FBI's Mortgage Lender Probe Grows to 17 Firms

The FBI has assigned 100 agents to investigate corporate fraud aspects of the housing crisis, including subprime lending and insider trading. Another 150 are looking at related securities fraud, and 153 are looking at loan originations, officials said.

The investigations are being conducted out of local field offices. The majority of cases are in New York and California, he said.

FBI agents were working in conjunction with the Securities and Exchange Commission and other federal agencies as part of a Justice Department mortgage fraud group, Power said. He said a majority of the FBI corporate cases were referred to the agency by the SEC, and the two agencies were working hand in hand.

The task force has been meeting regularly to compare notes and go over fast-developing trends and threats. "We meet on an ongoing basis once a crisis is happening, which is happening pretty much every week now," Power said.

Decisions on any charges are up to federal prosecutors and not the FBI, but individuals are likely to be prosecuted, Power said.

Deferred Prosecution

The government has been wary of prosecuting an entire company, after accounting firm Arthur Anderson shut down in 2002 as a result of its prosecution in the Enron energy firm collapse.

Asked if this caution would be a factor in the mortgage probe, Power pointed to the Justice Department's guidance which encourages "deferred prosecution agreements," in which companies agree to change their behavior under a monitor's oversight, as an alternative to indictment.

But he said individuals would face prosecution, and FBI spokesman Stephen Kodak said the investigators are targeting "all gamuts" of employees ranging from senior executives to lower level managers.

The opportunities for fraud existed all along the chain from mortgage origination to the investors in mortgage-backed securities. But the problems begin in loan applications that required minimal or no documentation, the officials said.

"That's the start of the fraud right there," said Mike Cuff, a supervisory special agent in the economic crimes unit. The poorly documented loans then made their way through the securitization system, through brokers and appraisers, and into investments and corporate balance sheets.

"We're looking at all phases of the securitization," Power said.

Power said the mortgage crisis demonstrates a need for regulatory reform. But he said the industry's vulnerability to large-scale fraud has been known for years.

In 2004, when house values were soaring and the mortgage industry booming, an FBI criminal division official, Chris Swecker, sounded a prescient warning to Congress: "If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market," he said.