Audit Notes: GE and Subprime, WaPo on Recess, Fed Fumes on Housing

The Center for Public Integrity’s Michael Hudson continues one of the most important series of the last year, on how the mortgage industry ignored or crushed whistleblowers who tried to point out systemic fraud during the bubble.

Today, Hudson turns his focus to blue-chip General Electric, which was one of the biggest and worst subprime lenders during the bubble through its WMC Mortgage Corporation unit. Hudson finds several former mortgage-company employees, including some high-level ones, to talk about fraud and how it was effectively condoned, which is sort of the formula for this series and a story in itself on pervasive fraud was. Indeed, it’s eerie how often X-acto knives, Wite-Out, and copy machines appear across various companies.

Riedel also helped work on a computer program designed to dig out fraud across the company’s loan portfolio. It sifted through a swarm of data, including evidence that many borrowers submitted multiple applications with income figures that mysteriously grew from one application to the next. Then it spit out a fraud alert flagging applications that appeared to have false information.

Riedel hoped, he says, that the company would use the data-tracking program on a real-time, wide-scale basis.

It was at a meeting about the computer program, Riedel says, that an executive declared “fraud pays” — explaining that it didn’t make sense to slow the gush of loans going through the company’s pipeline, because losses due to fraud were small compared to the money the lender was making from selling huge volumes of loans.

The anti-fraud algorithm was never put into regular use, Riedel says.

— It’s not easy to out-centrist the Washington Post editorial page, but Bloomberg View managed to do that with its editorial taking Obama to task for his recess appointments to the Consumer Financial Protection Bureau and National Labor Relations Board, neither of which could actually operate without new appointees.

The Post today calls it a “justifiable ‘power grab’” by the president:

Every three days or so, a lone senator enters the chamber and gavels in a seconds-long, pro forma session; a bipartisan agreement mandated that the sessions would proceed “with no business conducted.” With the Senate in session, critics argue, the president is prohibited from exercising his power to make recess appointments. Some also note that neither chamber can adjourn without the consent of the other. Lawmakers left for the holidays without such an agreement…

The Constitution vests the president with the power to fill vacant executive- and judicial-branch slots when the Senate is in recess. This power should not be undermined — indeed, nullified — through the use of ploys. To argue that phantom pro forma sessions render the Senate “open for business” is to defy common sense. The same holds true for the fiction created when lawmakers head out of town but decline to formally acknowledge an adjournment.

— You know things are bad when the Federal Reserve is weighing in on the side of consumers, pushing the Obama administration and the rest of the federal government to, like, do something about the housing market, which has been collapsing for half a decade now.

The Financial Times focuses on how New York Fed chief William Dudley is even calling for principal reductions, funded by investors and taxpayers, in order to stabilize the market.

The New York Fed chief say taxpayers could help save hundreds of thousands of households that experience a debilitating job loss from foreclosure over the next few years by providing them with a temporary loan to cover their monthly mortgage.

Although taxpayers would spend about $15bn a year, he said, the cost would largely be recouped through repayments and the savings achieved by staving off mass foreclosures.

To prevent a “bail-out” of lenders, Mr Dudley said that creditors should be required to reduce borrowers’ “excess debt” as a condition of taxpayer aid.

No comment from the Obama administration, whose half-hearted policies spent less than 5 percent of the meager funds allocated for homeowner bailouts.

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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 Follow him on Twitter at @ryanchittum. Tags: , , , ,