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Feds Investigating Possible Fraud at General Electric’s Former Subprime Unit

WMC mortgage target of federal probe, sources say

By Michael Hudson and E. Scott Reckard

iWatch  News | News Report
From The Center for Public  Integrity

Federal authorities are investigating possible fraud at General Electric  Co.’s former subprime mortgage arm amid increased public pressure to hold Wall  Street accountable for its role in the financial crisis.

The FBI and the U.S. Justice Department are looking into potentially criminal  business practices at Burbank, Calif.-based WMC  Mortgage Corp. during the home-loan boom, according to four people with  knowledge of the investigation. They declined to be identified because of the  sensitivity of the investigation.

The government is asking whether WMC used falsified paperwork, overstated  borrowers’ income and other tactics to push through questionable loans, two of  the people said. They said the probe appears to be focusing on whether senior  managers condoned improper practices that enabled fraudulent  loans to be sold to investors.

“It’s mostly about: Did they knowingly sell mortgages into the secondary market that they knew were fraudulent?” said one person with direct knowledge of  the investigation. A spokesman for the FBI declined to comment, and the Justice Department did  not return telephone calls.

Russell Wilkerson, a spokesman for GE, said the company “as a matter of  practice” cooperates with law enforcement on inquiries but does not comment on  specific investigations. However, he said any allegation that WMC sold large  numbers of fraudulent loans to investors was false.

GE acquired WMC near the height of the mortgage boom in 2004,  giving it a major presence in the growing subprime lending market. But by 2007  the California lender was hemorrhaging money and slicing into the conglomerate’s  earnings.

The unit was shut down as the housing market buckled. Since then,  investors have launched a string of civil lawsuits, and federal authorities  began a criminal inquiry.

The FBI’s San Francisco office indicated that it has been looking into WMC’s  business practices for nearly two years, according to one of the people who  has knowledge of the investigation. The bureau has examined individual WMC  loan files and has begun contacting former employees about how the lender  handled the sale of mortgages to investors, this person said.

WMC recorded the second-highest number of  foreclosures on higher-risk mortgages in America’s 10 hardest-hit real  estate zones, according to the U.S. Treasury Department. The company was second  only to now-defunct subprime lender New Century Financial Corp. of Irvine,  Calif.

For instance, the Treasury report said WMC’s foreclosure rate topped 40  percent in hard-hit California areas such as Merced, Modesto and  Stockton.

The FBI and Justice Department had little success in prosecuting mortgage  executives after launching investigations in 2008. But there has been increasing  pressure from groups including labor unions and Occupy Wall Street, to find  culprits for the devastating housing crash that  triggered the financial crisis.

Subprime lenders have long been in the cross hairs.

They issued hundreds of billions of dollars in mortgages to people with shaky credit, then bundled the loans for sale to investors as highly rated securities.  When the borrowers couldn’t pay their mortgages, the investments collapsed — leaving investors and lenders saddled with toxic debt.

Lawsuits in state and federal courts have charged that WMC and GE misled  investors and other parties in the sale of mortgages and mortgage-backed  securities.

An investor lawsuit in federal court, for example, said that a  $550-million pool of mortgages originated by WMC and another subprime lender,  EquiFirst Corp., included numerous examples of fraud. The lawsuit said a  review found inflated borrower incomes and other “material breaches” in 75  percent of the loan files sampled. GE said it would “vigorously defend” itself, adding that the complaint is “based upon a flawed statistical sampling of a small number of loans.”

“WMC had in place processes to detect and report fraudulent activity,” Wilkerson, the GE spokesman, said. “When any allegations of misconduct at WMC  were raised to GE, they were investigated and given an appropriate response by  WMC, including the termination of employees.”

WMC was a wholesale lender that issued loans through a network of independent  mortgage brokers, making it a less-familiar name than giant retailers such as  Ameriquest Mortgage Co. and Countrywide Financial Corp. Still, in 3½ years under  GE’s ownership, WMC issued roughly $110 billion in risky home loans.

Federal prosecutors in Los Angeles have said they investigated three  prominent high-risk home lenders in Southern California that melted down — Countrywide, New Century and IndyMac Bancorp — without finding clear evidence  that top executives intended to defraud anyone. No criminal charges were  filed.

Some settlements have been reached. Countrywide co-founder Angelo R.  Mozilo paid $67.5 million — much of it covered by insurance — to resolve an SEC  case.

Other executives are contesting the suits. Former IndyMac Chairman  Michael W. Perry has even created a blog, nottoobigtofail.org, on which he  argues he has been scapegoated with false accusations.

The Justice Department has been successful in only two major criminal  investigations into the mortgage crisis. Both ended in guilty pleas to  egregious fraud. One, at Taylor, Bean & Whitaker Mortgage Corp. in  Florida, included the creation of fictitious loans. The other, at U.S. Mortgage  Co. in New Jersey, involved selling the same loans twice — once to credit unions  and then to home finance giant Fannie Mae.

Some former WMC employees say sales staffers at the lender used  fraudulent practices to push through loans borrowers couldn’t afford.

Eight former employees told iWatch  News that WMC managers ignored them when they flagged loans  supported by misrepresentations such as fake bank statements and pay stubs.

“They didn’t want to hear what you found,” Gail Roman, who worked as a loan  auditor at a WMC office in New York, said. “Even if you had enough documentation  to show that there was fraud or questionable activity.”

Some ex-employees claim GE officials did too little to root out fraud at WMC,  despite warnings from whistleblowers who worked inside the lender. GE disputes  those allegations.

White-collar crime experts say the WMC criminal probe is unusual at this late  date — more than four years after subprime lenders began to collapse.

“In that area I haven’t heard boo these days,” said Orange County defense  attorney David Wiechert, a former federal prosecutor.

This story was the result of a reporting partnership  between iWatch News and the Los Angeles Times.  Michael Hudson is a staff writer with iWatch News and E.  Scott Reckard is staff writer with the Times.

Hudson’s previous reporting on General Electric’s subprime unit can be  found here.

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