In early 2006, Darcy Parmer began to worry about her job. She was a mortgage fraud investigator at Wells Fargo Bank. Her managers weren’t happy with her. It wasn’t that she wasn’t doing a good job of sniffing out questionable loans in the bank’s massive home-loan program. The problem, she said, was that she was doing too good a job.
The bank’s executives and mortgage salesmen didn’t like it, Parmer later claimed in a lawsuit, when she tried to block loans that she suspected were underpinned by paperwork that exaggerated borrowers’ incomes and inflated their home values. One manager, she said, accused her of launching “witch hunts” against the bank’s loan officers.
One of the skirmishes involved a borrower she later referred to in court papers as “Ms. A.” An IRS document showed Ms. A earned $5,030 a month. But Wells Fargo’s sales staff had won approval for Ms. A’s loan by claiming she made more than twice that — $11,830 a month. When Parmer questioned the deal, she said, a supervisor ordered her to close the investigation, complaining, “This is what you do every time.”
Amid the frenzy of the nation’s mortgage boom, the back-of-the-hand treatment that Parmer describes wasn’t out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business — including made-up addresses, pyramid schemes, and organized criminal rings — and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them.
In interviews and in court records, 10 former fraud investigators at seven of the nation’s biggest banks and lenders — including Wells Fargo (WFC), IndyMac Bank, and Countrywide Financial — describe corporate cultures that allowed fraud to thrive in the pursuit of loan volume and market share. Mortgage salesmen stuck homeowners into loans they couldn’t afford by exaggerating borrowers’ assets and, in some cases, forging their signatures on disclosure documents. In other instances, banks opened their vaults to professional fraudsters who arranged millions of dollars in loans using “straw buyers,” bogus identities, or, in a few instances, dead people’s names and Social Security numbers.
Corporate managers looked the other way as these practices flourished, the investigators say, because they didn’t want to crimp loan sales. The investigators discovered that they’d been hired not so much to find fraud but rather to provide window dressing — the illusion that lenders were vetting borrowers before they booked loans and sold them to Wall Street investors. “You’re like a dog on a leash. You’re allowed to go as far as a company allows you to go,” recalled Kelly Dragna, who worked as a fraud investigator at Ameriquest Mortgage Co., the largest subprime lender during the home-loan boom. “At Ameriquest, we were on pretty short leash. We were there for show. We were there to show people that they had a lot of investigators on staff.”
As foreclosures and economic pain have spread, bankers have painted themselves as victims of an unforeseen financial tsunami. In response to written questions, Wells Fargo and Ameriquest both said they had “zero tolerance” for fraud. (Wells Fargo declined to answer to specific questions about Parmer’s allegations, except to note that her case had been settled.) Industry officials and their defenders continue to argue that the mortgage business wasn’t brought down by its own unsavory practices, but rather by professional fraudsters and dishonest borrowers who exploited lenders’ open-arms lending policies during what was, at worst, a period of irrational exuberance. In a recent segment, top CNBC personalities slammed a guest who suggested that lenders used slick salesmanship and fraud to prey on homeowners. “Did they put a gun to their head?” Lawrence Kudlow growled. “It takes two to tango,” Rick Santelli added. “You can’t cheat an honest man.”
A growing body of evidence, however, attests that fraud and predatory lending were open secrets in the mortgage business — and that finance executives condoned and encouraged an array of shady tactics in the hunt for bigger profits. Support for this conclusion can be found in the recent results of a U.S. Senate investigation, which determined that top executives at Washington Mutual, the largest bank to fail in American history, were well-aware of the fraud inside their mortgage machine. (An internal bank investigation in 2005 revealed that some 60 percent to 80 percent of loans produced by two of WaMu’s top California sales branches were tainted by fraud.) More evidence can be found in the accounts provided by Darcy Parmer and other fraud investigators who saw the nation’s mortgage frenzy from the inside.
As Washington hashes out the details of new banking rules, the investigators’ experiences make it clear that protecting homeowners and preventing future disasters will require more than broad strokes and modest tinkering. To ensure that the culture of sleaze and duplicity doesn’t return in new forms, lawmakers need to demand that regulators show a real commitment to policing the banking and mortgage industries and put in place tough directives, including a requirement that lenders ensure that borrowers can afford their loans over the long haul.
