Reminder: Borrower Fraud Was Rampant During The Housing Bubble
From Sunday’s New York Times:
Occupancy fraud represented 19 percent of all mortgage misrepresentation on loans delivered to Fannie Mae in 2013, the latest data available from the agency, making up the largest category of fraud after misrepresentation of debt liabilities. False occupancy claims have since declined, according to the 2014 fourth-quarter fraud report released last month by Interthinx, another provider of risk mitigation tools. . . .
Occupancy fraud is costly to lenders because it can raise the default rate and the risk that, if a fraudulent loan is exposed, the loan investor (like Fannie Mae) could require the lender to buy back the loan. [Emph. added]
I can’t find Fannie’s mortgage fraud numbers for 2007 and prior, when the housing market was peaking, but suspect the rate of occupancy fraud back then was substantially higher than the 19% of 2013. There was a bubble going on, remember, and if people had to lie on their mortgage applications to get in on a can’t-miss investment, they would do it.
I mention this because, while it was the bankers who were the ones most vilified for causing the housing crackup and resulting credit crunch (and who later paid out tens of billion for mortgage putbacks and in fines), in fact the banks in large measure—and please, spare me your howls of protest—were the victims in the wholes mess. In the case of occupancy fraud, in particular, the loan applicant knowingly lies to the lender, and says he intends to live in the mortgaged property, knowing he’ll pay a lower rate and get better terms, when in fact he plans to rent it out and then flip it as prices keep rising. In the event, we know that prices didn’t keep rising. Once fraudulent borrowers realized that, they stopped paying and walked away from the properties entirely. Their mortgages went in default, and eventually Fannie and Freddie demanded that the originating banks take them back. So in the end who got punished? The banks the borrowers fleeced in the first place!
In the runup to the housing bust, banks certainly got careless and sometimes worse, in their underwriting practices. They’ve learned their lesson, and paid the penalty. Fine. Let’s move on. But is it too much to ask that the other bad actors complicit in creating the housing crackup be held to account, too? It’s not hard to identify them. Their names are right there on the mortgage docs! In a just world, a non-insignificant number of fraudulent borrowers would be prosecuted, at least as a warning for next time. Instead, they’re portrayed as victims and are sometimes even offered relief, to be paid for by the same banks they scammed in the first place. Insane.
What do you think? Let me know!
7 Responses to “Reminder: Borrower Fraud Was Rampant During The Housing Bubble”
Maybe the true villains in all of this were the mortgage originators who just cared about pushing production and nothing about underwriting as they were going to offload the risk anyway? Unsophisticated borrowers just thought they could get something for nothing and they were pushed by the originators, i.e., Sign Here! Get the house of your dreams! You’ll be able to refinance when the house appreciates! NOT!
Borrowers are not sophisticated enough to make the decision by their-selves. Originators would make that suggestion and the borrowers would follow through. The lenders could have been vigilant. They knew what was going on.
I thoroughly disagree that borrowers were so naive that they did not know they were lying on mortgage applications.
Well said. There were few victims, only volunteers during the run up. Then there were the illegal 3-4 family cash cows. Those who played by the rules were the victims as well.
Your last comment ailed it.
While I agree that fraud at the mortgage originators/real estate brokers/home buyers was the real culprit, I cant help it but point out that the data above states that 19% of fraud was due to occupancy. Not 19% of all mortgages. 19% of only the fraud mortgages. Hence this is not indicative of the overall level of fraud that led to the financial crisis. I do agree that banks could have made their rules stricter and could have understood and prevented the fraud that was happening at the buyer level, not preventing fraud is very different from actually committing fraud. Fraud was actually committed by the people who lied about occupancy, who lied about their income, who lied about other circumstances on the low doc loans. And not understanding mortgage documents is hardly an excuse for the home buyer and certainly it does not excuse the real estate broker. The same real estate broker who, despite being highly incentivized to conduct a transaction, did not have any fiduciary duty standard to either their customer or the bank.
I can see going after individual borrowers who may have committed fraud, AFTER the individual BANKSTERS who ran the mortgage businesses and securitization operations at the Too Big To Behave Banks that precipitated the Finnancial Crisis are successfully prosecuted. It is beyond ludicrous to think that “Banks” could be found responsible for their actions without the active participation of individual “Bankers”. Borrowers didn’t come up with the concept of Liar’s Loans. Borrowers didn’t package and sell these Toxic Loans by the billions. Borrowers didn’t claim that securities comprised of unaffordable, subprime mortgages were triple A investments. And borrowers didn’t create a global financial catastrophe that cost millions of Americans their jobs, their homes and their life savings.
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