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Since the mortgage meltdown and the onset of the economic crisis, the federal government has poured trillions of dollars into the support of the financial services industry. Regardless of whether the money was provided to banks directly or whether it was used to support relief efforts to help borrowers, U.S. taxpayers are footing the bill for many of the losses that were incurred as a result of risky loan programs and mortgage securities, and the ensuing collapse of housing values. * As is the case whenever there is a large federal program backed by hundreds of millions of dollars, the bailout programs supporting individual borrowers are tempting targets to those who seek to make a quick and illicit buck. * Because there are millions of troubled and underwater borrowers, and hundreds - if not thousands - of lenders and servicers involved in the administration of these programs, there are plenty of opportunities for fraud to flourish. Among the primary defenses against financial marauders are the inspectors general (IGs) for the various agencies and departments involved in dispensing federal funds. * Congress passed legislation commonly referred to as the Inspector General Act of 1978. The law created the position of inspector general for the U.S. Departments of Agriculture, Commerce, Housing and Urban Development (HUD), Interior, Labor and Transportation, as well as for the Department of Health and Human Services' Office of Community Services, Environmental Protection Agency (EPA), General Services Administration (GSA), National Aeronautics and Space Administration (NASA), Small Business Administration (SBA) and Department of Veterans Affairs (VA).

The Inspector General Act charged the IGs with conducting and supervising audits and investigations relating to the programs and operations of their respective entities, to recommend policies and procedures to promote economy, efficiency and effectiveness in the administration of such programs and operations; and with the duty to keep the various directors and Congress fully and currently informed about problems and deficiencies in the administration of such programs and operations and the necessity for and progress of corrective actions.

Although no one in 1978 could have predicted exactly the circumstances we now find ourselves in, it is clear that the inspectors general and their Offices of Investigation (Ols) exist in large part to protect taxpayers from fraud and abuse within the system and in government programs.

In recent years, a great deal of attention has been paid to deterring fraud in the financial services industry and in mortgage lending. One of the more well-known efforts is the interagency Financial Fraud Enforcement Task Force (FFETF) established by President Barack Obama in 201 1 to investigate and prosecute financial crimes through an aggressive, coordinated and proactive effort.

Members of this task force include representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local lawenforcement agencies. Together, this group provides a powerful array of criminal and civil enforcement resources to investigate and prosecute significant financial crimes; ensure just and effective punishment for those who perpetrate financial crimes; combat discrimination in the lending and financial markets; and recover proceeds for victims of financial crimes.

More recently, in his January 2012 State of the Union address, President Obama announced the formation of the Residential Mortgage-Backed Securities Working Group (RMBSWG) within the FFETF, which is charged with investigating securities-related frauds.

Given the attention the feds are paying to improprieties in the mortgage funding space, it seemed like a good time to take a look at what the inspectors general are working on and how they have teamed up to fight fraud together. To that end, I submitted written questions to the Office of Inspector General (OIG) for HUD and for the Federal Housing Finance Agency (FHFA). I also did research on Treasury's Special Inspector General for the Troubled Asset Relief Program (SIGTARP), since that office declined to respond to my questions.

HUD OIG

The Office of Inspector General for the Department of Housing and Urban Development (HUD OIG) is charged with promoting the integrity, efficiency and effectiveness of HUD programs in order to assist the department in meeting its mission of creating "strong, sustainable, inclusive communities and quality affordable homes for all."

The inspector general for HUD, David Montoya, was sworn in on Dec. 1, 2011. Montoya previously served as the executive special agent in charge, Office of Inspector General, U.S. Postal Service (2005-2011), the assistant inspector general for investigations, Office of Inspector General, Department of the Interior (2000-2005), an^ as deputy director/director of the Environmental Protection Agency's Criminal Investigation Division (1998-2000).

As HUD's inspector general, Montoya is the senior official responsible for audits, evaluations, investigations and oversight efforts relating to HUD's programs and operations. He observed that while HUD's primary focus is on Federal Housing Administration (FHA) loans and protecting the FHA insurance fund and its borrowers from fraud, some mortgage fraud cases can involve matters of mutual interest with other agencies.

In these cases, HUD OIG's ability to share information and investigative resources serves as a "force multiplier" to pursue and bring to justice those who are involved in criminal activity.

