Today, the Financial Crisis Inquiry Commission (FCIC) held the third in a series of four field hearings, entitled “The Impact of the Financial Crisis – Miami, Florida” to examine the role and impact of mortgage fraud in Miami. Testifying before the FCIC were the following witnesses:

Session 1: Overview of Mortgage Fraud

  • William K. Black, Associate Professor of Economics and Law, University of Missouri-Kansas City
  • Ann Fulmer, Vice President of Business Relations, Interthinx and Co-Founder, Georgia Real Estate Fraud Prevention and Awareness Coalition
  • Henry N. Pontell, Professor of Criminology, Law & Society and Sociology, University of California, Irvine

Session 2: Uncovering Mortgage Fraud in Miami

  • Dennis J. Black, President, D.J. Black & Company
  • Edward Gallagher, Executive Officer, Economic Crimes Bureau, Mortgage Fraud Task Force Miami-Dade Police Department
  • Jack Rubin, Senior Vice President, JPMorgan Chase Bank
  • Ellen Wilcox, Special Agent Florida Department of Law Enforcement

Session 3: The Regulation, Oversight, and Prosecution of Mortgage Fraud in Miami

  • J. Thomas Cardwell, Commissioner Office of Financial Regulation, State of Florida
  • Wilfredo A. Ferrer, United States Attorney, Southern District of Florida
  • R. Scott Palmer, Special Counsel and Chief of the Mortgage Fraud Task Force, Office of the Attorney General, State of Florida

The witnesses testifying during Session 1 provided a general overview of the role that mortgage fraud played in the U.S. financial crisis. These witnesses described the different types of fraud that were perpetuated in the years leading up to the financial crisis, including liar’s loans and illegal flipping of houses, and concluded that fraud has played a significant role in causing the financial losses throughout the country in general and in Florida specifically. Messrs. Black and Pontell indicated that “control fraud,” whereby controlling insiders of various organizations had suborned internal and external controls to enrich themselves at the expense of their organizations and the public, was pervasive and led to the financial crisis.

In Session 2, the witnesses focused on the specific causes that led to the failure of the Florida housing market. According to the Miami-Dade Police Department’s Economic Crimes Bureau, reports of mortgage fraud rose in 2006, and shortly thereafter, a new mortgage fraud statute was passed in Florida and the Mortgage Fraud Task Force (MFTF) was created “to reduce mortgage fraud and prevent victimization of individuals and businesses through effective education, legislation, regulation, law enforcement and prosecution.” However, the witnesses generally noted various obstacles that hinder the investigation of mortgage fraud, including obtaining documentation of the mortgage transaction, determining who provided the false information on a loan application, and proving intent to defraud.

The witnesses testifying during Session 3 focused on enacted Florida legislation intended to address various weaknesses that they believe led to pervasive mortgage fraud in Florida. Current Florida regulation “requires that all persons engaged in the mortgage origination process be licensed unless exempt. The principal exemption is for persons employed by regulated institutions, primarily banks.” Furthermore, licensees must pass a detailed criminal and credit history background check, pass various state and national exams to demonstrate professional competence, and have annual background checks as part of the license renewal process. Additionally, enforcement efforts to combat mortgage fraud have increased in Florida, as the U.S. Attorney’s Office of the Southern District of Florida has “prosecuted 401 mortgage fraud defendants, at all levels of the mortgage process, 63 responsible for almost half a billion dollars in fraud” as of September 2010. Common forms of mortgage fraud schemes include illegal property flipping, the use of straw buyers, foreclosure fraud, exploitation of home equity lines of credit, shotgun sales, ghost sales and quitclaim deed fraud. The FCIC will wrap up its field hearings this week in Sacramento in advance of its mandated December 15, 2010 report containing the cumulative results of its investigation.