Economics, Financial Services, Regulation

The real ‘mortgage fraud’ fraud

Image Credit: shutterstock

Image Credit: shutterstock

The Department of Justice Office of the Inspector General’s stinging mortgage fraud audit focuses on Attorney General Eric Holder’s spirited book-cooking, which exaggerated the scale of prosecutions by an order of magnitude. The Obama administration still sticks to its narrative that the bust was the result of nefarious fraud-committing executives, rather than government subsidies for reckless loans. Yet the Inspector General’s report suggests that, given the scale of the market, the level of criminal fraud was small-scale: 107 persons charged (apparently mostly lower-level), with losses from criminal activity totaling $95 million, or about $900,000 in alleged losses per defendant.

In order to prove criminal fraud, the government must prove beyond a reasonable doubt that the defendant knowingly made material false representations that were justifiably relied on. The problems of proof, whether of the defendant’s knowledge of falsehood or of the borrower or loan purchaser’s inability to do the due diligence that would have revealed the falsehood, are obvious. If the alleged damages averaged only $900,000 per defendant, it would have been a poor use of prosecutorial resources to launch massive numbers of criminal cases, particularly since the DOJ was having significant success in extracting civil settlements from major institutions around three orders of magnitude larger than the $95 million in alleged fraud losses. (Settlements from mortgage servicers totaled $25 billion, and from J.P. Morgan Chase totaled $13 billion.)

With bubble-era government guarantees (express and implied) enabling borrowers to buy homes with virtually no money down, the number of low-quality loans exploded, as did the number of defaults in the subsequent bust. If the government required borrowers to have significant home equity, reckless or unethical lenders would have far fewer customers to collude with, and Attorney General Holder would have less need to invent mortgage fraud prosecutions. Unfortunately, Dodd-Frank’s Qualified Mortgage regulations continue to encourage reckless loans.

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4 thoughts on “The real ‘mortgage fraud’ fraud

  1. How do credit default swaps affect housing prices?

    Where do you get your data and analysis?

    The falling value of mortgage backed securities made banks insolvent. That has nothing to do with CDS’s, which failed to provide enough insurance to offset bank losses after the fact.

    • Financial markets and the folks who play in them are affected by many factors every second, some known some unknown. When financial instruments are highly leveraged, then other assets are needed to pay for the losses, and contractions occur in many places when those assets are taken and used to pay those losses.

      BTW, a good “insurance company” wouldn’t and couldn’t afford to insure the losses. They, too, would have been kaput.

  2. Notional value of CDS outstanding has virtually nothing to do with the underlying fraud in lending standards which caused the meltdown.

    Fannie & Freddie’s balance sheets exploded in the runup to the meltdown, because they were facilitating and enabling the fraud.

    There was no financial deregulation – Sarbanes Oxley and multiple other regulations actually increased the amount of financial regulation over the runup period to the meltdown.

    The meltdown was caused by leftist government interference in the lending and mortgage markets, which resulted in all-time high homeownership rates, the goal of the programs.

    You are a moron.

  3. Borrowed money, margin accounts, leverage, derivatives are terms regarding stuff that people really don’t have. When you are highly “leveraged”, and derivatives mean you could owe a 100 times more than the actual “read assets” you have, it takes a relative small amount to force the unwinding of your leverages assets.

    BTW, thanks for the ad hominem attack. It makes it much easier to know one is dealing with a liberal viewpoint.

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