Abstract
Koller’s White Collar Crime in Housing helps to illuminate one of the 21st century’s often misunderstood crimes: mortgage fraud. Koller is careful to point out the differences between predatory lending and mortgage fraud, providing clarity that mortgage fraud qualifies as ‘predatory borrowing’ (p. 29). Much of the previous literature on white-collar crime, even that which tries to categorize different types of white-collar crime, has found that mortgage fraud defies fitting a neat category, given its unique characteristics and sometimes devastating consequences. Despite mortgage fraud being categorized as a white-collar crime, it adds an extra dimension of perniciousness in that it also destabilizes neighborhoods in the process (Carswell and Bachtel, 2007). Koller is correct in her assertion that ‘…[mortgage] frauds have compromised the normative boundaries of the mortgage system, have contributed to the financial chaos, and have tainted a potentially valid and fruitful avenue for home ownership in the United States’ (p. 2).
Traditionally, those who perpetrate fraud do so with a particular calculated plan where the benefits of committing the crime outweigh the overall costs. In many ways, the mortgage industry resembled the type of loosely regulated atmosphere that constituted a ‘lack of institutional organization against misconduct’ (p. 43), which is common in other white-collar crime scenarios. Mortgage fraud has traditionally been considered a fairly low-risk venture. Before the housing crisis of 2007–2012, the typical penalty for mortgage fraud committed by a mortgage professional was possibly to receive a fine for the offence commensurate with the amount swindled and face a possible suspension. Along with the infinitesimal chance of being caught, the punishment hardly served as a deterrent for prospective white-collar offenders.
Koller notes that mortgage fraud is a fairly broad category and that this particular white-collar crime is actually variegated in nature. As a result, mortgage fraud offences cover such a wide swath of offences including, but not limited to, value or appraisal inflation, credit misrepresentation or misstatement of intent to occupy a property. Interestingly, these different types of mortgage fraud offences do not maintain a consistent prevalence pattern over time, with new types of fraud gaining more popularity seemingly with each passing year during the housing crisis. Geographic patterns also showed the evolving nature of fraud over both time and space. While the secondary data available on mortgage fraud occurrences during the mid-to-late 2000s suggested that fraud perpetrators may have shifted their attention towards operating within different states, Koller astutely recognizes that this geographic shifting may be more the result of better detection of such fraud in these states, rather than decreased occurrences.
Koller’s melding of the diffusion of innovations theory with the mortgage fraud crisis is both deftly handled and on the mark. As a result, the book is one of the rare examples of the application of this theory in white-collar crime research (Baker and Faulkner, 2003). Broadly speaking, diffusion of innovations theory explores all of the possible reasons that new products and processes permeate through society, eventually reaching a critical mass or saturation point (Rogers, 2003). The theory has much interdisciplinary appeal as well, covering such fields as education, marketing and public health, just to name a few. While innovations are most commonly thought of as products and services, Koller correctly notes that mortgage fraud schemes are more evidence of process innovations. As a result, criminal enterprises such as the evolution of mortgage fraud practices can be thought of in the same vein. Koller makes a compelling case that the innovation of subprime mortgages followed the same pattern that so many product innovations make, including increased economic profitability, improved access for wider audiences, increasing employment opportunities within the industry sector, and increased differentiation of the ultimate product for the consumer. As a result, she broadens the field of white-collar crime research to include the notion that mortgage fraud represents simultaneously a special case and test laboratory for how white-collar crime evolves, noting that it ‘cannot be explained by conventional criminological theories alone’ (p. 35). As a result, she merely picks up where Sutherland (1983) remained somewhat vague about not whether white-collar crime exists, but rather how it evolves over time in an attempt to gain higher profits and/or evade authorities. Koller is also fair to assess that conventional criminological theories do not necessarily help to explain the spread of white-collar crimes throughout the country. While complexity is noted as one of the potential barriers towards adopting process innovations such as mortgage fraud, it is also possible that the intricacies of some mortgage fraud schemes are the direct result of both differential association within an informal network of industry insiders and an ability to stay one step ahead of law enforcement in its efforts to identify mortgage fraud. Subprime lending also benefited from an ‘ease of use’, which is one of the critical components in making sure that products or services can experience widespread diffusion throughout society. Part of this ease of use was made possible through more relaxed regulation, which eventually helped to engender fraud-type environments throughout the industry.
