Will Enron Convictions Put ‘Fear OF Jesus’ Into RE Biz?
Several readers see an Enron like situation in the real estate business. “As most know, yesterday former Enron executives Ken Lay and Jeff Skilling were convicted of fraud. Regular readers of this blog know about reports of illegal activity in the world of Real Estate, such as appraisal and lender fraud.”
“Also, based on a OFHEO report released earlier this week, governance at Fannie Mae appears to be a bit shaky. My question to my fellow bloggers is: Will such a high profile conviction put the ‘Fear of Jesus’ into unethical/dishonest appraisers, loan officers and other officials involved in the real estate/industrial complex? Or, will business continue as usual?”
A reply, “Very interesting, as Fannie pressured congress into investigating OFHEO through their purchased reps. If they pressed that hard, I do not want to imagine what OFHEO dared not investigate!”
Another, “It WOULD be interesting to know more about the background/history of the FNM fiasco. Pretty nervy to want OFHEO investigated. I’m wondering which side different congressmen have fallen on over this issue in the past several years.”
One saw others involved, “Don’t forget borrower fraud, e.g., stated income? The mortgage insurance companies are going to lobby government for the FB’s to be dragged before a judge for their greedy ways.”
One restated the topic, “Will The RE Fraud Eclipse Enron and Worldcom? I have a feeling that there is a lot of fraud by the FBs, lenders, realtors, appraisers, title companies, hedge funds, and organized crime. How much fraud is out there?”
Another made a comparison to the 80’s. “A veteran of the FDIC/RTC 1980s-1990s fiasco here. Been there, seen that, done it all, but something tells me that we’re going to see new and improved scams this time involving foreigners, illegal aliens, 20 people in a house and god only knows what else. Should make for very entertaining Congressional hearings, magazine articles, etc. not to mention beaucoup bargain for the patient down the line. We’re en route at the moment btw.”
The Christian Science Monitor. “When a company chartered by Congress to help finance affordable housing for lower-income Americans cooks its books to line the pockets of its managers, one might hope Congress would seek quick reform. It’s worth asking why it hasn’t.”
“A sudden meltdown of this ‘government sponsored enterprise,’ as former Federal Reserve chief Alan Greenspan warned, could bring down America’s financial markets, dwarfing the impact of Enron’s collapse, and require billions in tax dollars to clean up the mess.”
“Scaling back Fannie, improving its oversight, altering its governing board, and other such steps are fine. But more root-and-branch reforms will be needed.”
The Associated Press. “While the federal government has garnered its biggest victory from the business scandals of recent years with the conviction of former Enron Corp. chiefs Kenneth Lay and Jeffrey Skilling, prosecutors could have their sights on a new crop of potential targets.’
“Regarding Fannie Mae, the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight are looking at the roles of several current and former executives, including ousted Chairman Franklin Raines, in the accounting failures and whether they should be forced to return millions in compensation.”
“A criminal investigation of the company by the Justice Department is continuing.”
I believe that’s the first time I have heard the MSM mention a criminal investigation of FNM since 2004!
I think if the RE pundits are afraid of this, they should quickly move headquarters to the Netherlands.
Last week we finally had the court decision on the Dutch version of Enron, the biggest business/stock market scandal in Dutch history (about Ahold and their US operation US Food Service). The guys in charge only got proforma convictions (’they were already severely punished by the negative publicity’) and a fine that amounts to less than 0.5% of their net worth.
Not a surprise, because it follows the pattern of previous court decisions regarding big stock exchange scandals. And no surprise again that the Dutch real estate market is an extremely popular investment for international criminals (especially those from the US)
This sounds very similar to the Congressional investigations in 1931-1933 which resulted in the Securities Act etc of 1933. Not surprisingly in the midst of the Depression.
When the crackdown is in force, that’s when we’ve hit bottom. That’s probably 2 or 3 years away.
Let’s remember that “Depression” was the *euphemism* used by the powers-that-be at the time to linguistically anaesthetize the reality of the situation: the more correct name used previously in a sharp credit-contraction downturn was “economic panic”.
So the “Great Depression” was an ironic phrase…..today it would be witten like the great “”"Depression”"”, employing snarkquotes.
