On July 9, 2013 I participated in a radio interview with a lobbyist for the 100 largest financial firms. The San Francisco radio program host asked me what question I would ask the lobbyist and I said that any discussion should begin with allowing him to state his view of what caused the crisis. In the course of his explanation, he bemoaned the fact that there was no warning about the crisis.
I found this ironic because I had just published that morning an article about how the appraisal profession warned us that the senior officers controlling the mortgage lending firms were engaged in pervasive “accounting control fraud.”
That article discussed the ten logical implications about the developing fraud epidemic that any competent financial regulator could have explained to FBI agents and Assistant U.S. Attorneys (AUSAs) on the basis of the facts contained in these two sentences:
“From 2000 to 2007, [appraisers] ultimately delivered to Washington officials a petition; signed by 11,000 appraisers...it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were 'blacklisting honest appraisers' and instead assigning business only to appraisers who would hit the desired price targets” (FCIC 2011: 18).
Note that the appraisers' petition began in 2000 and was public. When the regulators and prosecutors did nothing in response to the appraisers' warning the appraisers delivered it to government officials to ensure that no one could say they were not warned. What tends to be forgotten is that the mortgage industry's leaders did nothing to restrain the fraud epidemic and a great deal to expand it. A finance industry representative claiming in 2013 that no one warned the industry of the coming crisis when the warnings began no later than 2000 epitomizes the industry's death of accountability, integrity, and candor.
Any of the following federal actors could have responded to the appraisers' warning and prevented the crisis: the Federal Reserve, the FBI/Department of Justice, the lenders' CEOs, the secondary market purchasers', Clayton and the other “due diligence” firms, the lenders' and secondary market purchasers' internal and external auditors, the credit rating agencies, the SEC, Congress, and President Bush. Several of the state Attorney Generals had sufficient staff to prevent the crisis. The industry and federal leaders took no effective action. The states took two major actions against appraisal fraud, but neither was effective because they never understood the significance of the facts they found.
Public Integrity's Article on Appraisal Fraud
It turns out that by reading a single article, and adding some analytics, one can explain why the industry and the federal government failed to act and why the Department of Justice (DOJ) still refuses to prosecute the controlling officers of the mortgage lenders and secondary market purchasers. The most depressing aspect of the ineffective responses to the appraisers' warnings, however, is the two efforts by state prosecutors to respond to the epidemic of appraisal fraud. These efforts were well-intentioned but failed to even slow the epidemic of accounting control fraud because they failed to understand the implications of appraisal fraud. The single article, published in 2009, that allows us to understand the myriad failures is entitled “The Appraisal Bubble.”
The article is excellent in its presentation of many of the essential facts, but incomplete on several vital analytical areas. One of the odd factual weaknesses, which produces several analytical weaknesses, is that a story devoted to discussing appraisal fraud does not mention the appraisers' petition.