Is Fraud The Cause of the Mortgage Meltdown?
October 24th, 2007
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There’s a lot of talk that fraud is at the heart of the mortgage meltdown. I think this is likely true to a great extent, but I am uncertain whether to blame borrowers, loan officers or underwriters.
Writing on the well-respected blog at EconLog.Orga>, Arnold King makes an interesting point:
“When I was at Freddie Mac, we presumed that any loan that defaulted within 12 months was fraud. Typical cases included inflated appraisals, loans that were sold to us as owner-occupied when they were actually investor loans, loans on vacant lots, totally fictitious loans…These were not just minor misrepresentations. They were pure mini-conspiracies to enrich mortgage brokers. In some cases, the broker did more than just take fees for originating junk loans. If you traced the recipient of the loan, you might find a close relative of the broker — a relative who never had any intention of repaying the loan.”
Truth is, there are millions of loans issued every year and yet mortgage fraud prosecutions are rare. FBI figures from its fiscal 2006 Financial Crimes Report to the Public show that:
“Through FY 2006, 818 cases investigated by the FBI resulted in 263 indictments and 204 convictions of Mortgage Fraud criminals. The following notable statistical accomplishments are reflective in FY 2006 for Mortgage Fraud: $388.9 million in Restitutions, $1.4 million in Recoveries, and $231 million in Fine.”
While prosecutions are rare, is fraud itself uncommon? Not just minor errors, but purposeful efforts to deceive lenders and investors? I’m not sure, but I suspect that fraud will decline substantially as lenders stop making loans with “stated-income” mortgage applications where borrowers guess how much they make and lenders conveniently don’t check.
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This entry was posted on Wednesday, October 24th, 2007 at 12:48 pm and is filed under , . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Listen to FHA Loan Pros columnist Peter Miller on American Public Radio:
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October 24th, 2007 at 2:11 pm
Peter, I’m sure that fraud is a big part of the mortgage problem and it will subside as we have to document borrowers’ incomes again.
I’ve been a mortgage broker for 18 years and few things have more professionally distressing than watching the hoards of new lenders swarm the business, rip off consumers, and laugh all the way to the Ferrari dealership.
The barrier to entry in our profession is so low that any slimy creature can crawl over it. That needs to change.
That said, the consumer is far from innocent. Going cold turkey after the day-trading tech bubble burst, the lure of quick profits in real estate promoted by all the seminar hacks and Flip That House TV shows was just the next designer drug for the avaricious.
I recently had clients who repeatedly sent me altered W-2’s in their loan packages, so eager were they to “cash in”. Do you think I could find a single soul to whom I could report that deception? Not.
October 24th, 2007 at 2:27 pm
Marc –
Thanks so much for your posting. Much appreciated.
Right now there is an effort to establish licensure standards for all loan officers — something that would at least create some sort of minimal standard before someone could go out in the world as a mortgage loan officer.
As to the buyers with the flexible W-2s, you have to decline the application. If the W-2 is fake, then you have to wonder what else might be inappropriate.
Please keep posting, we appreciate your experience and candor.
November 2nd, 2007 at 11:06 am
Why dont you blame the guys on wall street who saw an opportunity to make flexible guidelines, make multi millions and have virtually zero liability…cmon lets get serious, they didn’t care if they screwed up the economy because after the dust settled, they live above the rest of the economy. It’s a joke, it’s so obvious, yet so ignored, yet everyone is to blame though.
November 2nd, 2007 at 11:07 am
50% borrower, 50% broker, 100% blame on the people who trusted an unproven system and made ultra flexible guidelines to make millions
November 2nd, 2007 at 11:12 am
Matt –
Thanks for your post.
Certainly you make a good point. However, the real question is how do we stop toxic loans going forward. The answer is to cut off supply so there is nothing to securitize. This means having a system where loan officers must act as agents for borrowers and seek the best possible rates and terms.
October 27th, 2009 at 6:26 pm
Okay, where has common sense gone???? As a real estate investor, why are the banks and inspectors left off the hook here. When I bought my first house, it was inspected and both the bank and the title company relied on that inspection. Rather than add additional burden to the ones trying to increase the value of the local real estate, let’s put it where it belongs.