Reply #12: On the role of the mortgage brokers and loan officers -- the root of the fraud

[FarCenter]

PAUL SOLMAN: So, what would you do?

WILLIAM BLACK: I would prosecute the felons.

So, in September 2004, the FBI began publicly warning that there was -- quote, unquote -- "epidemic" of mortgage fraud, and it predicted that it would produce an economic crisis, if it were not dealt with. The FBI has also said that 80 percent of the mortgage fraud losses occur when lender personnel are involved. So, Fitch looks at a small sample of these loans, finally, in November 2007.

PAUL SOLMAN: Fitch is one of the ratings agencies?

WILLIAM BLACK: Yes. It's the smallest of the big three.

What did they find? They said, the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined. And they said that normal underwriting would have detected all of those frauds.

So, this is coming from the lenders overwhelmingly. They created incentive systems for the loan brokers and the loan officers that were based overwhelmingly on volume, and nothing on quality. We know that they gutted their underwriting standards. We know that you got in trouble if you were moral and tried to be a good officer and protect the organization from loss.

PAUL SOLMAN: But, if I were a loan officer in those days, I think I would have said to myself, I'm getting money into the hands of people who previously wouldn't have been able to buy a home. And we all think homeownership is a good thing in America.

WILLIAM BLACK: Well, we have lots of things that we study in criminology of what we call neutralization techniques, where people try to interpret their criminal acts as socially beneficial. So, yes, psychologically, maybe that happened sometimes.

But until the FBI brings these cases, we're not going to have we're not going to have definitive information.