Things About Mortgage Fraud that Holder Should End Today: Suspect Ethnic Groups

September 13th, 2014
in Op Ed

by William K. Black, New Economic Perspectives

I am returning to my series of articles about the pathologies that have caused the Department of Justice (DOJ) to suffer a strategic failure in prosecuting the banksters that led the three fraud epidemics that caused the financial crisis and the Great Recession. I have been inspired by Tom Frank’s column in Salon covering our successful defense of a mortgage fraud case in Sacramento. This column addresses the single most offensive thing I learned in the course of that case. Under U.S. Attorney Ben Wagner’s leadership the Eastern District of California has begun targeting immigrants of Russian descent for mortgage fraud prosecutions.

Follow up:

The links are all broken because the Sacramento Bee does not preserve its links, but the spoor of those links shows that the paper has repeatedly written that Wagner’s mortgage fraud prosecutions now target dozens of Russian-Americans. This should be immediately suspicious, for mortgage fraud was, according to Wagner’s theories, committed by over three million Americans in 2006 alone. The incidence of fraud in “liar’s” loans, in the study relied upon by the federal government, including key members of DOJ’s task forces against mortgage fraud, was 90 percent. By 2006, roughly 40 percent of all home mortgage loans originated – well over two million – were liar’s loans. That means that there were over two million fraudulent mortgage loans, and over three million borrowers signing the notes on those loans. Far from being an “ethnic” crime, mortgage fraud was ubiquitous in the United States and the United Kingdom (where 45% of all the loans made in 2006 were liar’s loans).

I was preparing to excoriate Wagner for his selective prosecutions of a disfavored minority when, to my horror, I found that the FBI is also promoting mortgage fraud as an ethnic crime.

The FBI’s 2008 report to the nation on mortgage fraud prominently features this claim.

Mortgage Fraud Perpetrators

Mortgage fraud perpetrators are industry insiders, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives. Perpetrators are also known to recruit ethnic community members as victims and co-conspirators. FBI reporting indicates numerous ethnic groups are involved in mortgage fraud either as perpetrators or victims. This type of mortgage fraud is known as affinity fraud. Ethnic groups involved in mortgage loan origination fraud include North Korean, Russian, Bulgarian, Romanian, Lithuanian, Mexican, Polish, Middle Eastern, Chinese, and those from the former Republic of Yugoslavian States. Street gangs such as the Conservative Vice Lords, Black P. Stone Nation, New Breeds, Four Corner Hustlers, Bloods, and Outlaw Motorcycle Gang are also involved in various forms of mortgage loan origination fraud as a means to launder money from illicit drug proceeds. Additionally, African, Asian, Balkan, and Eurasian organized crime groups have also been linked to various mortgage fraud schemes.

The FBI’s 2009 report has the identical language.

A Thought Exercise

What if the FBI’s list of suspect ethnic groups contained the word “Jew?” We all know that the list would last less than a day before it was removed amidst a blizzard of criticisms and unctuous apologies blaming obscure staffers. If the above list contained the descriptors “white” and “male” the inanity of the list would have been clear. It would have been clear that everyone involved in the home lending industry – an overwhelmingly “white” and “male” group of actors – was a potential suspect for mortgage fraud. The list would have been promptly taken down among a chorus of jeers for the FBI. Indeed, the list as it was actually written is a superb guide to what ethnic groups the FBI’s leadership thinks it can safely label “the [suspect] other” in America today.

If the FBI were compiling an accurate list of ethnic and demographic groups leading the epidemics of accounting fraud the list would consist of two descriptors ”Jews” and “high status white male banking executives.” For obvious reasons, the FBI will never use either descriptor to create a “suspect ethnicity list.” In the rare studies that have been done of the ethnicity and demographics of the most destructive white-collar criminals in the U.S., being Jewish, an adult, male, with high social status, a college degree, business executives, and owning a home are the variables that best predict those crimes. The classic white-collar criminology study of perpetrators, “White Collar Crime and Criminals,” was published in 1988 by Stanton Wheeler, David Weisburd, Elin Waring, and Nancy Bodett. Their study found that Jews were far more likely to have been convicted of white-collar crime than any other religious group, but were underrepresented among blue collar criminals. (Protestants were substantially underrepresented among criminals of both the streets and suites.)

