FBI Launches Criminal Investigation into Subprime Market
Before subprime lending turned sour for so many borrowers and lenders, most people seemed enthusiastic about it - those with weak credit or who were rebuilding after a bankruptcy had access to credit and those offering the loans believed they'd be making big bucks down the line.
Unfortunately, the abuse of subprime lending ended badly for both of those groups. Many people who already had weak credit opted to file for Chapter 13 bankruptcy to save their homes, thus weakening it further. And, of course, those expecting to profit from the loans are now experiencing serious financial losses.
And now the government has taken an interest in whether the lending methods used by many subprime lenders and investors were even legal. According to Business Week, the FBI has launched a criminal inquiry into 14 companies involved in the subprime market.
Specifically, the FBI's investigation will explore potential instances of accounting fraud, insider trading and questions of loan securitization, sources indicate. Basically, this means that people involved in every part of the lending process will be examined.
Though the Securities & Exchange Commission (SEC) is reportedly already investigating the subprime industry, theirs is a civil suit. The potential of criminal charges that comes with the FBI's investigation raises the stakes for the companies under scrutiny.
So far, one thing seems to be clear: questionable activity occurred - or might have occurred - at every level of the lending process. The FBI has evidently broadened its investigation to include loan originators, loan processors and those who securitized and sold loans.
The theme of the investigation appears to be that everyone involved contributed to the downfall of the subprime market.
Lenders who convinced borrowers to lie about their incomes or who didn't clearly explain the terms of the loan's payment plan; brokers who invented new ways of grouping the risky loans and making them available for sale; those who told investors that the loans carried no great risk - the actions of all these groups led to the current subprime mess.
So what could happen to the companies under investigation?
Reports show that earlier investigations of mortgage fraud have led similar companies to declare bankruptcy. In some cases, the New York Times points out, high-ranking officials could face criminal penalties like fines or jail time.
It's no wonder the FBI has launched the investigation: the Attorneys General from New York, Ohio, Illinois and Connecticut have apparently already taken similar action on behalf of the citizens of their states. In fact, that could be one of the reasons the subprime industry was able to get away with its practices in the first place.
The mortgage industry is reportedly difficult to regulate legally, since both state and federal agencies share responsibility. Some mortgage lenders evidently hold state licenses but are actually part of national companies, which complicates the process of overseeing from a law enforcement standpoint.
Reports show that since 2003, reported instances of mortgage fraud have increased by several thousand each year. These enormous jumps suggest a need to investigate the entire valuation system used by mortgage lenders and banks - and this should prove no small task for the FBI.