Friday, January 14, 2011

There Were Many Reasons For the Housing Meltdown; Fraud Was One of Them

When things start melting down and trouble ensues, its a natural human tendency to blame. People seek to shift responsibility from themselves and onto others. Scapegoats make people feel good. It's nice to have a whipping boy, someone or something on which to out take your frustrations.

In the case of the housing meltdown, many people still blame sub-prime borrowers. But so called Alt-A borrowers also defaulted in mass, and even prime borrowers lost jobs and were foreclosed upon. Commercial real estate went bust as well. That certainly wasn't the fault of sub-prime borrowers.

The problems in housing were related to a credit binge, or "irrational exuberance", as Alan Greenspan so famously referred to it. There was far too much cheap money available, and everyone seemed to think that home prices could only escalate — indefinitely.

If people couldn't really afford their mortgage in the long term, the feeling was that their house would continually appreciate, offering them greater equity and a stronger position for refinancing down the road.

There were no money-down loans, negative amortization loans, stated-income loans, interest-only mortgages, adjustable-rate mortgages (ARMs) and options that let buyers choose their payment (including interest only) on loans that would reset within five years.

Option ARMs were still being granted by banks as late as 2007, which means those particular mortgages will continue to have problems through at least 2012. If people are defaulting even now on low-rate teaser mortgages, what happens when those rates reset higher?

Lots more foreclosures, that's what.

But these problems did not suddenly creep up on us, or jump out of nowhere in 2007 and 2008. They were a long time coming, and the FBI knew this as early as 2004.

Back then, the FBI was investigating the mortgage-lending industry and warned that mortgage fraud was "epidemic". And the Bureau gave notice that if these practices — perpetuated by unscrupulous professionals and organized crime groups — were not curtailed, the fallout would be worse than the S&L Crisis, which cost taxpayers $132 billion.

The nations' chief law enforcement officers said they were investigating the dealings of suspect mortgage brokers, appraisers, short-term investors, and loan officers.

The FBI also noted that the number of open investigations had increased more than fivefold in the period from 2001 to 2004, reaching more than 500 by June of that year.

The mortgage industry clearly knew that there was trouble afoot, noting that there had been 12,000 cases of suspicious activity in just the first nine months of 2004 alone.

However, the Bureau had just 250 agents investigating these crimes, compared to the more than l,000 who handled the S&L crisis in the 1980s.

The FBI was utterly overwhelmed, saying, "The thousands of financial fraud investigations now underway are putting a strain on the bureau's ability to fight other crimes. An explosion of mortgage fraud cases has stretched the FBI so thin it's having a hard time investigating other white collar crime."

Ultimately, many of the FBI's corporate crime experts were reassigned to investigate and fight terrorism, leaving the Bureau even more shorthanded.

What this makes clear is that the problems in housing were brewing for quite some time before the eventual and ongoing meltdown, and that the FBI and mortgage industry were all well aware of it.

Clearly, there was fraud. But there was also greed, complacency and a blatant disregard for sound business and lending practices.

The money coming from the Fed was so cheap. It was easy for the banks to make money selling mortgages. And once the Big Banks came up with the idea of bundling and then securitizing millions of mortgages, the risk was sold off to unwitting investors around the world, many of whom got wiped out in the ensuing tsunami brought on by Wall Street's financial crisis.

It's easy to blame sub-prime borrowers, the Community Reinvestment Act, the Republicans, the Democrats, Fannie Mae, Freddie Mac, etcetera, etcetera. But it's obvious that there were many culprits here, not the least of which were the banks themselves.

There is something sweetly ironic about the fact that the fraudsters in the banking industry were themselves being swindled by equally unscrupulous industry insiders and organized crime groups.

If the whole house of cards hadn't fallen down on so many millions of decent and hard-working Americans, you'd call it poetic justice.

But ultimately, the bankers are never left holding the bag. It is always long-since passed along to some unwitting suckers.

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