PME604 Project Financial Management
December 18, 2012
Freddie Mac Fraud
The definition of fraud is “an intentional deception or deceit, perpetrated for profit or to gain some unfair or dishonest advantage” (dictionary.com). Fraud is a breach of law and can be punishable by law. Mortgage fraud is one of the financial crimes where a company materially misrepresents or omits information on its mortgage loan documentation in order to secure a loan larger than what is actually required for the business. It could be perpetrated by one or more participants, including the borrower, real estate agent, loan officer, appraiser or multiple related parties. Fraud not only destroys a company’s reputation and makes customers feel that accompany unreliability but it also hurts homeowners, businesses and the national economy. It is crucial for companies to prevent fraud. However, sometimes the company commits fraud unintentionally. Companies need to focus on knowing and studying the ways to prevent it. The U.S. government has a department, known as the U.S. Securities and Exchange Commission (SEC), which inspects frauds. The primary purpose of the SEC is to control the stock market and prevent company malpractices, especially involving the purchasing of securities and company reports. The SEC has the power to license and moderate stock exchanges, the companies, which securities can be traded, and the dealers and brokers who do the trading. Freddie Mac
There have been many famous fraud cases and Freddie Mac is an example of fraudulent practices. The Freddie Mac Company started in 1970 to expand the country’s residential mortgage markets and to create opportunities for home owners and reasonable rental housing. Freddie Mac played a key role in the US housing market. The mission of the company is to provide a stable and an affordable environment to the U.S. housing market. Freddie Mac contributes to the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment. An example of the secondary market is the purchasing and sales of bonds, option, stock and futures. The secondary market usually refers to loans which are sold to a mortgage bank such as Freddie Mac. This secondary mortgage market helps to increases the supply of money available for mortgages. Freddie Mac has played a key role in America’s economy.
In June 2003, Freddie Mac’s accounting scandal exploded when it leaked that the company had misstated earnings of about $5 millions, mostly underreporting them for 2000-2002 in order to meet with Wall Street earning expectations (ABC news, 2011). The government regulators charged Freddie Mac for hidden profits of billions of dollars. The SEC also ruled that Freddie Mac had violated accounting rules. The false profit of Freddie Mac was estimated at 9 billion US dollars, which is the equivalent to 40% of the company’s total earnings over the same period (Ballard, 2012). Freddie Mac reported that 2010 loan modification fraud trends include strategic defaults and the company reported false statements concerning assets, income, or the homeowner’s inability to pay. Loan modification perpetrators misinterpreted income and occupancy; pay stubs were altered, and sought changes that did not reveal financial hardships. The federal government developed Freddie Mac and Fannie Mae to increase the availability of loans, mostly because the government guarantees secured investor trust that reduced the cost of millions of mortgages. However, during many requirements of house, Freddie Mac distorted the government support to enrich shareholders and executives by making millions of sloppy loans (New York Times, 2011).
Types of Fraud
Identifying the common elements for fraud contributes to better fraud detection and investigation. Those common fraud elements might include inflated appraisals, loan level misrepresentation,...