diggfacebook Twitter stumble reddit del.ico.us
Read More: Economy , Financial Fraud , Foreclosure Crisis , Foreclosure Fraud , Foreclosures , Housing Bubble , Housing Crisis , Jobs , Mortgage Crisis , Mortgage Fraud , Recession , Subprime , Business News
There are plenty of reasons why the foreclosure fraud crisis sweeping the nation's housing market is an economic disaster. Banks are charging borrowers illegal fees, kicking the wrong people out of their homes and even hiring thugs to illegally break into houses. But the fundamental scam is much worse than these shameful acts. Fraud in the foreclosure process conceals a second, more massive fraud: the astonishing levels of mortgage fraud perpetrated by subprime lenders during the housing bubble. These frauds don't just expose big banks to epic losses, they expose bigwig bankers to prison time.
Clearly, we're dealing with a lot of different frauds here. Tomorrow, I'll detail one of the smaller-bore problems with foreclosure fraud: providing cover for illegal fees that lenders charge to troubled borrowers. But today I'll discuss a much different and much bigger scandal. During the housing bubble, banks falsified documents on a massive scale in order to issue as many toxic subprime loans as possible. This was straightforward mortgage fraud, and the current wave of fraud in the foreclosure process is covering it up.
In 2004, the FBI sounded the alarm about an "epidemic" in mortgage fraud. This was right at the beginning of the real subprime explosion -- things got much worse as the housing bubble inflated. What's more, according to the FBI, 80 percent of mortgage fraud is committed by lenders.
Bankers and mortgage brokers didn't just make reckless loans to borrowers who couldn't afford them. They also illegally falsified documentation in order to push borrowers into loans they could not afford. This was not a con perpetrated by irrational poor people attempting to live beyond their means -- it was committed by perfectly rational lenders, who knew they could make a handsome profit by selling these garbage mortgages off to investors.
We know about how these frauds were incentivized at specific lenders thanks to anecdotes collected banks that actually went under during the crisis. When Washington Mutual collapsed in September 2008, it was one of the largest banks on the West Coast, with $350 billion in assets. It wasn't a small-time specialty shop operating off the grid -- it was a regulated bank, overseen by the Office of Thrift Supervision, subject to standard consumer protection regulations and federal anti-fraud statutes. Yet the bank engaged in systematic, knowing fraud which its executives allowed to continue unpunished. As Sen. Carl Levin, D-Mich., emphasized in a hearing this April, the company even rewarded some of its employees who committed fraud by promoting them.
Why all the dodgy dealing? Bigger bonuses. During the housing bubble, Washington Mutual CEO Kerry Killinger took home between $11 million and $20 million every year.
This type of mortgage fraud is not the scam that consumer advocates are currently sounding the alarm about. That's a much different fraud. When banks go to foreclose on borrowers, they do not have the documentation necessary to prove they actually own the mortgage. Banks can't document their right to foreclose, so they're fabricating documents, forging signatures and lying to judges to push them through. So how are the two frauds related?
Fraudulent mortgages are, by definition, illegal. Banks that issue them can be sued, and the bankers involved can be tried in court and sent to prison. Bankers very much want to avoid both of these scenarios.
But it's also illegal to package fraudulent loans into securities and sell them to investors -- especially if you don't tell investors that the security is full of fraudulent loans. It's securities fraud, and bankers also don't want to lose huge amounts of money on that line of business.
If you're a bank that packages mortgages into securities and sells them to investors, and you know your securities are full of fraudulent loans, you might not want to transfer all the necessary documents detailing the loans. Those documents, after all, would reveal that your securities were completely illegal -- and that you are responsible for any losses stemming from them.
For intermediaries like securitizers, fraudulent loans are the best kind of loans -- they're literally too good to be true. So long as nobody ever pins the legal liability on you, you can make a lot more money from fraudulent loans than you can make on loans that actually make financial sense. Fraud-packed securities fetched much higher prices than mortgage securities packed full of boring, legal mortgages, and led to much bigger bonuses.
In today's foreclosure fraud scandal, mortgage servicers -- the housing industry's debt collectors -- don't have the legal documents necessary to move on a foreclosure. They don't have the documents because the banks who created the securities never handed them over. And without those documents, it's far more difficult to prove that the securities and the underlying mortgages are illegal.
So this isn't about "paperwork" or technicalities. This is about preventing the basic fraud at the heart of the financial crisis and the Great Recession from being prosecuted.
That, ultimately, is the big danger for Wall Street, and for the policymakers who have provided economic cover for megabanks. Wall Street banks aren't worried that their mortgage servicing costs may increase while they "track down" paperwork -- they're worried that the entire $2.6 trillion mortgage-backed security market is about to land on their doorstep, with punitive damages and prison sentences to boot.
Apologists for CEOs spent much of the summer complaining about the "uncertainty" that new regulations and tax policies supposedly create for businesses and investors. If potential taxes were an economic problem, just wait to see how financial markets respond to a fresh $2.6 trillion hole in the banking system created by fraud.
