From Inside Mortgage Finance:
While lenders are coming under increased pressure to help borrowers avoid foreclosure, the U.S. Attorney in San Francisco has launched an effort to pursue fraud cases against subprime borrowers who lied on their loan application.
“In my way of thinking, it didn’t make any sense for us to excuse any one component of the group that was involved in this phenomenon,” said U.S. Attorney Joseph Russoniello. “So while we obviously have an interest in the predatory lending practices, we’re also finding from our investigators that significant numbers of borrowers submitted falsified applications for a mortgage.” [Emph. added]
Good for Russoniello. The media likes to portray the typical defaulted subprime borrower as some poor soul who’s feeding her kids Kal-Kan sandwiches and burning the furniture to heat the house, but the reality is more complex.
In fact, an awful lot of defaulted borrowers are old-fashioned con artists. They lied to lenders about their incomes. They lied about their assets. They lied about whether they intended to live in the properties. They gamed their credit scores. And as soon as home prices turned down, they abandoned their properties without a second thought.
It was fraud, pure and simple. And not a small-scale one, either. To give you a sense of the size of the problem, early defaults on loans originated in 2007 already topped 11% by February of this year. Inside Mortgage Finance reports the U.S. Attorney in San Francisco expects to bring cases against anywhere from 8,000 to 11,000 subprime and Alt-A borrowers.
These people should be indicted. And yet somehow, consumer protection types think the borrowers should get a pass. “Fraud is not good,” admits the associate director of the California Reinvesment Coalition, according to IMF, “but, in the larger context of things, is this really where the resources should be spent and is this really going to get us to the solution to the big problems we’re facing?”
He’s got to be kidding. There’s simply no difference between a broker or appraiser who lies to lender to get a loan approved, and a borrower who does the same thing. Besides, fraudulent speculators are one group of borrowers who, if pursued aggressively enough, might actually be a source of material recoveries. (Just because they walked away from their loans doesn’t mean they don’t have assets elsewhere.)
Just about everyone in the mortgage lending process, from the investment banks, to the brokers and appraisers, to the lenders themselves, have taken a beating in the media ever since the housing bubble popped. Everyone, that is, except the borrowers, who for some reason seem to get portrayed as wide-eyed, innocent victims. Nuts to that. In a lot of cases, the home buyers were the low-downdest actors of all. The U.S. Attorney is right to go after the worst of the lot.