Subprime mortgages — loans designed for borrowers with flawed credit or modest incomes — were the leading edge of the nation’s mortgage boom. Ameriquest, an Orange County-based lender, was a pioneer in the market. Ed Parker signed on as Ameriquest’s head of mortgage fraud investigation in early 2003, as the company was on the verge of becoming the nation’s largest subprime lender. The first case he took on involved allegations that employees at the company’s Grand Rapids, Mich., branch were pushing real-estate appraisers to inflate loan applicants’ home values. Workers admitted to the scheme, Parker said, and the company shut down the branch and repurchased hundreds of loans from the investors who’d bought them.
Parker saw the investigation as a success. He thought he’d helped set a precedent that fraud wouldn’t be tolerated. But he discovered that his actions didn’t endear him to many of his co-workers. One executive told him the sales force looked on him as “Darth Vader.” On another occasion, when a suspicious loan file was brought up during a staff meeting, a senior executive said: “Don’t give it to Ed. If you give it to him, that one file will multiply and become hundreds of files.”
Parker said higher-ups began pushing him to limit the scope of his inquiries and focus on smaller cases rather than big-impact ones like Grand Rapids. This message was driven home after Ameriquest learned that a TV reporter was digging into problems at a branch in Mission Valley, Calif. Two loans raised questions about whether branch employees were falsifying not only borrowers’ incomes but also their ages, so that the inflated incomes would seem plausible. One borrower was 67, but the loan application prepared in her name said she was 41. Another was 74, but the loan application indicated the borrower was 44. The company, Parker said, wanted to limit its exposure and portray the problem as a couple of isolated cases. The company had all of the branch’s loan files boxed up and transported to the fraud investigation team in Orange County. Management sent word, however, that Parker’s team shouldn’t open the boxes. His investigators looked anyway. As they cracked open the files, they saw that falsified incomes and ages were a problem that went beyond two borrowers’ loans. When senior managers discovered what the team was doing, Parker said, they weren’t happy. “They said: ‘Don’t look anymore,’ ” he recalled. “They didn’t want to know.”
Kelly Dragna, who was a member of Parker’s team in 2005 and early 2006, echoes this. “There was never an attempt to send a message that they wouldn’t tolerate this,” Dragna said. “The company wasn’t really totally opposed to the fraud. They were willing to tolerate it as long as you didn’t get caught.” Ameriquest no longer makes loans and is winding down its operations. In a written response, Ameriquest said Dragna never raised these issues while he worked at the company. It called Parker “a disgruntled former employee,” noting that he had pressed a wrongful dismissal claim against the company before an arbitrator and lost. (The arbitrator wrote that it didn’t make sense to him that the lender wouldn’t want Parker to do his job and find fraud.)
Ameriquest said it “took its responsibility to its borrowers very seriously. In almost every instance, policies were implemented that exceeded industry standards.” State law enforcers reached a different conclusion. They accused the lender of using boiler-room sales tactics and inflating borrowers’ incomes and property values. Ameriquest agreed to a $325 million loan-fraud settlement with authorities in 49 states and the District of Columbia.
As Ameriquest and other Orange County-based lenders showed how much money there was to be made in high-priced home loans, Wells Fargo, Countrywide, and other established mortgage players began making a big push into subprime loans and other unconventional mortgages. Countrywide treated borrowers, California Attorney General Jerry Brown alleged, “as nothing more than the means for producing loans,” signing them up for loans with little regard for whether they could afford them. Illinois Attorney General Lisa Madigan noted that Countrywide’s “business partners” in Chicago included a mortgage brokerage controlled by a five-time convicted felon. Countrywide kept up its partnership with the brokerage for more than three years, even as the smaller company falsified borrowers’ incomes on their loan applications and misled them about their loans, according to a lawsuit filed by Madigan. Countrywide’s push to increase loan volume, the suit said, “facilitated rampant fraud” on loans that required little or no documentation of borrowers’ finances. One former employee in Illinois, Madigan said, estimated that borrowers’ incomes were exaggerated on 90 percent of the reduced-documentation loans sold out of his branch.
