At the height of the subprime frenzy, thousands of sales people packed into offices all over the country. Their mission: sell subprime loans. Its known now, of course, that hundreds of thousands of those loans were fraudulent. Loan officers misstated people's incomes, targeted minorities and the elderly, even forged signatures. These fraudulent loans were then bundled up and sold to Wall Street investors like Lehman Brothers. So, now five years after the collapse of Lehman, where are all those lenders and bankers who caused the collapse?
It turns out that many of the employees at the bottom of the subprime food chain were already criminals -- even before they started pedaling subprime mortgages. "One of the disturbing things we found is that a large number of the people that work in these places are probationers, parolees, very low-paid people that are essentially just picked out of Craigslist ads," says Elizabeth Henderson. She heads the real estate fraud unit of the District Attorney's office in Orange County, Calif., which was home to four of the six largest subprime lenders in the country.
When the market collapsed many of these low-level employees, who worked in boiler rooms cold-calling homeowners, lost their jobs. Some went to work in other fields, but others simply found a new way to fleece home owners. "Those people then morphed, when that market collapsed, into loan modification mills, and we receive complaints every day about loan modification fraud. So it continues," says Henderson.
Non-agency prime: Prime mortgages without Fannie Mae/Freddie Mac backing
Subprime: Mortgages issued to borrowers with credit scores of 620 or less
Alt-and Option-ARM: Stated-income mortgages and adjustable-rate mortgages with the options to vary monthly payments
FHA/VA: Mortgages backed by the Federal Housing Administration and Veterans Administration
The district attorney has successfully prosecuted a handful of people involved in fraudulent lending. From 2011 to 2012 the office made 15 convictions. Together those cases involved 545 victims whose losses totaled $173 million. But what about the people higher up the food chain -- the Wall Street participants who packaged and sold fraudulent loans? Where are they five years after the collapse of Lehman Brothers?
"The answer to that is that overwhelmingly they are simply where they were before except they are much wealthier," says William Black, a former bank regulator and expert in white collar crime.
He and his colleagues at the Federal Loan Bank of San Francisco were instrumental in exposing corrupt members of Congress during the Saving and Loan Crisis of the 80s and 90s. So it made sense that he was asked to testify before Congress in 2010. He explained to the Committee on Financial Services in detail how Lehman's collapse was the direct result of fraud. "It had an entire operation, Lehman Brothers, called Aurora that specialized entirely in making liar loans," says Black.
He also singled out Lehman as the largest purveyor of liar loans -- loans that required no proof of income -- in the country. After his testimony, Black was surprised that none of the committee members asked him any follow-up questions. To date there has not been a single criminal prosecution of any the Wall Street executives involved in the financial crisis.