We at The Audit have called on the press to do more reporting on the underbelly of the mortgage industry, who fed it, and how it metastasized in the absence of government oversight.
So it’s nice, but all too rare, for us when we see all three in one neat package. The Miami Herald has run a series of stories since July called “Borrowers Betrayed” on the ex-cons—literally—who ran rampant in the Florida mortgage-brokerage industry during the boom and the regulators who let them do it.
State regulators allowed thousands of ex-convicts to enter a profession that gave them access to the most sensitive and personal financial information: credit cards, bank accounts and Social Security numbers.
Those criminals went on to commit nearly $85 million in mortgage fraud, the newspaper found. They stole their customers’ identities. They stole their money. They even stole their homes…
Beyond the licensing, regulators routinely overlooked or ignored complaints, allowing rogue brokers to flourish amid one of the biggest housing booms in state history.
It’s excellent (and as Barry Ritholtz at The Big Picture, says, prize-winning) stuff and has already claimed the head of a key regulatory agency in Florida and led the state to enact emergency measures to rectify the problem.
Jack Dolan, the reporter who kicked off the series, which he wrote with colleagues Rob Barry and Matthew Haggman, has been at the Herald for a year and a half. Before that he was on the I-team of the Hartford Courant for six years.
The Audit spoke to Dolan recently about mortgage crimes, lax regulators and “street-level dealers”:
The Audit: How did you get the idea for this story? The mortgage mess has obviously been the big news, particularly in Florida, but where did this angle come from?
Jack Dolan: I started on a story in August of 2007 on all the toxic mortgages that had been written in Miami. If you stood on the roof of The Miami Herald, we’re surrounded almost 360 degrees by empty brand-new, gleaming condo towers. And you have to figure there’s not a 30-year fixed mortgage in any one of them.
Part of what I was doing was talking to mortgage brokers just to see if anybody even asks for a 30-year fixed anymore. As just kind of CYA, before I would put a mortgage broker’s “expert” quote in the paper, I would put them quickly through the state criminal-background check, and I was really stunned by a couple of people I saw, crimes like fraud and there was one RICO I came across that way.
So it was kind of a short leap from there to ask the state banking commissioner for all of the licensed mortgage brokers in the state and do a mass batch match looking for their criminal records. The first screen that came up there was one bank robbery and I figured we were onto something.
TA: It’s interesting you found that in a pretty basic step but one I don’t think most reporters would have gone through the trouble of doing.
JD: In Miami you might. I went to Missouri grad school and I worked at NICAR, so I just sort of got it drummed into my head—check
TA: What did you expect to find when you went in there? Some of those numbers are amazing.
JD: I expected there would be some criminal histories. There’s gonna be a few pot possessions and stuff like that. The law said that they were supposed to screen brokers for crimes involving fraud, dishonesty, and “moral turpitude”, which has a pretty broad definition. When I saw the first screen, and one of the first people was a bank robber. I said, “okay, how did a bank robber slide around that definition?”
TA: How many were prevented from getting licenses?
JD: Whenever the agency takes some sort of action against a broker or even an applicant, they have to file a final order, so we went back and looked through all the final orders for denial of licenses that mentioned fraud, dishonesty or moral turpitude. I forget what the number was, but I’m tempted to say twenty-nine from 2000 to 2007.
TA: They had the regulatory power to do this. What was the reason they didn’t? A big part of the problem on Wall Street and across the country has been this laissez-faire attitude toward regulation. Was it philosophy? What caused them to just not do their job?
JD: Nobody ever came right out and said on the record “Jeb Bush appointed us and he’s not a big fan of government, so we didn’t do it.” One of the more telling things that one of the higher-ups at the agency told me; he said “Look, my whole career has been spent regulating guys in silk suits. These mortgage brokers, they’re not bankers. They have little storefronts. Those are guys in polyester suits.”
He said that, and that kind of summed it up for me. These were kind of white-shoe regulators, and the mortgage brokers were, you know…
TA: They didn’t want to get their fingernails dirty.
JD: Take a couple of examples. There was a guy in the story, Scott Almeida, he stepped out of prison, he was a convicted cocaine trafficker. He admitted that on his application, and he had a letter of reference from his mom and another letter of reference from a guy in the mortgage business who, by the way, ultimately was charged with $100,000 of grand theft himself.
When I talked to the regulators, they took what he sent them in his application and decided he’s okay. What they didn’t do—what any cub reporter would have done—was get the police report from the arrest. That tells you the narrative of what the guy did. Had they seen that, they never would have licensed him—they told me that. The guy was arrested with a massive amount of cocaine and a small arsenal.
