Great frauds in history... Lee B. Farkas’s dodgy mortgages

Lee Bentley Farkas transformed TBW into one of the largest mortgage brokers in the US – his fraud is reckoned to have cost around €3bn.

Lee Bentley Farkas was born in Albuquerque, New Mexico. He dropped out of college to run the family insurance firm after his father died. After it floundered, he drifted for a period, before setting up a construction company in Ocala, Florida, which failed in 1989. In 1991 he bought a small mortgage company called Taylor, Bean & Whitaker (TBW) for $75,000, funded by a loan from the mother of a friend. Over the next 18 years he would transform TBW into one of the largest mortgage brokers in the US. By 2008, it was dealing with $35bn a year in mortgages.

What was the scam?

TBW originated the mortgages, then quickly resold them to various investors, relying on Colonial Bank, one of the largest banks in the region, to provide short-term funding. Consistent losses meant that TBW’s overdraft with Colonial grew and grew. Farkas persuaded Catherine Kissick, an executive with Colonial, to hide the overdraft from her superiors. Meanwhile, he started including fictitious mortgages in the bundles that he resold to investors. With debts continuing to mount, Farkas borrowed even more money from large financial institutions through a subsidiary, using mortgages that were either fraudulent or pledged for multiple loans as collateral.

What happened next?

By early 2009 Colonial Bank was on the verge of going under. Realising this would expose the true extent of his overdraft and by implication his fraud, Farkas joined a consortium of investors that offered to recapitalise the lender in exchange for support from the government’s crisis-era Trouble Asset Relief Program (TARP). Auditors hired by the scheme quickly discovered evidence of fraud and alerted the FBI. Later that year TBW declared bankruptcy. Farkas and Kissick were convicted of fraud and received hefty prison sentences.

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Lessons for investors

Total losses from the fraud are estimated at around $3bn and Farkas’s use of mortgages as collateral for multiple loans caused legal chaos for many unfortunate homeowners. The collapse of Colonial, which lost around $500m with TBW, was the sixth largest bank failure in US history; the Federal Deposit Insurance Corporation lost $2.8bn in the subsequent rescue. Much of this could have been avoided had the lenders followed the example of Fannie Mae, which cut ties with TBW back in 2002 over claims that some of the mortgages it had been sold were fraudulent.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri