FBI Probes Housing Fraud

By Pamela Mortimer

On Tuesday, the FBI announced that it is actively investigating fourteen companies on suspicion of accounting fraud, insider trading or other violations related to the practice of giving home loans to "risky borrowers".

FBI officials have not identified the companies under investigation but reveal that the companies involved are in the financial services industry, ranging from mortgage lenders to investment banks that attach home loans to securities sold to investors.

According to Neil Power, chief of the FBI’s Economic Crimes Unit in Washington, the FBI is working in conjunction with the Securities and Exchange Commission on the corporate fraud case.

The investigation, which officially started last spring, is making note of the dramatic spike in the number of mortgage fraud cases. An agency spokesman reported that 1,210 such cases are currently open, up from approximately 800 cases one year ago.

The announcement was no surprise since authorities in New York and Connecticut made a statement a couple of weeks ago, stating that they are trying to uncover if Wall Street banks are guilty of withholding crucial information about high-risk loans bundled into securities.

Power stated that the FBI is looking into the practices of "subprime" lenders, institutions who regularly give loans to those who do not qualify through mainstream channels. The investigation also hopes to uncover the potential accounting fraud allegedly committed by financial firms that keep these loans on their books or "securitize" them with the purpose of selling them to other investors.

Power made reference to certain unnamed bankrupt subprime lenders, stating there are "some irregularities there that we’re looking into". These irregularities include the suspicious timing of stock sales by executives and home builders who may have manipulated financial statements in order to inflate revenues.

While dozens of subprime lenders have filed for bankruptcy over the past year, the most prominent company to do so is the New Century Financial Corporation.

"We’re looking at the executives to see if they were committing insider trading," Power said.

FBI officials referred to "a growing pattern of suspected mortgage loan fraud" which may have been committed when loans were made to risky borrowers. Officials also cited an influx in "suspicious activity reports" that all banks are required to file with the government.

The number of those suspicious activity reports is expected to rise to 60,000 this year, up from 48,000 last year. The number of reports made in 2003 was only 7,000. "We’re going to have to take a hard look at these things," said Assistant FBI Director Ken Kaiser.