Well its my opinion, & it is unfortunate that i think this way, HOWEVER!
The Government has been overcome by GREED. WeE have criminals in every order of business / agency. There is NO one looking out for “We the People”… Fnm, HUD, FEMA, now homeland security…the indivivuals are simply out to line their own pockets OR their benefactors. And if an honest man or woman enters the system to clean things up or do the peoples business, they soon become corrupted or resign!
Sorry but that is the way it is….IT is fully understandable in a “secular society” that no longer beleives that a higher power / judgement is to come.
Can we please stay clear of politics and religion as much as possible here. I don’t want to see this turn into a yahoo stock message board.
I was thinking this topic over and it occurred to me that Fannie Mae IS part of the government, in a way. Sure, they have stockholders and a board. But don’t the top appointments always have a political connection? One of the less covered facts from the OFHEO report was that a lobby connected board member was Reagans chief of staff, or some such position. This baloney goes way back.
Now this makes me inclined to think that Raines and co. won’t see a court room, because the arms of the government seem to never be called to account. But, I was skeptical when some posters here suggested developers and lenders would see legal action, and that has already started.
I recall congressional hearings when the S&L’s blew up. The speaker of the house eventually left office. When we see a little daylight on what’s been happening the last few years, it might prove a surprise.
I don’t disagree Ben. What I’m talking about is a pissing match between Republican and Demcrats and the “I hate Bush” or “I hate Liberals” crowd. I’ve seen this happen on the Patrick site and it was like a virus.
But, I hate both…
It is not a question of Republican or Democrats. It is all about doing the work of the people.
Easy money is what corrupts people…politicians see the easy money made by speculators, CEOs, and what in on it. We need to purge the system and move to a system where people get rich by adding real value to the economy not merely flipping property.
I agree. Do not know about the other organizations you mentioned but certainly FNM management were not thinking about We The People. It is now clear that the books were cooked for individual gain. Yet why are the Senators of our country not pushing for open hearings. They love the face time, but do not seem willing to push this one.
I suspect that a lot of the slush money went to the Senators that would be responsible for any open investigation. Too much noise from Capitol Hill and you might see leaked memos appearing, that mention certain campaign contributions or worse. Also, Greenspan has warned the Senate about the consequences of a messy failure.
Don’t expect too much from the Senate on this one.
Remember Sen. Alan Cranston of California? The Cranston name was very powerful and popular in both Sacramento and DC, but he threw it all away for “more” money; he already had enough, but it just wasn’t enough!
I thought that the current administration was a big proponent of the deference to a higher power creed. Just goes to show that the politicians who talk most loudly about God are the ones we should trust least.
Amen Brother!
http://tinyurl.com/ksrsf
If people like this USB analyst in the story above continue the see no evil, hear no evil, speak no evil routine. I would say the answer is no
It should put such fear into those at the top. They should all be in the same place. I don’t have much hope for that though.
Nope. I do not think it will stop them! Just like bank robbers getting convicted does not stop other bank robbers from holding up banks. Crime is a gamble and Americans love to gamble.
Unfortunately I agree. People engage in unethical behavior because they think that they, unlike “those other idiots” will fly under the radar and won’t get caught. Or they find ways to convince thenselves that what they are doing isn’t wrong for them for whatever reason. Heavy sigh. Personally I like being able to sleep at night more than quick riches but I often feel like a minority in that belief.
The MBSec & RE industries don’t think they are doing anything wrong. To be perfectly honest they aren’t. Now, hold on guys, put down that rope. Let me explain. Even the wink, wink No Doc loans are not “wrong.” Yet. Unwise lending practices will no doubt ultimately prove disastorous but not now and we don’t have a way to legislate wisdom. A return to trend could at the overshoot disgorge $7-$9 trillion in paper wealth. What’s that? $25,000 per person in the US? Hmmmm, just about the same as the national debt. Anybody crushed under their share of that?
Ultimately we will learn and not repeat these mistakes next time. We will however make awhole new bunchof mistakes.
I wouldn’t be so sure that these mistakes will not be repeated. The amount of time that will pass before a repeat will be proportional to how badly the current situation turns out. Apparently the last S&L collapse of 1988 was only bad enough to prevent mistakes for about 12 years, if you count 2000 as the first year of the current bubble. Does anyone have a better date for when the lending standards were lowered this time?
Here’s a point that seems to be missed by many over and over again. With the exception of 40-50 yr mortgages, and the sole reliance of fico scores to determine credit wortiness. The latter which started pre-bubble. There has been no lowering of lending standards. Those products like the ARM’s and Neg-Am’s have always been available. Cheap Money just made them affordable to the masses.
Exactly. What did they do wrong? Give people what they want? A mortgage?
FNM and FRE have it in their charter that they are to make homeowning more affordable. They have certain “goals” as far as lending to low income people. It’s seen as a good thing. Yes.
And they are not even the ones selling the negative amortization stuff.
There are serious problems with the veracity of stated income and no-doc loans in SoCal in last several years. Yeah, they’ve been around for a while so that self employed people could get mortgages, but they’ve been abused by the mortgage lending industry. Read Socalmtguys sight (Another F’d Borrower) The link is here on Ben’s site. He explains the problems with it from an insider’s standpoint.
They were abused by sheeple greed. The mortgage industry cannot take all the blame for this. You can’t sell it if there’s no market for it.
Wrong? Well we won’t know that until they open their books again. But here’s one Enron like tidbit that was reported and quickly forgotten: Fannie has thousands of ’special purpose entities’ set up off shore.’ Enron only had 6 or 7 hundred. And that’s where the fraud was to be found.
And what about the derivative risk that is apparently so tangled that hundred of accountants and $400 million dollars haven’t produced a measure of it? IMO, when corporations purposefully muddy the waters, there is a reason.
My point is, FNM mantipulated their books for personal gain. That, my friends, is not in their Charter! It stinks to high heaven and if you do not think it wrong, then you have a very different view of the world than I do.
Ben-
Did you post information about the off-shore account. I must have missed it. I would like to read that.
“IMO, when corporations purposefully muddy the waters, there is a reason.”
True enough, but those “issues” were there long before this bubble or Raines.
I’d like to see the evidence for the “off-shore” accounts. Of course they have special purpose entities - ironically, the market demands them BECAUSE of the fear of bankruptcy. They are the mechanism that ensures that the bankruptcy of the securitizer won’t interfere with the cash flows of the securities, so long as the underlying mortgages themselves are still throwing off cash. The market wants to see an SPE “own” the underlying mortgages as insulation. Private label securitizers use the same framework.
FNM as a fairly autonomous unit inside of itself that manages their stock / investing portfolio. They have a staggeringly large amount of cash under their management, and I would not be surprised if they have in fact set up entities “off-shore” to allow them to better invest in forgien markets. My suspicion is once the Managment fakery is investigated, that group (Portfolio) is where they will find the dirt next. Even back in the mid 90’s it had a very Enron / California Energy Market feel to it.
Yes, I posted that info at the peak of the Fannie reporting in the spring of 2005. These are entities, not accounts.
searching the old site doesn’t turn up anything for the words “off shore” or “offshore” I’ve looked at their SEC filings, and done some google searches, and can’t find anything that indicates they have offshore SPEs.
I thought ARMs weren’t in use until the early 1980s and only came about because of the hyper-high fixed rates of the day.
There’s two aspects of this gravy train that have the potential for national scandal, IMO. One, that wall street keeps repeating that the MBSs’ have some guarantee when they don’t. I for one will carry the biggest sign to that protest march. The second is the appraisal industry. When the public gets wind of the massive fraud that has been going on, I expect some people will get fried. The Ameriquest ’settlement’ didn’t put one person in jail, but the company isn’t off the hook as many claimants didn’t sign on and nobody can make them.
As for the $25k; even many ‘wealthy’ people I know run very thin when it comes to actual cash. Especially if they have a small business. Doctors and such have cash.
Fair enough. For my money the appraisal industry is the prime candidate for disintermediation. Instead of low ethics, low diligence inspectors we’ll see the equivalent of FICO scores for houses. Used to be that there were too many variables to accurately determine house values. Notice I said house values; sticks, lumber, cement sure but also tax rates, auto insurance, utility rates, etc. These are house values as divorced from home values. People will always pay a premium for certain home characteristics but that’s not part of the equation because the next person may differ. So, just evaluating house values we’ve got enough relevant information today to be very accurate. We don’ need no stinkin’ appraisals.
