As viewed from Frank Alpan’s cubicle, through the glare of two flat-screen monitors, the collapse of the housing market looks a lot like a crime scene. Clicking his way through electronic case files, he hunts for clues: a strange font on a pay stub, numbers on a W-2 form that don’t add up. He is continually amazed at just how sloppy some suspects can be.
Alpan (whose name has been changed, as his company’s policy forbids unauthorized employees to speak to the media) spends eight hours a day at this desk in Digital Risk’s office building in suburban Maitland, Florida, reconstructing the exact circumstances that led so many Americans to buy houses they couldn’t afford. The cases he has seen reveal a country gone berserk: a woman in Ann Arbor who refinanced her home five times in five years but neglected to tell her lender that she had quit her job; a concrete finisher in Las Vegas who applied for 15 mortgages in one week; pastors—dozens of them—who doctored bank statements, bought houses they couldn’t pay for, and then filed for bankruptcy. “The nice thing about pastors is that their church shares information when asked,” Alpan says. “Pastors are always an easy [fraud] claim.”
Four years after the crash, most financial institutions still aren’t equipped to find evidence of fraud in the toxic loans crippling their balance sheets. So they outsource the job to Digital Risk. The company’s CEO, Peter Kassabov, calls Digital Risk the “watchdog of the financial world.” Demand for watchdogs is high: the company, which has 1,100 employees, plans to double its workforce by the end of this year. Kassabov’s recruits tend to have underwriting experience; many are refugees of the housing bust. One such hire was George Zimmerman, the man who killed Trayvon Martin in February (Zimmerman says he acted in self-defense). At the time of the shooting, Zimmerman worked as an auditor at Digital Risk, and before that, he was a mortgage broker.
The company spends about $10,000 to train each new employee in the art of fraud prevention and detection. Credit reports are pulled; ex-spouses are contacted; Digital Risk’s proprietary software is deployed. Once problems are uncovered, clients can try to recover money. (Say Digital Risk finds evidence of fraud among mortgages that have since been sold to an investor. The investor can use that evidence to force the bank that issued the mortgages to buy them back.) The information that analysts dig up unsettles Alpan. “There’s nothing you can hide,” he says. “This is why auditors are so paranoid.”
Kassabov started Digital Risk in 2005 with seven employees. Mindful of a lesson he learned during the dot-com boom (“If something goes very fast up, it’ll go down just as quick”), he and his partners designed software to give loan underwriters access to detailed financial information about borrowers. Banks were impressed, Kassabov says, but feared the product would slow business. Why verify income when there were mortgages to be bundled and sold? That was then. Today, Digital Risk says it saves its clients a combined $5 billion a month.
Alpan works through lunch most days, reading files over food from the deli downstairs. Right now, he’s reviewing the case of a grocery-store manager in New Jersey who paid $120,000 for a home whose value then jumped to $220,000. Over the course of a single day, the manager took out five home-equity lines of credit. A week later, with half a million dollars in his pocket, he walked. The scheme is called shotgunning, and Alpan sometimes wishes he was unscrupulous enough to have done it. “I could have been a millionaire,” he says, snapping his fingers, “just like that.”
One of every four files Alpan reviews contains a hardship letter. Such letters are meant to win the bank’s sympathy, but more often than not, they end up highlighting the lies the borrower once told. “I was selling cars … making $2,100 a month, and they cut my hours,” explained one borrower, though his mortgage-loan application had said he earned $350,000 a year as a regional manager for a Big Three automaker. One hardship letter that went viral around the office began, “I did a lot of coke, and now I can’t afford my mortgage.”
Alpan scowls as he plows through the files. The infinite variety, as well as the sheer tonnage, of bad behavior has clearly affected him. Among the thousands of fraudulent loans he has audited, the only common denominator is deceit. “It’s not just lawyers and pastors and CEOs who lie and scheme. It’s nurses and schoolteachers, too,” he says. “Everybody’s guilty; no one’s up to any good.”
Like Zimmerman, Alpan used to work on the other side of the industry, at a firm that sometimes handed out loans to the undeserving. Not that its loan officers were in any position to pass judgment: some had been fired from previous jobs for sexual misconduct; others were alcoholics struggling to pay child support. Most were skilled at bullying borrowers into signing. When one man didn’t have the gas money to come in and sign papers, an officer drove the papers to him. One Digital Risk employee came from a brokerage whose in-house motto was “Copy, paste, cut, delete. We’re not done until the loan’s complete!”
For Digital Risk, the housing crash meant not just new business, but new talent: fully half of the company’s employees once worked in the lending industry. When Alpan reviews a loan, he sometimes finds that the person who brokered it is in the next cubicle, giving another bad loan the kind of scrutiny it should have received years before.
“Part of our job,” Kassabov told me, “is to teach them to forget some of their bad habits from the past.”