What About Lending Fraud?

The foreclosure scandal offers the press a chance to revisit an undercovered story

Bloomberg News does what I wish more of the press would do when reporting this foreclosure scandal story: Ask what happened on the front end of the loan process, too.

It reports from Tampa on how the scandal is throwing a wrench in the state’s notorious rocket dockets—courts that zoom through foreclosure cases in a few seconds apiece.

Bloomberg tells the story through a borrower named Nicole West who’s challenging her foreclosure because she says the banks have committed fraud on the court in the process by forging signatures and backdating documents. She’s representative of a wave of challenges hitting the system, which was already overloaded. This is good reporting, backing up the anecdote with harder evidence:

At the Clearwater court, lenders as of yesterday had canceled more than half of the 84 hearings to approve foreclosures that were scheduled for today, according to Ron Stuart, a court spokesman. Half of the 110 hearings originally set to take place tomorrow were canceled as well.

But most interesting is how Bloomberg ends the story: With several paragraphs on how the Wests allege that they were also defrauded when the loan was made in the first place.

In 2005, the couple tried to refinance by getting a fixed- rate mortgage to replace an adjustable-rate one. According to West, Option One said it was willing to provide a fixed-rate loan. When the couple went to sign the paperwork, West alleged that Option One, which is now part of American Home Mortgage, changed the terms of the loan to an interest-only mortgage for five years. West claimed she was subsequently threatened with a lawsuit by an unidentified title insurance company employee if she didn’t accept that deal.

West said she was “scared to death” and agreed to take the new loan. Their monthly payment went from $1,900 to $3,100, she said. They kept up with it for about two years until Tim West lost his job in January 2007, she said. Option One promised a loan modification the next month and wouldn’t accept their mortgage payments, West said. In March of that year, West said she received a foreclosure notice from Deutsche Bank.

The problem with this is that we needed more information on the Wests’ allegations. I don’t understand why or how their payment would soar 63 percent by refinancing into an interest-only loan. Did they take cash out? Was their some other chicanery going on by the bank?

It’s worth noting, too, that the Wests have been in the foreclosure process for three and a half years already. Have they been living there for free? Why has the process taken so long? We’re not told. We should have been.

But at least the point is raised. And that ought to be an example of what to do for the rest of the press. Don’t just explore the foreclosure-paperwork angle. Look into what happened when the loan was made. Chances are you’ll find an even better story, though it probably won’t be tied in a pretty little bow for your editors, as we see from this Bloomberg piece.

An industry that would commit rampant fraud on one end of the loan process would commit rampant fraud on the other. We know that lending fraud happened—heck, it happened to my folks— but that still hasn’t been reported out to our satisfaction.

In fact, I’d daresay every story ought to note whether the subject of the alleged foreclosure fraud says that fraud happened in the lending process, too.

This Fortune CNN piece, for example, good enough as it is, looks like it has a hole in it, doesn’t it?

The foreclosure scandal and the flurry of new reporting on the housing crisis is a great chance to double back on the critical issue of lending fraud.

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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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.