Milwaukee J-S Exposes Criminals in the Mortgage Biz

Late last year I did a Q&A with The Miami Herald’s Jack Dolan, who led a team that wrote an excellent series exposing how Florida’s licensing authorities let convicted felons run amok through the state’s mortgage industry.

I was interested in whether this story could be replicated and asked Dolan whether he thought this was a Florida-specific problem or if the series could be done across the country. He said:

I didn’t see anybody else do what we did, and I’m absolutely certain they could have.

Dolan was right, as the Milwaukee Journal-Sentinel is showing.

The paper’s Cary Spivak digs into the Wisconsin mortgage industry and finds:

A killer, a handful of drug dealers and a onetime leader of the Latin Kings - these are just some of the criminals who have received state-issued licenses to write your mortgage loan.

Those ex-cons are among hundreds of people with convictions ranging from prostitution and drunken driving to burglary and armed robbery who obtained state permits to work as mortgage loan originators, commonly called loan brokers - a profession that operates with minimal state oversight.

The Journal-Sentinel appears to have just counted applications where brokers admitted their convictions. Surely the real numbers are much higher. The Herald found those by matching the broker database with a criminal one.

But the paper still found a large number of questionable brokers. What would a California, Nevada, or Arizona paper find? (Email me if you’ve seen other pieces like this and I’ll note them).

Here’s the J-S:

More than 340 mortgage brokers who had licenses last year admitted to felony or misdemeanor convictions on their license applications, a number that balloons to more than 500 when drunken-driving convictions are included. Among the felons who have held licenses was James Lytle. He already had a long rap sheet - which he didn’t disclose to regulators - when he obtained his license and used it to mastermind a $4 million mortgage fraud scheme. He is serving seven years.

And this is good context:

The licenses give the ex-cons easy access to a client’s personal financial information, including bank account and Social Security numbers. More importantly, the licenses open the door to the mortgage market, which was awash in billions of dollars until it crashed, sparking the national economic crisis.

Today, regulators and investigators nationally are discovering scores of illegal real estate schemes that helped contribute to the nation’s mortgage meltdown, particularly in the now-moribund subprime market. Many of the illicit deals were hatched by people who had criminal histories before receiving state permits to enter the business.

There are striking similarities to the Herald series. The Journal-Sentinel’s second piece in its series focuses on a couple of cons who met in jail and eventually figured out the easiest scam of all—bankers handing out home loans with little-to-no due diligence:

Despite having an extensive criminal record in two states, Lytle was awarded a state mortgage broker’s license in 2001. The license empowered him to tap the overheated subprime market, giving him the credibility needed to write 19 bogus loan applications that were eagerly scooped up by local and national lenders. His partner also had a rap sheet when he received his broker’s license in 2003.

Neither man should have gotten a license. Their failure to disclose anything about their criminal pasts on their license applications should have been enough to disqualify them for two years, regulators say. The state, however, didn’t conduct background checks.

I was hoping and waiting for Spivak to take his story to the next level by looking at the role of the big boys in these scams. Good thing he does just that. First a little context:

Lytle devised the scheme to take advantage of the frenzied subprime mortgage market. Lenders eagerly approved loans that sent billions of dollars to borrowers who often supplied little or no proof of their income or employment status.

The risky loans were then packaged and sold to investors around the world, setting the stage for a global economic meltdown.

And he doesn’t let Wall Street and the banks’ weak-sauce excuse stand, batting it down in the very next sentence:

Some lenders and investors who bought the securities say they were clueless about fraud and other problems occurring at the street level. But some other people find that hard to believe.

“They knew what the hell was going on and they didn’t care,” said Rodney Cubbie, a former federal prosecutor who, as a defense lawyer, has defended people charged with mortgage fraud. “They’d take these loans, bundle them and sell them off as investments” in order to spread the risk from future defaults.

Cubbie’s comments were not aimed at the Lytle-Valadez case but rather the overall attitude in the subprime mortgage market that lasted until it crashed in 2007. That hear-no-evil, see-no-evil approach allowed unscrupulous local brokers to game the system and feed the demand created by national lenders and securities dealers.

“If you’re going to prosecute any of these guys on the local level, you need to prosecute those guys too,” Cubbie said, referring to the national players.

Good stuff.

Attention, ambitious reporters in other states: the Herald and Journal-Sentinel series have set up a template for you. Apply it to your state and rake in the awards.

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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.