The Wall Street Journal reports today that the Federal Bureau of Investigation (FBI) has opened criminal inquiries into 14 companies as part of an investigation of the subprime-mortgage crisis, FBI officials said. The probe is focusing on accounting fraud, securitization of loans and insider trading, among other areas.
The Journal says that the FBI wouldn't identify the companies under investigation but said it is looking into allegations of fraud in various stages of the mortgage process, from companies who bundled the loans into securities to the banks that ended up holding them.
Yesterday, Morgan Stanley and Goldman Sachs disclosed in regulatory filings that they had received requests for information from government and regulatory agencies related to subprime loans, but the companies didn't identify the agencies.
The New York Times says that the FBI has been warning for years that mortgage fraud is a significant and growing problem. In the 2006 fiscal year, it documented 35,600 suspicious-activity reports related to mortgage fraud, up from 22,000 the year before and as few as 7,000 in 2003.
Many of the cases the FBI has brought so far have focused on local or regional mortgage fraud rings that involve speculators, loan officers, brokers and other housing professionals.
Sharon Ormsby, financial-crimes section chief in the FBI's criminal-investigative division, said in an interview with the Journal that the bundling of both good and bad loans into single securities makes any possible fraud hard to untangle.
"The bundling of these loans is so huge, it's difficult for us to tear apart each of those bundles and say, 'OK, this bad loan is causing this securitization to fail."
The Journal says one potential angle is whether real loans were used to create mortgage securities. Typically, a mortgage security might hold thousands of mortgages.
Among other things, the Justice Department is likely to look at whether one mortgage was replicated across multiple securities as underwriters sought to meet high investor demand.
