relies to manage the business and asses the quality of its earnings does not facilitate full disclosure. We believe this restriction will diminish rather than enhance transparency and in some cases may mislead investors."

Enhancement of transparency is profoundly sought by many, both here and abroad. Such as political reformers in the Czech Republic and other Eastern European countries once part of the Soviet bloc. These countries have had a far more extreme experience of swag being moved out the back door. As they embarked on privatizing the many parts of state run economies, such as banks, insurance companies, utilities, manufacturers, mines, media and housing, the process became riddled with financial crime. Particularly asset stripping. As the world shifted under their feet, many a Communist official rushed to empty the state cupboard. And as borders collapsed, bankers from here, there and everywhere hurried to help, along with organized crime with transnational interests. The selling off of stripped assets produced a huge amount of dirty money. Creating an equally huge need for money laundering. New and sophisticated money laundering practices arose which utilized the Internet and new products of the financial system. A number of Eastern European countries have become, according to many authorities, a money launderer's paradise, with profits from international drug trade, bribery, theft, slavery, prostitution, gambling, etc, getting washed before being poured back into legitimate financial activities around the globe. To paraphrase the old Pinkerton slogan: money never sleeps.

This was another situation where law enforcement was behind the curve. According to Poland's Deputy Finance Minister Jacek Uckiewicz, in a report on money laundering covered in a November 11th 2002 UPI article: "The criminals adapted themselves to new circumstances faster than the state". It was also another case of crime thriving on systemic complexity and lack of legal cohesion. Tangles of post Communist government protocol hindered law enforcement response. As did lack of cooperation between government agencies and traditional suspicion of disclosing information. And corruption within law enforcement is no stranger in the former peoples' paradises. Along with the growth of Black Market activities, countries in Eastern Europe have also experienced, to greater and lesser degrees, a move towards what has been called "Mafia Capitalism": where extortion and blackmail, plus the kidnapping and/or murder of politicians, business rivals and journalists become normal part of operations.

In 1995, an article by Dr. Louise Shelley appeared in the Journal of International Affairs, titled Transnational Organized Crime: An Imminent Threat to The Nation-State? Dr. Shelley is a Professor in the Department of Justice, Law, and Society and the School of International Service at American University. In her article Dr. Shelley dismisses the idea of some international criminal conspiracy, led by any one group. Her premise is that myriad criminal organizations, often in competition with each other and with international interests, pose a danger to the political integrity of individual nations. She describes "parts of the world where organized crime groups have supplanted the function of the state" and how "in many countries, the infiltration of organized crime into political structures has paralyzed law enforcement from within". Ms Shelley expands the traditional, scholarly definition of the criminalized state, of which her example is Nazi Germany, saying: "...it is equally valid to apply the term to a state apparatus used to further the goals of organized crime groups". While Ms. Shelley stressed that the threat posed by transnational crime is most intense in countries in political transition, with shaky, or no democratic traditions and deals extensively with the post Soviet state and Eastern Europe, she also speaks of the vulnerabilities of the United States.

Louise B. Shelley also discusses how increasingly fluid and complex financial transactions, taking place in an increasingly borderless world, facilitated by information technology, create great opportunities for transnational crime. She is neither anti globalization nor anti technology, but is simply describing a threat and recommending it be met. She knows the problem will never be eradicated, but believes limitation is possible. Her proposed solutions include greater globalization of law enforcement efforts, greater consistency in international law and more transparency by financial institutions as to their transactions. Whether or not Dr. Shelley's solutions seem correct, her delineation of the problem is compelling. When one thinks of the mortgage and housing fraud boom, with its layers of parasites battening on a basic human need, or of our cities within cities where drug trade is the most vibrant part of the economy and where law enforcement makes little dent, or of the political "pay for play" public contract corruption which, in certain parts of this country has become endemic and almost sociopathic in its disconnect from the public welfare, or of WorldCon & Company, you find yourself asking, ala Marvin Gaye-- what's going on?

Don't get me wrong. International crime cartels don't reign in all our cities and we're not doing full tilt Mafia Capitalism. Nor have foreigners stolen our souls. Any souls missing had a price tag affixed. Though there certainly are transnational criminal interests in play in economic sectors of the USA, many of its reps were welcomed with open arms and no questions asked, particularly during the starry eyed days at the End Of History and the Dawn of the New Economy. No foreigner made the Rochester physician or his mother, or various profit and non profit profiteers, or our home grown boys on Wall Street and corrupt pols on Main Street, believe that fraud was AOK. A downward shift in ethical attitudes occurred somewhere along the line and tipped the can-be-lived-with fraud level towards the dysfunctional. Some of the same political and technological trends that have facilitated transnational crime and helped grow Mafia Capitalism in other parts of the world have simply sped our very own plow. So along with some much needed regulatory and political reforms, which address new criminal realities, it's also time to look inward angel.

Speaking of benign forces, as crime moves across the borders of states and nations via info technology, so does information about its activities. Law enforcement may identify new forms of fraud slowly but a screwed consumer with an Internet connection moves faster than a speeding bullet. For instance, mortgage fraud and other housing scams have spawned a whole genre of websites where the gouged lay out the greedy for all to see. Pretty hard not to spot patterns when scores of folks from all over the country log on to sites devoted to a particular lender or builder and sign themselves things like "Forced Into Default" or "Mold All Over". These are "vent" sites. They're a gold mine of leads for those looking for answers to Marvin Gaye's question and they testify to the more than money cost of fraud. Such as loss of trust. In oneself and in society.

There are also more journalistic Internet ventures, often driven by lacks or gaps in corporate newsmedia coverage. Such ventures can be broad in focus or devoted to particular topics. What's lacking in resources is made up for in flexibility. Internet journalism can be tailored much faster, can pick up a trend, a development or a scam and put it out there without the censorship born of financial considerations. As it becomes increasingly necessary for citizens to become more canny about intersections of crime, finance and politics, the need for information and information about information grows. Though Internet journalism is rarely impartial, many out there in readerland now have the weird notion that regular news media also have axes and interests to grind. Ones more difficult to discern. Besides, check out old Westerns. The gravel voiced editor of the crusading frontier town newspaper was always plenty opinionated. And for better and worse, the Internet is nothing if not a frontier.

Carola Von Hoffmannstahl-Solomonoff

"If we had foreseen her killing, we would never have robbed the bank...We felt we were committing an idealized, ideological action to gain government insured money and that we were not stealing from ordinary people..."

Emily Harris Montague, Ex-radicals sentenced in slaying, Associated Press, February 14, 2003

"We wore several hats," Ms.Rapaczyski said. "The newspaper hat, the corporate hat, and we wore the civic hat," she added. "It became very confusing, and it takes time to learn that if you just wear your journalist hat, all the others will fit."

Polish tale of bribery and/or politics and/or journalism, New York Times, Feb 12, 2003

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