Inspector General Montoya notes that his office has worked successfully with the Federal Bureau of Investigation (FBI), the U.S. Secret Service (USSS)7 the Financial Crimes Enforcement Network (FinCEN) and other federal and state law-enforcement agencies to share intelligence and analysis to better identify and target mortgage frauds, and to capitalize on investigation and prosecution coordination.

This joint approach is also reflected in Montoya's position as a co-chair of the Financial Fraud Enforcement Task Force's Mortgage Fraud Working Group.

Montoya stated that while the HUD OIG recently attended the first meeting of the FFETF's new Residential Mortgage-Backed Securities Working Group, the RMBSWG is focused more on mortgage-backed securities (MBS) involving Fannie Mae and Freddie Mac, so HUD's involvement with this new financial crimes unit might be minimal going forward.

Montoya highlighted HUD's role as the lead agency for the Mortgage Fraud Working Group's Policy Committee as another example of the cooperative approach, noting that HUD OIG has been working to advise and coordinate with the Consumer Financial Protection Bureau (CFPB) on its redesign of the HUD-i settlement statement and the various disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The CFPB assumed primary jurisdiction of RESPA from HUD in 2011 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act financial reforms.

Montoya also pointed to the efforts of HUD's Civil Fraud Division in the Office of Audit in task forces dealing with scams targeting individuals attempting to avoid foreclosure and in the robo-signing settlement negotiations.

On March 1 3, Montoya released a series of reports on the OIG's investigation into foreclosure practices at Bank of America, JPMorgan Chase & Co., Wells Fargo & Co., CitiMortgage and Ally Financial Inc. (formerly GMAC). In each case, the OIG concluded that the servicer generally had not complied with applicable foreclosure procedures when processing foreclosures on FHA-insured loans. In each case, OIG concluded that process weaknesses led to servicer misrepresentations and that those misrepresentations "may have exposed [them] to liability under the False Claims Act." Montoya noted that these reports were used in negotiations in settlement of the case.

On Feb. 9, 2012, Montoya participated in the high-profile press conference to announce that the five largest servicers had agreed to pay more than $25 billion to address servicing deficiencies, and another settlement of $1 billion for loan origination deficiencies involving Countrywide Financial Corporation. This was the largest civil settlement the HUD OIG has participated in.

In another achievement of note, a recent HUD OIG investigation stopped a multimillion-dollar mortgage fraud scheme that was targeting seniors in southern Florida. Three loan officers and a licensed title agent conspired to solicit individuals aged 62 and older from Florida and around the country to refinance their existing mortgages with FHA-insured Home Equity Conversion Mortgage (HECM) reverse-mortgage loans.

One of the loan officers fraudulently altered legitimate property appraisals to falsely create the appearance of sufficient equity for the reverse mortgages to close. As an additional part of the conspiracy, the licensed title agent closed the loans but failed to pay off the borrowers' existing mortgages and then illegally diverted more than $975,000 of the re ver se- mortgage proceeds to a bank account controlled by the conspirators, who used this money for their personal benefit.

FHFA OIG

The Office of the Inspector General for the Federal Housing Finance Agency is the newest of the IGs, having been created as part of the Housing and Economic Recovery Act of 2008 (HERA). Steve Linick was confirmed as the first inspector general in 2010 and he is the senior official responsible for audits, evaluations, investigations and other law-enforcement efforts to combat fraud, waste and abuse within or affecting the programs and operations of FHFA.

FHFA OIG's oversight includes FHFA's regulation of Fannie Mae and Freddie Mac, and the 12 Federal Home Loan Banks. An attorney by training, Linick's experience includes serving simultaneously as executive director of the Department of Justice's National Procurement Fraud Task Force and deputy chief of its Fraud Section, Criminal Division, where he managed and supervised the investigation and prosecution of white-collar criminal cases. Those cases involved procurement fraud, public corruption, investment fraud, telemarketing fraud, mortgage fraud, corporate fraud and money laundering in addition to contract fraud cases relating to the U.S. wars and reconstruction in Iraq and Afghanistan (2006-2010).

Linick also served as an assistant United States attorney in the Central District of California (1994-1999) and in the Eastern District of Virginia (1999-2006).

Linick noted that the FHFA is coordinating its efforts with the CFPB, as it does with a number of other partner organizations, and that it will continue working with CFPB as it gets up and running. He noted that while the CFPB is obviously borrower-focused, and FHFA OIG is focused on fraud, waste and abuse related to FHFA and the government-sponsored enterprises (GSEs), both share a mission to fight fraud.