This has some real long term consequences. My house is extremely energy efficient but that isn’t a valued characteristic by many and a difficult concept to quantify in the past so it has been typically ignored. How much would a Scottsdale resident think a house that needs no air conditioning at all is worth more per month? The Buffalo denizen learning the winter heating gas bill was $60? For the entire winter heating bill. Point being information will make appraisal obsolete for several reasons. It will also make title insurance a mere county recording fee process.
Sunlight will disinfect this vile infection.
agree, good points.
I would like to add this: in Europe (and probably in the US as well?) most appraisers are very small companies; usually just a one or two person office, or they are some small spin-off or department of a realtor office.
Also, they are making reports with ‘hard facts’ that can be disputed at a later time (while realtors often say a lot of things that never are put into writing). And they probably make far less money than realtors, developers and lenders and are usually less ‘connected’ to high level politians and big business.
because if this, I think the appraisers are likely to get fried first. They are easy prey (and nice scapegoats) when things go wrong.
Most state appraisal boards are so desperately underfunded that the worst appraisers know they’ll probably never be held accountable. Many states are backed up a couple of years with complaints waiting for investigation, and most complaints are from homeowners upset that the appraiser didn’t value their property at the value they (the homeowner) thought it was worth. Even if busted, it’s very, very rare for an appraisal to have their license revoked because the worst ones know that they can threaten the board with a hefty lawsuit…something most boards can’t afford. The bad guys get a slap on the wrist, if that. It’s enough to make an honest and ethical appraiser want to puke, knowing that there are some who don’t think twice about putting a homeowner upside-down with an inflated appraisal for just a $300 fee and promise of future work from some scumbucket mortgage broker.
Most attorneys won’t take the case if a homeowner wants to sue for any losses due to a bad appraisal, because they quickly learn that the appraisers Errors and Omissions insurance is void IF the appraiser has violated the USPAP (Uniform Standards of Professional Appraisal Practice) that all appraisers are supposed to abide by. 9 times out of 10 there’s a violation. Can’t get blood out of a turnip, and usually the homeowner’s loss isn’t as much as what the legal fees would be to pursue the matter. Let’s not forget that those homeowners who have been wronged the most are no longer in a financial position to pursue it anyway.
I know a couple of people who are review appraisers for major lenders who have been told that under NO CIRCUMSTANCES are they to turn in fraudulent appraisals to their respective state boards. The lenders want to keep the problems in-house and not draw any public attention to the worst offenders. A cushy staff appraiser salary will keep things nice and quiet.
Sadly, the general public has no idea how bad it is, and what I just mentioned is the tip of the iceberg.
Demos did a report on appraisal fraud early last year. It’s a good read for those who may not have already seen it.
Here’s the link. Once open click the “View the Document” PDF link.
http://www.demos.org/pub485.cfm
I quit appraising nearly a year ago because I felt that most of the “comps” in my area were already so badly tainted with fraud and speculation that it’s nearly impossible to come up with a credible appraisal. Besides, most mortgage brokers won’t hire an appraiser unless they guarantee to get them the ‘needed value’ to make the deal close before ever laying eyes on the place.
IF lenders start handing bad loans back to the mortgage brokers who originated them, I can see the MB’s pointing the finger of blame on the appraisers (errrr…that they hand picked for their ability to make the deals work).
Life is good since I made the decision to leave the profession. Maybe after the big purge I’ll go back to it, that is if the general public and lenders decide that they really want an unbiased opinion of home values.
End of rant.
The ex-CEO would be very lucky if he only had to return his bonuses. Investigators might be able to recover enough evidence that the CEO supported fraud to get a higher bonus. I give this guy a 50/50 chance for jail time.
No. I don’t think there will be any jail time. Oh how I wish, though…
I think there will be jail time. The masses are fed up, and once they discover their savings have been looted they will demand retribution. Look at Ken and Jeff. They looted and scammed for 5 years until they were finally busted in 2001.
The wheels of justice grind slowly, as Daniel Mudd and Franklin Raines are about to discover.