“Jews, although roughly eight percent of the population of our districts, make up only three percent of our common crime sample, but fifteen percent of our white collar sample?” It would be a fair summary of our data to say that, demographically speaking, white collar offenders are predominantly middle-aged white males with an over-representation of Jews.”

Home ownership was also a major explanatory variable for white-collar crime perpetrators.

“[F]orty-six percent of our white collar offenders own their own homes, in contrast to only six percent of the common crime defendants.”

Unlike the FBI’s reckless claims that mortgage fraud was a “[disfavored] ethnic group” crime, the authors of the 1988 study (funded largely by DOJ) did real empirical work that led to actual correlations in which demographic factors varied considerably in their association (or lack thereof) with white-collar crime perpetrators.

“It seems well established, then, that whatever else may be true of the distinction between white collar and common crime offenses and offenders, they definitely do draw from distinctively different sectors of the population.”

The authors’ sample came from judicial districts in which Jews were far more common (roughly eight percent of the districts’ total population) than in the U.S. as a whole (roughly two percent). Relative to the two percent figure, the over-representation of Jewish white collar criminals found in their same study (fifteen percent) was extreme. The authors stressed in their later book on this subject– quite correctly – that none of this suggested that Jews were more likely to commit white-collar crimes than non-Jews for any reasons unique to their religion. Jews were more likely to hold more senior positions in their organizations in the seven metropolitan areas studied and therefore had more opportunity to commit larger white-collar crimes.

Criminologists do not like to discuss these matters because it is certain that some yahoo will grab a quotation about the Jews, ignore the paragraph about opportunity (immediately above), and trumpet the quotation as proof of perfidy of Jews. In the case of the current crisis, where the triple epidemics of mortgage fraud were led by the officers controlling investment, mortgage, and commercial banks, the degree to which Jews are overrepresented leading such frauds is likely to be exceptionally large given those differences in opportunity. But no one has done that work and unlike the era when Wheeler and his co-authors conducted their studies, DOJ is now infamous for refusing to prosecute those who occupy the C-suites even of the far from elite mortgage banks that caused billions of dollars of losses by systematically originating fraudulent loans and then selling those loans to the secondary market through false “reps and warranties.” Wheeler’s study design would produce nonsense results if it were applied to DOJ’s current practices of prosecuting solely the least culpable individuals engaged in alleged mortgage fraud. Wagner’s selective indictments would “prove” that Russian-Americans are far more likely to be mortgage fraud perpetrators.

In any event, the FBI has no basis for it “ethnic” speculation – mortgage fraud was led overwhelmingly by folks not on the FBI’s “suspect ethnicity” list. The FBI’s suspect ethnicity list for mortgage fraud is far worse than the CDC’s infamous labelling of being “Haitian” as a “risk factor” for AIDS. In that era there was at least a positive (albeit spurious) correlation between AIDS and being a resident of Haiti and there was uncertainty about how AIDS was transmitted. The true correlation between the ethnic and demographic characteristics on the FBI’s suspect ethnic groups list and the leaders of the mortgage fraud epidemics is negative – and was always obviously negative. Members of the ethnic groups on the FBI’s suspect ethnicity list were virtually never important leaders of the three mortgage fraud epidemics. The FBI’s advice that investigations of the leaders of the three mortgage fraud epidemics should begin by concentrating on mortgage fraud by “Russians” or by gangs such as the “New Breeds’ is beyond silly.

The FBI’s suspect ethnicity list is the indefensible product of bigotry and anti-empirical practices. Attorney General Eric Holder purports to be a huge opponent of this kind of faux “profiling” of a disfavored minority. The clock is ticking. How long will it take Holder (or the FBI’s director) to end the travesty of the FBI’s suspect ethnic group list? And how long will it take for Wagner to stop his selective prosecution of disfavored minorities?

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