He noted that FHFA OIG is an active member of the new FFETF RMBS working group since Fannie and Freddie are, with a current market share of around 70 percent, effectively the entire secondary market. Linick added that the advantages associated with the RMBSWG include focusing attention and resources on securities frauds, which improves the government's ability to recover losses, prevent fraud, uncover abuses and hold accountable those who violate the law.

On the latter point, Linick highlighted the FHFA OIG's involvement in the case of Taylor, Bean & Whitaker Mortgage Corporation, where a group of executives conspired to devise various schemes to hide cash-flow shortfalls. These schemes involved defrauding Colonial BaneGroup, Ocala Funding LLC and the U.S. taxpayers, as well as the filing of numerous false records.

Additionally, the conspirators allegedly covered up financial diversions by selling loans owned by Colonial to Freddie Mac without paying Colonial for the loans. As a result, Freddie Mac and Colonial each believed they had an undivided ownership interest in thousands of the same loans.

The situation turned into one of the largest mortgage frauds in history, and the office of FHFA OIG was actively involved in the case. To date, seven defendants have been convicted and federal prosecutors won a $3.5 billion restitution judgment against the seven defendants.

Another case handled by FHFA OIG involved Marshall Home and Margaret Broderick of Tucson, Arizona. Home and Broderick ran the "Individual Rights Party; Mortgage Rescue Service," and charged individuals facing foreclosure $500, purportedly to make the proceedings stop by becoming part of a "larger overall bankruptcy liquidation."

Home later sought to place the United States into bankruptcy by falsely telling the Bankruptcy Court that he and Broderick had a financial claim of $250 billion against the United States. The pair then filed or caused to be filed in Bankruptcy Court 173 false claims relating to individuals participating in the Mortgage Rescue Service, including loans guaranteed by the GSEs.

Home and Broderick also inappropriately transferred at least 28 properties owned by Freddie Mac, with a value of more than $8 million.

Another case known as Home Owners Protection Economics Inc. (H.O.P.E.) involved four defendants who made misrepresentations to financially distressed homeowners - many of whom had loans owned or guaranteed by the GSEs - seeking a federally funded loan modification. The borrowers were instructed to pay H.O.P.E. a $400 to $900 upfront fee in exchange for a "virtually guaranteed" Home Affordable Modification Program (HAMP) modification.

H.O.P.E. misrepresented that it was affiliated with the homeowner's mortgage lender, that the borrower had been approved for a modification, that owners could stop making payments while waiting for a modification, and that H.O.P.E. would refund the fee if the modification was not successful. In exchange for the upfront fees, borrowers received a do-it-yourself application nearly identical to the HAMP application provided by the government for free, but H.O.P.E. customers had no special advantage.

SIGTARP

The purview of the Office of the Special Inspector General for the Troubled Asset Relief Program is limited to that program and HAMP, the Home Affordable Foreclosure Alternatives (HAFAJ program and the Home Affordable Refinance Program (HARP).

SIGTARP has teamed up with the Consumer Financial Protection Bureau and the Department of the Treasury in a joint task force to combat scams that target homeowners seeking help under HAMP.

This task force protects taxpayers by investigating and shutting down these scams and by providing educational programs to vulnerable homeowners. In particular, SIGTARP is concerned with investigating mortgagemodification schemes in which companies convince struggling homeowners to pay fees on the false promise of lowering the homeowner's mortgage debt or payments through HAMP.

"Mortgage scams harm not only homeowners but legitimate businesses and the market as a whole," said Richard Cordray, the recently appointed director of the CFPB.

"By joining forces with SIGTARP and Treasury, the CFPB hopes to protect Americans and the integrity of one of the largest consumer financial markets in the U.S," he said.

It is clear that interagency coordination and cooperation are crucial to the recovery not only of the mortgage industry but the housing market as a whole. Mortgage bankers and everyone involved in the housing industry must recognize that we are on the front lines of the effort to fight fraud every day. We, too, can play a role by saying something when we see something, and by cooperating where we are able to by sharing information and leveraging our experience and our technology to join in the fight against the criminals who seek to benefit from the nation's mortgage crisis.

Author affiliation:

Ann Futmer (based in Washington, D.C.) is vice president of business relations at Agoura Hills, California-based Interthinx. She can be reached at afulmer@interthinx.com.