Why Haven't We Thrown Any Of the Scoundrels In Jail?

Anal_yst commented on a piece I wrote yesterday about Obama's financial regulatory suggestions saying:

None of the "solutions" proposed thus far address the lying and fraudulent behavior in the mortgage market, from both the borrower and originator (broker) level.

Good point. But fraud is already illegal, so in theory, you shouldn't need additional legislation or regulation to stop it. You just need Johnny Law to roll in and start handcuffing people. So why hasn't that happened?

On the borrower level, my guess is that it's too widespread to begin to try to prosecute everyone who has done it. But that doesn't mean the authorities shouldn't try. If you had people signing statements that indicated their net worth or other underwriting criteria were straight-up lies, those people should be arrested for fraud. So if the authorities don't have the manpower to go after these people, then perhaps a new department of the FBI with greater resources at its disposal to detect and enforce consumer credit fraud would make sense.

On the originator level, fraud is probably a little more difficult to prove. Frankly, it's pretty easy to take advantage of unsophisticated consumers with fancy finance. That's why transparency is so important. I hope Obama's proposed "Consumer Protection Agency" will take on the task of making certain borrowers understand exactly what they're getting into. Sure, we've got a truth-in-lending disclosure, but that doesn't explain that payments on your adjustable-rate mortgage could spike by hundreds of dollars when it resets.

So for originators to be guilty of fraud, I would imagine it was on the sell-side, i.e. when they sold bad mortgages to banks. Even then, however, I'm a little unconvinced that there needed to be much fraud. Banks had become so comfortable buying giant pools of ugly mortgages, they did minimal due diligence. Some banks knowingly bought pools of mortgages where no income verification was done when the mortgages were created. Originators don't need to knowingly report false borrower incomes if the bank doesn't care about the information anyway.

Still, there must be some originator fraud out there. And again, some government agency with enforcement authority should be examining some of these pools of bad mortgages to see if originators made false representations about the mortgages they contained. Like in the consumer case, if no such department exists, create one.