Mortgage Fraud Is on the Rise, Infecting the GSEs

The Mortgage Asset Research Institute came out with its quarterly report which showed mortgage fraud is on the rise. This is curious, considering the heightened scrutiny that banks should be making during the "credit crunch". I just wanted to point out that the states which show the highest incidence of fraud are the same states which have eliminated the attorney and have substituted "settlement companies" staffed by non lawyers.

This would lead one to conclude that underwriters are still churning out loans to sell them into the secondary market to keep afloat, borrower representations and appraisal review be damned. The only difference is, the investment bankers who participated in the private market for these Mortgage Backed Securities [MBS] will no longer create or trade these ticking time bombs amongst themselves. Instead, underwriters now need Fannie Mae (FNM) and Freddie Mac (FRE) to pass along these tin nickels to some poor investor. Guess who is going to foot the bill to pass along these lemons?

If you have been hearing a lot of talk about the Government Sponsored Agencies, and you don't know your CBO from your MBS, a very engaging article entitled "How Resilient are Mortgage Backed Securities to Collateralized Debt Obligations?" was presented at the Hudson Institute on February 15, 2007, by Joseph R. Mason and Joshua Rosner. This was an early warning of the credit crisis and is an extremely entertaining and enlightening read.

Why is it interesting? Because the academics are pointing out what the real estate practicioners have been seeing on the ground for years. We can talk about it on our boards and blogs but somehow, it doesn't really exist unless it gets printed in a journal. Go figure.

Finally, we all may be reading a lot of articles concerning the government "bailing out" Fannie Mae and Freddie Mac, but you will see the words "investors" "government" "market" and many other financial terms, but one word I rarely see is the word "homeowner". Sometimes, financial analysts and talking heads forget that before you have a mortgage you need to have a homeowner. If we have these Government Sponsored Agencies, and the banks are getting money at 2 percent, and a 30 year mortgage is hovering at around 6.87 percent, how are the GSEs helping the homeowner? Explicame, por favor.

Disclosure: Long SKF.

Comments

[Ishortyou:]

well thats the way banks make money, first build capital through deposits and services, pay low interest rate on those deposits, then lend the money at higher interest rates, and pocket the difference, and there you go. Does this benefit the homeowner, of course not? the middle man is the bank.

2008 Aug 28 09:14 AM

[redbaron:]

Ah, but if that is all there is, then this cycle has not yet run it's course. The homeowner needs to see the benefit as well, or this is not yet over. Agreed?

2008 Aug 28 09:20 AM

[buyitcheap:]

Later in that same report, I understand that they're also predicting satellite radio and something called the Internet as an up and coming technology that might have legs.

2008 Aug 28 09:30 AM

[epeon:]

Here is how you do the california shuffle. Buy a social security number, plenty available in California, get a 0% down mortgage. Then go to the bank, get a 110% home equity loan. Move in and never make a payment. It takes a couple of years to get you out. You keep the 10% home equity loan, get two years of rent, cool man.

2008 Aug 28 11:51 AM

[dinochick:]

As an underwriter, who struggled to perform her duties with integrity, I am appalled that there are individuals who call themselves underwriters degrading the position even further.

I have been in the industry 40 years, saw the ups and downs, and this mess was by far much worse than the S&L situation. I hope the industry returns to the old fashioned way, as it worked, but alas, it wasn't a get rich quick industry, but homeowners fared better, and jobs were more stable.

2008 Aug 30 09:27 AM

[michaelblom...:]

I highly doubt the fraud is up; the problem is depreciation. I know some of you may find this hard to believe, but the Lenders, I-banks and credit rating agencies were looking the other way and knowingly funding fraudulent loans. In they heyday there was little reporting of fraud, but it did exist. Today, there is no double digit appreciation to bail out the defaulting borrowers, Lenders, etc. so they are stuck with a bad loan instead of being able to sell it or refi the turd.

Dinochick: Did you work for any of the I-banks, which lenders?

2008 Aug 30 09:50 AM