There was another guy, he lied on his application about the fact that he’d been in prison for strangling his wife and throwing her in Tampa Bay. And they found out about it, but by the time they’d found out about it it was a day late, so they’re “eh, what’re you gonna do?”
TA: One thing I like was you continued to pull the thread. You started with the background checks and did some reporting and got this Almeida guy. And then recently you’ve followed him up the chain to Orson Benn (the lender, who worked for Argent Mortgage, a subprime shop bought by Citigroup last year).
JD: That was always my intention from the start—the mortgage brokers, it’s kind of retail.
Everybody knew there were some crooked brokers out there. I wanted to go up the food chain, and the first step was the regulators. I’ve never seen an agency so disorganized and just not prepared to do its job. But also, the fact of the matter was, in order for the brokers to get away with just blatantly forging documents, there had to be a banker willing to accept those and Orson Benn was just wonderful [for these guys].
He was an aggressive young guy with no real banking education who just saw if you don’t scrutinize the income statements and don’t really care that the credit report looks like it’s been cut and pasted, you can make a lot of money. And they just went wild.
TA: Who was funding him? Was he securitizing those things to Wall Street?
JD: Absolutely. In one of his statements to police they touched on it really briefly. He said when the guys from Wall Street came in to buy groups of mortgages that they would then go off and bundle, he said they actually had to pay more if they wanted to scrutinize them first. And very few people did. There was absolutely no culture of checking at Argent, the lender he worked for, which became the biggest subprime lender in the country for awhile.
TA: My operating assumption is that Wall Street saw they could package these things and make tons of fees off them and kept this meat grinder going and put pressure on down the chain. The mortgage brokers are the little guys, sort of like your…
JD: Street-level dealers
TA: …right. Street-level dealers compared to your don up on Wall Street. Is that what you saw after looking at this for a year and a half?
JD: Yeah. It absolutely is. I know from interviews all up and down the chain of the industry. The sense that I got down here was that Countrywide and IndyMac—if Countrywide was willing to accept, say, a 600 credit score, two weeks later IndyMac would come back and say 580.
It was a race to the bottom and it didn’t really matter to them because, it’s a sort of tired tale, but in our parents’ generation, they went to the bank and the guy sitting across the office from them had to decide whether they could pay him back. If they didn’t he lost money. Now one of the great pieces of “progress” of the financial revolution of this decade was that just inherent common-sense checks and balances was just gone completely.
You can’t even find your mortgage. Nobody knows who has it anymore.
TA: We keep hearing about the cuts, and newspapers are in terrible shape, but stories like this show that the metro papers still have some scrap in them. How was it doing this with the level of resources you have versus what you were used to earlier in your career?
JD: It’s not like my editors ever said “Don’t do that it’s too expensive.” But you do a lot of self-editing. When I was at the Hartford Courant, which is not the biggest circulation paper in the country. I was doing a story about the medical schools which produce the doctors who get disciplined most frequently. They flew me to Guadalajara, Mexico, for two weeks. St. Lucia for two weeks. I wouldn’t dream of asking for that now.
TA: Do you think this went on in other states? Have other reporters talked to you? Maybe other states didn’t have a regulator as asleep at the switch as Florida…
JD: I’ll bet they were pretty drowsy.
TA: But have you heard of any other reporting on this line?
JD: I haven’t. There are the obvious daily stories of “There’s been a $10 million mortgage fraud case, or a $20 million case”. If you search those there ‘s an endless supply of them, but I didn’t see anybody else do what we did, and I’m absolutely certain they could have.
TA: I like the matter-of-fact tone in this series. You guys called a spade a spade when you found wrongdoing or gross negligence. I think this is part of what’s been wrong with newspapers in years past, was that when they found stuff they too often made their readers read between the lines.
JD: We’ve all been beat reporters and done dailies, and you don’t know the answers often. You’ve got what this guy said and what that guy said and you’ve got to try to balance it. If you spend eight months and looked at 200,000 criminal backgrounds, by the end of it you know the answer. You’ve presented your findings to everybody who’s gonna get named and had long, sometimes contentious interviews with them.
My editor is a guy named Mike Sallah. I’m a much more flowery writer than he is, and he just said “No. Just tell it.” Like a sledgehammer. And we fought over that a lot, but I think he was right.
TA: Are you still working on this? Is there a lot more out there?
JD: There is. We’re working on trying to do at least one more installment in the series. A bunch of emergency rules were established by the governor and the cabinet after the third installment of our series. Those were really good and really necessary.
But that whole business about the people who are loan originators, the ones who are not licensed. They need the legislature to change the law, so we’re going to keep writing about that.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.