Friday, December 21, 2007

Finally fraud comes out as a big reason for the mortgage crisis

This was so very obviously coming. A huge number of the mortgages now going bad in the subprime mortgage crisis are doing so because of overstated income via "liar's loans." I am confident that a very large percentage of loans now going bad are because of this.
Yet the system itself bears blame. The evolution of mortgages into a securities instrument turned loan origination into a competition. Caution gave way to a push for speed and volume. Embroiled in an all-out war for market share, issuers reduced barriers to credit, for example, by offering so-called "stated-income" loans, which require no proof of income. "The stated-income loan deserves the nickname used by many in the industry, the 'liar's loan,' " says the Mortgage Asset Research Institute, which works with lenders to prevent fraud. A recent review of a sampling of about 100 stated-income loans revealed that almost 60% of the stated amounts were exaggerated by more than 50%, MARI says.
I haven't talked a ton about the housing/mortgage crisis, even though it's one of the topics I understand best. Here's my take - everyone is to blame. Here's a list for starters.

Mortgage brokers/bankers/officers - encouraged people to take more mortgage than they could afford and pushed them into products that would give them a higher commission.

Banks and lending institutions - knew that they would immediately sell off loans, and so didn't do due diligence to assure borrowers had sufficient means to make payment.

Ratings agencies- didn't see the lies going on that obviously made the mortgage securities likely to not be paid back in full

Appraisers- just rubber stamped whatever people were paying for the house so as not to lose business.

Buyers- lied about income and assets to get more loans

Real Estate Agents- encouraged people to buy more house. Often worked hand in hand with mortgage brokers.

Investors in mortgage securities- didn't do due diligence to realize that the securities were not really worth what they were supposed to be.

All in all, there were a lot of faults. Now to what the government should do- not as much as people are proposing. The market has learned a lot of lessons that will now be incorporated into everyone's thinking. Covering up mistakes will only do more harm that good.

A few no-downside policy options:

More disclosure and transparency required from the mortgage industry both to borrower's and to buyers of the securities

Allow appraisers more power to give independent appraisals. As appraisers stand now they do basically nothing.....

Hold people accountable for the fraud in the past and make it clear that it is unacceptable.


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