Documentation Fraud Key to FBI Investigations of Mortgage Industry (Wall Street Journal)

"The FBI's investigations represent an added dimension to the bureau's decade-long focus on mortgage fraud, which spiked during the housing boom. For years, the FBI has targeted fraud cases involving real-estate agents, appraisers and fake buyers. More recently, FBI officials and local prosecutors have set up teams to investigate mortgage fraud in several states where they have noted high fraud activity, including California, Texas, Florida and Arizona, all of which saw fast-growing rates of home-value appreciation.

Now, the FBI is taking a closer look at possible fraud in the secondary market for mortgages, which could implicate well-known financial firms. The faltering U.S. housing market and a rise in defaults and foreclosures, particularly among low-end borrowers, has whipsawed global stock and bond markets, led to the dismissal of Wall Street chiefs and resulted in losses by banks, hedge funds and securities firms."

One potential angle is whether real loans were used to create mortgage securities. Typically, a mortgage security might hold thousands of mortgages. Among other things, the Justice Department is likely to look at whether one mortgage was replicated across multiple securities as underwriters sought to meet high investor demand.

"On Jan. 17, the Florida Attorney General issued a subpoena to Countrywide. Among other things, the subpoena asks Countrywide to describe the standards it used to determine whether borrowers qualified for a prime, subprime or Alt-A mortgage and for no and low documentation loans. The subpoena -- which covers the period from Jan. 1, 2005, to the present -- also asks the company to explain how its underwriting standards may have changed over time. It also asks Countrywide for copies of "promotional advertisements, literature, booklets" and other materials aimed at subprime customers as well as for copies of any scripts or instructions given to Countrywide employees."

"The attorney general is "looking for information regarding whether or not consumers have been taken advantage of and whether or not any of these business practices may potentially violate Florida law," says a spokeswoman for Florida attorney general Bill McCollum. The attorney general is conducting "a widespread review of the mortgage industry," she says."