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May 4, 2008

Mortgage Fraud on the Table But..

Resolving the mortgage fiasco is going impossibly long, and while words like 'fraud' and 'scam' have been floating since the beginning, they are really only now making big news. Unfortunately they still haven't much referenced the collusion between the lenders and appraisers, and in taking it a step further, the local assessor officials. I began blogging at the beginning of this mess, Not Rocket Science and Confessions of a Mortgage Broker, trying to illuminate the 'Big Picture' in my view regarding the chain of events and participants. Appraisers and local property assessors played a bigger role in my situation than has been discussed in any meaningful way, and as events unfold it becomes more and more clear that my situation mirrors the national situation pretty closely. That having been said, I do not suffer from a 'impending doom' adjustable mortgage, and I did manage to buy my properties before the effects of what was happening hit the actual prices.

I will blog more about my own story another day, for now I just want to re-state the chain of events as I see them:

  • Interest rates drop to insulate us from the global economic decline of late '80's early '90's.
  • Home mortgage rates decline a sufficient amount (8% to 6%) to spur massive refinance loans.
  • Increase in refinance opportunities spawns massive increase in new lending company openings.
  • Increase in new loans spawns massive increase in new appraisal company openings.
  • Rate decrease lowers monthly payments on small 1st time buyer type homes enough to entice marginal buyers.
  • Greed Kicks In.
  • Inexperienced or questionable lenders target sub-prime market, develop/enhance 'no document' type loans.
  • Above spurs 'Sellers Market' in home sales, agents take cue and raise sales prices.
  • Lenders 'acquire' friendly appraisers to bump values and justify newly raised prices.
  • Lenders/Underwriters accept new valuation methods from appraisers.
  • Local assessors looking to boost revenue make record number of rate increases over 10 year period keeping up with market values.
  • Lull in action spurs intense ads targeting sub-prime market with adjustable rates.
  • Refi's and new purchases slow, huge pool of lenders look to create business, increase 'no document' type loans, rates stay low, prices continue to rise without value.
  • After the first few rounds of adjustables become due, large numbers head into default causing loan qualifications to tighten. Borrowers look to refi as instructed but find qualifying tougher, and lower home values no longer match loan amounts.
  • Massive defaults of sub-prime adjustable rate loans.
  • Lower values make even fixed rate loans virtually un-refinanceable.
  • Lenders (also the President and Mr. Mccain) blame irresponsible borrowers.

The rest, as they say, is history. A huge number of other things contributed to our situation, had all of these things happened at any other time it may not have ended with the same result. We need to clearly identify the failings in the system and make adjustments. This is a very good example of how a 'Free Market' approach with no real oversight or regulation doesn't come close to being a good idea. Free market for razor blades and cabinet doors, sure, but lets get together on things that effect our country as a whole like lending, health, transportation, energy and lets not forget military.

How Fraud Fueled the Mortgage Crisis:

"Brokers pushed borrowers to lie, lenders misled and ratings agencies looked the other way.
The debate over what caused the mortgage mess and how best to fix it is now taking a sharp turn, as new problems surrounding liar's loans and payment-option mortgages reveal the pervasive fraud, lying and deceit that permeated the market at its height.
As loans made to borrowers with decent credit begin to fail at a surprisingly rapid rate, it's becoming clear that widespread fraud helped support the entire mortgage system - from borrowers who lied on their loans, to brokers who encouraged it, to lenders who misled some low income borrowers, to the many lenders, investors and ratings agencies that conveniently and deliberately looked the other way as profits rolled in."

"Despite its widespread role, fraud hasn't yet been at the forefront of proposed rescue plans, which center on refinancing people out of loans now resetting to higher rates. That may begin to change as the mortgage market continues a meltdown that seems to have no end. As fraud becomes a focus, the question of who did most of the lying and cheating will be crucial in deciding who deserves help in any housing rescue plan. "

"Others familiar with the mortgage industry contend that pervasive fraud was, indeed, a problem - on the lender's side. At the peak of the housing boom, they say, the nation's mortgage system was set up to promote and encourage outright fraud in order to close a loan - and everyone, from brokers to loan officers to Wall Street, looked the other way. Borrowers also were put into products like payment-option arms that were unsuitable - and lenders knew it. "They were pushed like Vioxx, with very little regard for their dangers," said Kathleen Keest, senior policy counsel with the Center for Responsible Lending, a research group that investigates predatory lending. "

"Patrick Madigan, an Iowa assistant attorney general who has investigated mortgage fraud, said it makes no sense to conclude that lenders are somehow victims. Madigan's office engineered a settlement two years ago with Ameriquest over its subprime practices, including high-pressure "boiler room" sales tactics. Regardless, Madigan said, there is a movement to "blame the borrower."
"There's a perception out there that there's this hapless lender who got duped by middle class and lower income subprime borrowers," Madigan said. "It's ridiculous. Our investigations have shown that most of the fraud happens at the suggestion and direction of the loan originator, who had significant financial incentives to close the loan, no matter what misconduct was required."

"Even if fraud has become a larger part of the mortgage meltdown picture than first realized, it's not simple to figure out who should take most of the blame. Many people point the finger at investors playing the market or homeowners who bought more expensive houses than they could afford - the "irresponsible" borrowers cited by both President George W. Bush and probable Republican nominee Sen. John McCain (R-Ariz.). "
"But the numbers don't exactly tell that story - which proves that much in this crisis taken as fact is poorly understood. That also makes a difference, when it comes to deciding whether it makes sense to bail out the market. At the request of The Washington Independent, the trade industry publication Inside Mortgage Finance in Bethesda, Md., ran some numbers and analyzed the resulting data.
Did most people simply buy big homes they couldn't afford? In 2007, 62 percent of all securitized Alt-A loans involved refinances, and 38 percent were for home purchases. In the subprime market, 64 percent were refinances and 36 percent, home purchases. The percentages were the same in 2006. Those borrowers may have been tapping equity for reasons as varied as fancy vacations to overdue medical bills, but the majority were not buying new homes.
Were they just trying to make a quick buck? Regarding investors versus homeowners, in 2007, about 5 percent of all securitized subprime loans and 14 percent of Alt-A loans were reported as investor loans. That compares to 5 percent of subprime loans and 13 percent of Alt-A loans in 2006. These numbers don't include second homes, so the percentages are probably higher, but not significantly so.
Then there's the question of who really lied on the liar's loans. Madigan, the Iowa assistant attorney general, cites repeated cases where borrowers were encouraged by brokers to suddenly create businesses in their basements, like day care centers, to boost their incomes. If they questioned it, brokers would say that lenders required it, or not to worry. Still, borrowers signed on the bottom line, some knowing the information was false. Consider this borrower's account in the San Francisco Chronicle of a sales conversation with a broker:

" He didn't say anything illegal out loud," she said. "He didn't say 'lie,' he just made a strong suggestion. He said, 'If you made $60,000, we could get you into the lowest interest level of this loan; did you make that much?' I said, 'Um, yes, about that much.' He went clickety clack on his computer and said, 'Are you sure you don't remember any more income, like alimony or consultancies, because if you made $80,000, we could get you into a better loan with a lower interest rate and no prepayment penalty.' It was such a big differential that I felt like I had to lie, I'm lying already so what the heck. I said, 'Come to think of it, you're right, I did have another job that I forgot about.'"

" Countrywide, for example, had a loan program called "Fast and Easy" that required no pay stubs, tax forms or employment verification. The FBI investigation is finding extensive fraud on loans across the board at Countrywide that didn't require full documentation, The Wall Street Journal reported. "

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