Monday, June 30, 2008

This is a bad thing, isn't it?

Then why didn't it get more publicity? This is lifted right from the Office of United States Attorney District of Arizona's website.

PHOENIX - The United States reached a civil settlement with Wells Fargo Bank and Ticor Title Agency of Arizona. In the settlement, Wells Fargo Bank has agreed to pay $4,046,786 and Ticor Title has agreed to pay $265,370.

Under certain circumstances, the Federal Housing Administration’s "pre-foreclosure sales" program allows homeowners with federally-insured loans to avoid foreclosures by listing their homes for sale. If a sales price is not enough to pay-off a loan, then the lender submits an insurance claim to the Federal Housing Administration which will pay the lender the balance owing on the loan.

The United States contends that Well Fargo Bank submitted more than 70 false claims to the Federal Housing Administration under the pre-foreclosure sales program and that Ticor Title prepared inaccurate escrow documents which allowed lenders to submit false claims to the Federal Housing Administration. The United States contends that it suffered $2,156,078 in losses. Wells Fargo Bank and Ticor Title deny the United States’ contentions but agreed to pay the amounts listed above.

The investigation leading to the settlement was conducted by the U.S. Department of Housing and Urban Development, Office of Inspector General.

RELEASE NUMBER: 2008-165(Wells Fargo settlement)

Unless I am completely misunderstanding this, Ticor Title and Wells Fargo were in cahoots to lie to the government--OUR government--about the sale price of properties that were in foreclosure but not yet owned by Wells Fargo. This is the way I understand it, and please someone correct me if I am mistaken: Homeowner owes Wells Fargo $100,000, stops making payments, and foreclosure is commenced. Homeowner tries to sell house before foreclosure sale, but can only get $80,000 for the place. The FHA's pre-foreclosure sale program would allow Wells Fargo to recoup that $20,000 (which is darned nice of us taxpayers). But that's not enough for Messrs. Wells and Fargo. They somehow get Ticor to prepare a HUD-1 that says the property only sold for $50,000, so now Wells Fargo can get a $50,000 shortfall (rather than the $20,000 to which they are entitled) from the government, as well as the $80,000 from the sale of the house. This would net them $130,000 rather than the $100,000 they were owed.


1 comment:

Sergiy said...

* It's not specified here what kind of 70 false claims were submitted. It would be pretty crude fraud if the banks just lied to FHA outright. The way I read it (e.g.): an executive (or their dummy) snatches the house for themselves for $50K. Maybe even not turning it around immediately (it would look really bad and risky), but just creating long-term cashflow by renting the place out so that it covers $50K. They do that 70 times, submitting 70 claims for $50K. Bank doesn't suffer, FHA pays money that effectively end up in the executive's pockets, if not directly, then through the created positive cash flow.

If this is the case, it's just as good as claiming the wrong price, but requires a little bit more footwork and renders a lot less risk of being discovered. Once discovered, the DA must prove criminal conspiracy between the executive and his dummy, which may be really tricky. Correct me if I'm wrong, but this sounds much more real than just submitting claims with wrong numbers. Maybe I'm far from the real world, which is much more crude than I think. What do I know?

Second point: It's not _that_ nice of us taxpayers to pay that $20K of difference. FHA is supposed to collect insurance premiums for that $20K, and at least in theory they should evenly cover the loss from claims. Maybe this year FHA will lose some, hopefully (in theory) it should've collected enough in the past few years of booming market. If it's not enough, FHA should raise the premiums, thus removing some liquidity from the markets. That will ultimately lead to cooler market, lower prices and less speculation. Unfortunately, if FHA and other insurers get aggressive (and history shows that almost all insurers always overextend during good times, because otherwise the competition gets too tough and blinds them - they're just people leading those bastard corporations), and prices are already too high, removing liquidity ever so slightly may lead to the chain reaction of too many claims.. That's not the point. The point is that FHA shouldn't only rely on taxpayers, but also on insurance premiums to pay that $20K claim.