Worst of all, U.S. taxpayers own a huge portion of these securities. Fannie Mae and Freddie Mac have enormous portfolios of subprime-mortgage-backed securities, and the Federal Reserve purchased large volumes of mortgage securities in order to sustain the housing market as it collapsed. The government has no choice but to deal with this mess, if only to cut its own losses. Whatever the policy the government pursues, Rick Santelli and his friends will be sure to complain about a bailout for "losers," but something has to be done. It's not a question of bleeding hearts, it's a question of basic justice for homeowners, investors and taxpayers.
Follow Zach Carter on Twitter: www.twitter.com/zachdcarter
Loading twitter module...
Most Popular on HuffPostApF9Gq%2F1%2BMqpuurrucLtyNc%2BFPT2UyzT5K%2FCfmafXsF%2FXgJgdignV83gtH1JcvYETxo1c25LkL%2F5xjN01TCRhQ%3D%3D 4YxbTRbamwKApU2fWrXyPa21McW1FBeQmQRwnkLY1uTR3o1hzMqFfKHpYFEJOh9tjJXnOzReXPimUBm6lTcGFA%3D%3D
1 of 2
Kim Kardashian Bowls In Strapless Dress, Platform Shoes (PHOTOS)
343 Comments
PHOTOS: Teen Heartthrob Shares Crazy Shirtless Muscle Pics
822 Comments
Chile Miners Rescue: LIVE Updates (VIDEO)
7,281 Comments
John Hamilton "Progressive Hunter" Jailhouse Confession:...
4,152 Comments
The Frenemy 14 Things We Learned From Romantic Comedies
213 Comments
Beyond Left And Right: Arianna And Mike Huckabee On Fox News (VIDEO)
700 Comments
13 Halloween Costumes That Have No Business Being 'Sexy' (PHOTOS)
379 Comments
PHOTOS: Minka Kelly Strips
197 Comments
LISTEN: Ken Buck Explained To Alleged Rape Victim Why He Wouldn't Take Her Case
4,721 Comments
Don't Miss HuffPost Bloggers1 of 5
Dan Rather
Help Not Wanted?
Bernard-Henri Lévy
Sakineh’s Son Arrested: The Great Silence of Conformist Thinkers
Henry Louis Gates, Jr.
Faces of America: Mehmet Oz and the Immigrant Story Pedigree
Al Gore
Standing Up Against the Oil Lobby, in California and Beyond
Alec Baldwin
Waiting for "Superman": A Monumentally Important Film
Melinda Gates
Why We Tell Success Stories (VIDEO)
Ted Danson
A Pacific Gem, Protected
Michael Gerson
The Success and the Failures of the Religious Right
George Lucas
Beyond Superman (VIDEO)
Ezekiel J. Emanuel, M.D., Ph.D.
How We Can Save Over 4 Million Children
Hot Trends
brian wilson foreclosure freeze gmac mercedes recall the gap new logo
Follow Huffington Post
Today's Markets as of Oct 13, 1:35 PM EDT
Loading..
S&P 500 1182.69 +12.92 +1.10%
NASDAQ 2446.97 +29.05 +1.20%
NYSE 7582.97 +93.35 +1.25%
Gainers Losers Most Active CRWN $3.78 +1.23 +48.24%
SIGA $12.17 +3.61 +42.17%
JOBS $45.25 +6.99 +18.27%
MOTR $20.09 +2.67 +15.33%
ADTN $33.21 -2.31 -6.50%
THOR $33.02 -2.24 -6.35%
ACOR $28.25 -1.90 -6.30%
IIJI $5.88 -0.38 -6.07%
SIRI $1.41 +0.06 +4.44%
INTC $19.55 -0.22 -1.11%
QQQQ $50.59 +0.48 +0.96%
CSCO $23.25 +0.63 +2.79%
SEARCH WIKINVEST
POWERED BY
Wikinvest data is provided as-is, delayed, and subject to Terms
TOP VIDEO PICKS1 of 5
Nobel prize for economics awarded
Major Foreclosure Fiasco for Banks
Economic Mood Swing is "Almost Palpable"
HUFFPOST'S BIG NEWS PAGES
World Food Conference Looks At Subsistence Farming Hunger
Chile Miners Rescued Wearing $450 Oakley Sunglasses (PHOTO, POLL) Chile
4 Reasons Binge Drinking Is A Public Health Problem Health
Pat Quinn Ad Accuses Bill Brady Of Supporting Mass Dog Euthanasia (VIDEO) 2010 Elections
Dallas Stars Ice Girls Take A Dip On Lake Day (VIDEO) Hockey
Train Surfing: Man Rides Top Of MTA Subway Car (VIDEO) MTA
BP Silent On Future Plans In Gulf Of Mexico After Drilling Moratorium Lifted Gulf Oil Spill
Mel Kiper Jr., ESPN's NFL Draft Expert, Denies Josh Luchs' Claims About Gary Wichard Relationship College Football
Apple Schedules October 2010 'Back To The Mac' Event Applemore big news pages »
Front Page Politics Business Media Entertainment Comedy Sports Style World Green Tech Food Travel Living Arts Books Religion Impact Education College NY LA Chicago Denver Blogs
Advertise | Log In | Make HuffPost your Home Page | RSS | Careers | FAQ | Contact Us
Copyright © 2010 HuffingtonPost.com, Inc. | User Agreement | Privacy | Comment Policy | About Us | Powered by Movable Type