Seeing a rich man in handcuffs makes us feel better, and we forget that the apparatus which has engaged in a massive transfer of wealth (swindle) goes merrily on. Meet the new boss, same as the old boss.
Justice? Hardly. Seeing a rich man in handcuffs only distracts from the reality that a massive transfer of wealth (swindle) has taken place. The system goes on. Ken Lay may die in prison, but the Enron workers will still be poor. Meet the new boss, same as the old boss.
I am a former Enron worker.
I took a hit but am not poor.
The dumbass employees that had 100% of their 401k in Enron stock deserve to be poor.
I know 2 that lost multi-millions due to that bonehead move.
They were jerks then. Now they are just poor jerks.
I am sorry, the masses are asleep. They barely understand where the mortgage $$ comes from, let alone how the FNM fraud happened. If you ask an average person what Fannie Mae is, you will get one of these answers
1) Never heard of it
2) Don’t they make those boxes of candy?
3) They are the government agency that insures my mortgate.
Most people have no clue where the mortgate $$ comes from, or what the exposed risk is at this time in history. By in large it seems they think it happens more or less by “magic”.
Enron is a big story because everyone is pissed about energy costs, and they wiped out some people’s retirements in a fairly high profile way. “The Fannie Mae Scandal ™” won’t light up until it reaches into their lives and causes problems. Or it becomes an election demogauge issue.
Appraisal is partly art anyway, so it’s doubtful anyone gets prosecuted for it. If the neighbors 1000 ft bungalow went for 500K, then a fair appraisal on a 1,200 foot bungalow is 550K. And on it goes. Throw in the expectation of increases (however slight) and it’s all justifiable.
As far as FNM being “reigned in”, you need to be specific. The “systematic risk” Greenspan, etc. have pondered is related to their INVESTMENT risk, that is they OWN some of the same MBS that others do. They made to mention whatsoever of the systematic credit risk that they have. In fact Greenspan would want FNM/FRE required capital to be reduced by about 90% and in return they would give up their profitable investment in MBS sideline. They would be all credit risk, no interest rate risk.
So sure, there was fraud etc. uncovered, but it wsn’t as though FNM was selling 1 billion in MBS backed up by 100M in mortgages. That’s the fraud the market would be worried about. That’s why MBS didn’t move on the news.
I don’t think anyone believes capital punishment deters murder. No, Enron convictions will have no effect on the RE business. Sarbanes-Oxley created a new business (Sarbanes-oxley compliance) for accountants who previously failed to protect Enron sharelholders. The only thing that can improve business ethics are for business people to have…ethics. Unfortanely the pressures, personal and professional, to cook the books are many. The benefits of honesty are much less tangible and immediate than a massive stock option exercise. Making a few thousand dollars by selling someone a mortgage they should not have (but want very much) can be rationalized a thousand ways. Such is the state of the world today. Protect yourself as much as you can because there really is no one else looking out for you.
No state run capital punishment doesn’t deter crime, but concealed carry weapons laws do!
What I don’t understand is how did Lay lose all his money? He claims to have less than a million. Is he stashing it in other countries? I heard he lost 400 mil in Enron stocks. Where did all the other money go?
Read about I answered my own question…. what a dick.
Read about Answered my own question.
What a prick… they should take it and let the family hang. They caused so many families to fail financially. How could he look in the mirror each morning?
One saw others involved, “Don’t forget borrower fraud, e.g., stated income? The mortgage insurance companies are going to lobby government for the FB’s to be dragged before a judge for their greedy ways.”
A classic example of chutzpah is the child who murders his parents, then asks the court for leniency because he is an orphan.
There is a fundamental disconnect between risk and accountablity here. And plenty of chutzpah.
A gold article also compares FNM and Enron in an aside:
“In our view, Fannie Mae is more like Enron than Enron could ever be. This week’s news reflected the building anger at former Fannie executives in that purported $11 billion dollar scam they devised to gain outrageous bonus payments. Since they are a quasi, queasy, government capitalistic fraud, we say they all walk and the taxpayers get stuck. They are holding such a screwed-up accounting mess, their 800 full-time auditors cannot provide a bottom line. Last we heard the answer arrives in 2007 after three postponements. We say the taxpayers will never know the answer.”