One slight criticism with Koller’s writing is that she seems to transition effortlessly back and forth between her discussions on subprime lending (a legal practice) and mortgage fraud (a crime). While Koller tries to differentiate the two concepts by referring to subprime loan products as the ‘innovation’ phase and the fraud process as the ‘reinvention’ period, it is sometimes hard to separate the two concepts within her writing. As a result, the reader may lump these two concepts together unnecessarily, rather than seeing fraud as the natural offshoot of the development of the subprime mortgage industry. She correctly point out, however, that the two concepts diffused throughout American society at similar rates of dispersion but with mortgage fraud peaking at a slightly lagged pattern from peak periods of subprime origination activity (roughly 2 years). This finding alone may help banking industry regulators understand that there is a relatively short time lag that should be recognized between the time a financial innovation is introduced and the time that it starts being used for fraudulent purposes on a widespread basis. One can only imagine that in an increasingly technicized society such as ours, these lag periods will only become shorter over time, even though word-of-mouth and informal professional networks were commonly cited by Koller’s interviewees as information sources for many of these illegitimate activities. Also, such research is helpful when portrayed in the context of the housing industry, because there was a subsequent timeline between the critical mass of fraud activities and the ultimate collapse of the entire housing industry (roughly a period of 4 years).
Koller employed a survey method in which she recruited current and former employees in the mortgage finance profession to find out what sort of techniques were used within their institutions to help facilitate what she calls ‘the use and reinvention of the [mortgage fraud] innovation for illegal purposes’ (p. 72). Koller’s survey respondents assign blame to both government policy towards broad homeownership opportunities and the lack of an effective regulatory watchdog as potential accelerators of the process. What she refers to as a convenient ‘opportunity structure’ eventually served as the launching pad for future industry lawbreakers. She also contends that prime lending institutions and the secondary mortgage market became seduced by the lesser quality loans as a way of improving business, and as a result, they can be considered forerunners in the complex mortgage fraud puzzle. In exploring this line of accountability through her research, Koller is perhaps venturing into territory already well-trodden by other researchers and business authors (Immergluck, 2011; Katz, 2009; Lewis, 2015; Morgenson and Rosner, 2011), but it is interesting to hear the origin of the mortgage fraud epidemic being traced back to these people and institutions through the qualitative responses of the industry survey respondents.
Koller’s study suffers a little from a lack of geographic dispersion, with many of her research subjects operating out of the Midwest region of the country. Her study relies on highly qualitative information from a limited number of participants; thus, she recognizes that the results may not have a high degree of external validity and generalizability across the entire industry. Despite these limitations, however, Koller provides a good descriptive analysis using rich survey information from professionals that provides a glimpse into the inner workings of deviant players within the mortgage industry.
As is evidenced by the FBI’s continued efforts to try to combat new forms of mortgage fraud even several years after the housing crisis, Koller observes that this crime is ‘capable of changing over time’ (p. 145). An example of this is the outbreak of foreclosure fraud and reverse mortgage fraud after the more conventional mortgage origination fraud opportunities had dried up after the housing crisis began unfolding. Another thing that can change is the risk/reward dynamic associated with the perpetuation of mortgage fraud. Recognizing this, several states have taken bold steps in increasing the amount of jail time and punitive fines as a way of deterring this aberrant industry behavior (Crowell, 2014).
Because the field of research into white-collar crime is still relatively young (yet expanding), I feel that Koller’s work should be welcomed by many in the sociology and criminology research realms. Because of the unique perspective that she brings in examining the evolution of mortgage fraud over time, the importance of her work is duly noted. Koller recognizes that fraud continues to evolve into different forms over time and never really goes away, which is unwelcomed news to those communities that become the targets of such fraud in the future.