Larry Forwood, a California-based fraud investigator in 2005 and 2006 for Countrywide, said fraud cases were so common that in-house investigators couldn’t keep up with them all. “Lots of stuff we had to put on the back burner,” he said. His own caseload totaled as many as 100 cases at a time, including many cases involving multiple loans. Outside loan brokers and in-house employees, Forwood said, frequently pushed appraisers to exaggerate loan applicants’ home values. The appraisers were independent contractors. If they got caught falsifying an appraisal, the company logged their names onto an internal “do not use” list. But many Countrywide branches simply ignored the list, Forwood said, using these appraisers anyway. “Sales was definitely driving the ship,” he said. “All they wanted to do was to get their quotas and get their bonuses.”
Bank of America (BAC), which purchased Countrywide in 2008, said it couldn’t comment on events that happened well before it acquired the lender. The allegations by California and Illinois authorities, a bank spokesman said, “are water under the bridge,” given both cases were resolved as part of a multi-state settlement of predatory-lending claims against Countrywide.
The anything-goes ethos spread through the mortgage industry. At IndyMac, the quality of loans became a running joke among its employees, according to a former IndyMac fraud investigator who was cited as a “confidential witness” in a securities-fraud lawsuit in California. The investigator said shoddily documented mortgages became known inside the company as “Disneyland loans” — in homage to a mortgage issued to a Disneyland cashier whose loan application claimed an income of $90,000 a year. The fraud investigator claimed that the vice president in charge of the company’s fraud investigation department was pressured not to report fraud, and in one case was pressured to “sanitize” a report on the company’s loan pipeline.
A securities-fraud suit in New York, meanwhile, claimed that Lehman Bros. installed managers at its mortgage subsidiaries, Aurora Loan Services, who were more concerned with keeping loans flowing into the investment bank’s mortgage-securitization pipeline than with making sure the loans were legitimate. One of the Lehman-installed managers, the suit claimed, “stormed out of a meeting and yelled at the vice president of special investigations, loud enough for everyone in the vicinity to hear: ‘Your people find too much fraud!’”
As lenders pushed their workers to take advantage of borrowers and play fast and loose with loan-approval standards, they left themselves vulnerable to a growing swarm of street-level fraudsters. By 2006, word had gone out among the criminal underworld that mortgage companies were easy marks. FBI agents noted that gangs that once focused on drug dealing and other street crimes had branched into mortgage fraud. “It’s more profitable and less risky,” one FBI official said.
Steve Jernigan realized just how bad things were when he got a call from a real-estate appraiser in Indiana. Jernigan was a fraud investigator who worked in the Orange County headquarters of Argent Mortgage, Ameriquest’s sister company. He’d dispatched the appraiser to check on a subdivision that Argent had made loans on. The appraiser wanted to make sure he had the right location. “I’m standing in the middle of a cornfield,” he told Jernigan. The addresses on the loan applications, it turned out, were made up. The houses didn’t exist. Jernigan pulled the files and found that all of the original appraisal reports had been accompanied by a photo of the same house.
In another Indiana case, Argent and other lenders were taken in by a con man named Robert Andrew Penn, who later admitted that he and his accomplices had duped about 100 people in Virginia, appropriating their names and credit histories and using the information to get loans and buy houses at inflated prices around Indianapolis.
An Indianapolis real estate agent had warned Argent in 2004 that Penn may have been engaged in mortgage fraud. Jernigan said Argent didn’t conduct a serious investigation of Penn’s frauds, however, until mid-2006, when it learned that Countrywide was preparing to file a lawsuit and make the scheme public. By then, Argent was out millions of dollars, stuck with properties that were worth considerably less than the loans that were attached to them. It had loaned nearly $500,000, for example, to cover the purchase of a house on Easy Street in Indianapolis that turned out to have a market value of less than $300,000.
Jernigan spent weeks wallpapering a conference room with printouts of information about the loans that had fueled the scheme. Eventually, he said, the investigation led him higher up Argent’s food chain, to a senior executive who had been “pretty much turning a blind eye” to whether the loans were on the up-and-up. Jernigan said a supervisor let him know that upper-level management was off limits. “I was pulled into an office,” Jernigan said. The supervisor “looked me straight in the eye and said: ‘You’ve got to stop.’ ”
This is part one of a two-part series, for which The Investigative Fund at The Nation Institute, now known as Type Investigations provided provided research support.