Fraudulent Mortgages in US Triggered International Financial Crisis

An Indian-American investor and producer of Bollywood movies has been convicted of mortgage fraud in the United States. How did he scam US banks and investors? How did US mortgage money end up funding Bollywood? To answer these questions, let's look at the broader story of US mortgage fraud and its impact on the international financial markets and the world economy.

The French stock market triggered worldwide shares selloff in August 2007 after BNP Paribas, the largest publicly traded bank in France, suspended investors’ ability to remove money from three funds that had invested in American mortgage securities. The bank said it had become temporarily unable to place a value on the funds, which have turned sour as increasing numbers of homeowners have defaulted on their loans.

The news came as a shock to many who mistakenly believed the damage from the US mortgage crisis was limited to the US financial markets. How did this happen? The answer lies in how the mortgage business has changed over the last decade. Until the 1980s, the mortgage lenders kept the loans on their own books and assumed full risk of default. The loan officers either knew the borrowers or checked them out carefully before approving the loans. All of this changed with the advent of securitization of debt that allowed the original lenders to offload their loans and pass the risk on to investors, including large foreign institutions such as BNP Paribas, who bought US mortgage-backed securities as investments. The rating agencies jumped into the opportunity to make money by giving AA and AAA investor grade ratings to some of the riskiest of securities backed at least partially by shaky or sub-prime mortgages issued to less credit-worthy, even fraudulent, customers. Others such as AIG created the appearance of lower risk to investors by issuing credit default swaps to ensure such securities.

Many of the subprime loans were issued to unsuspecting borrowers lured by dishonest mortgage brokers. These loans were based on false information such as exaggerated claims of income, inflated property appraisals, and given at very low teaser rates. Some of the borrowers knowingly took advantage of easy credit by falsifying information on their applications. Mortgages brokers and banks made enormous profits by issuing such mortgages which were then sold as securitized debt to investors. Needless to say, many of the borrowers started to default as soon as their rates and payments increased after the initial period of teaser rates.

Last month, I actually met a technician in Silicon Valley who came to do some work at my newly-purchased home. He asked me if I had bought my home through short sale or foreclosure. I said no. Then he proceeded to tell me that he had had two of his homes foreclosed recently. When I said I am sorry to hear that, he said it's no big deal. It turns out that he had borrowed 125% of the value on each of those homes at low teaser rates and pocketed the extra cash after paying for the homes. He rented the homes and then used the cash to buy two brand new cars and took a vacation. When the rates increased, he did not keep up with the payments and lost both homes. But he kept the cars, enjoyed his vacation and the kept leftover cash.

What this technician's story represents is only the tip of the huge mortgage default mess and massive investor losses. Yesterday's Washington Post reports that Vijay K. Taneja, a well-known Bollywood investor, has admitted to mortgage fraud in Virginia. Taneja pleaded guilty in U.S. District Court in Alexandria to a fraud enterprise that cost banks at least $33 million, the largest mortgage fraud case in Virginia in almost 20 years and among the largest nationally. Prosecutors said he created bogus mortgage loans, sold legitimate loans to more than one buyer and pocketed the proceeds of refinancings.

Taneja's recent movie, "Aap Ka Suroor" featuring Himesh Reshammiya, was released in June of this year. His concert "Incredibles" , featuring big Bollywood stars, toured the US earlier this year.

According to Washington Post, prosecutors told the judge that Taneja invested millions of his mortgage proceeds in Indian films and theatrical productions through one of his companies, Elite Entertainment, and that they are still trying to untangle the financial web. "He has millions of dollars unaccounted for," Assistant U.S. Attorney Stephen Learned said as he asked Hilton to order Taneja to be electronically monitored to ensure that he doesn't flee before sentencing. "There's so much money, and it's difficult to figure out where it all went."

The above two examples are just the beginning of the anecdotal evidence of fraudulent mortgages that are at least partly responsible for the international financial crisis we find ourselves in. The Federal Bureau of Investigation is investigating 19 major corporate fraud cases related to the mortgage crisis. The targets of most of those investigations have not been disclosed. In addition, the F.B.I. has 1,380 small mortgage fraud investigations now open in field offices around the country, a sharp increase over previous years, according to FBI officials. Other culprits include inadequacy of the risk models, lack of regulation of financially engineered products, and the actions of the US rating agencies. The US origins and the global nature of the problem requires concerted international investigation of the current crisis to develop a new regulatory regime and enforcement mechanisms that cover financially-engineered products such as securitized debt and credit default swaps and better oversight of the rating agencies.


Riaz Haq said…
A 50-year-old Indian-origin tech entrepreneur has been arrested in the US for an alleged investment scheme that defrauded more than 10,000 victims of over $45 million and netted him several luxury cars and real estate.

Neil Chandran, of Las Vegas in Nevada, was arrested on Wednesday in Los Angeles, the Department of Justice said.

According to the indictment, Mr Chandran owned a group of technology companies that he used in a scheme to defraud investors by falsely promising extremely high returns on the premise that one or more of his companies, operated under the banner of "ViRSE," was about to be acquired by a consortium of wealthy buyers.

Mr Chandran's companies -- which included Free Vi Lab, Studio Vi Inc., ViDelivery Inc, ViMarket Inc, and Skalex USA Inc, among others -- developed virtual-world technologies, including their own cryptocurrency, for use in the companies' own metaverse.

The indictment alleges that Mr Chandran caused other individuals to make various materially false and misleading representations to investors, including that investors in his companies would soon receive extremely high returns when one or more of those companies was purchased by a group of wealthy buyers.

In fact, according to the indictment, there was no such buyer group that was about to purchase the companies for the claimed returns; a substantial portion of the funds was misappropriated for other business ventures and the personal benefit of Mr Chandran and others, including the purchase of luxury cars and real estate; and there were no prominent billionaires involved in purchasing Mr Chandran's companies.

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