Mortgage Fraud, Anyone?

This would be terribly funny if it weren’t so God-damned tragic:

Mark Hanson, via Abelson:

“MORTGAGE GUARANTY INSURANCE CORP., familiarly known as MGIC, which also has taken more than its share of lumps from the housing collapse, is wrestling with Countrywide over a bunch of the latter’s bum mortgages it insured. At issue is whether those mortgages were mortally flawed from birth, something, alleges MGIC, that Countrywide had more than a little reason to be aware of.

In its complaint to the American Arbitration Association, MGIC makes no bones that it thinks Countrywide, eager to exploit the housing bubble, embarked on “a reckless strategy to attract new subprime and other high-risk business.” And the insurer goes on to cite a clutch of cases to prove its point. We found the narrative lively reading (and we’re grateful to Mark Hanson for bringing it to our attention).

There is, for example, the woman who bought a $600,000 house, claiming she worked as an account exec at a California investment firm, earned $13,494.03 (nice touch that three cents) a month, had a $45,000 bank account at Wells Fargo and, according to the insurance application, made a $30,000 down payment.

When MGIC nosed around, it discovered the investment firm she supposedly worked for didn’t exist, neither did the bank account, she hadn’t made a down payment and she actually earned $3,901.58 a month as a janitor at a medical facility.

In another instance, a $350,000 loan was extended by Countrywide to a fellow who wanted to buy a home valued at that amount and claimed he was a dairy foreman earning $10,5000 a month. Again, the snoops at MGIC discovered the guy was a milker at the dairy who earned $1,100 a month and signed the documents where he was told to — even though he couldn’t read English.

There’s plenty more of the same in the complaint by MGIC charging that Countrywide agents were complicit in various and sundry deceptions. Frankly, we found it all something of a hoot, though it’s not hard to see why MGIC isn’t laughing. But even comic tales typically embody a moral, and this one is no exception. Fraud played no small role in the great demolition of housing, but the principal perpetrators were never diligently pursued and, for the most part, went crying all the way to the bank. Moral hazard, anyone?

I believe mortgage fraud was endemic during the Credit bubble/Housing boom. My best guess was that half of all subprime mortgages, and probably 20% of all other mortgages where there was a mortgage broker involved . . .

UPDATE: April 3, 2010 8:22pm

I am surprised at some of the comments, especially when it comes to the blame portion. As I made clear in the book, there is lots of blame to go around — including a healthy portion to those people who bought more house than they could possibly afford.

However — AND THIS IS CRUCIAL — an individual mortgagee has a very different standard of care and legal fiduciary obligations than does a lender, bank and/or mortgage broker. The individual’s obligation is to pay their mortgae or forfeit the house. The bank, on the other hand, has very specific fiduciary obligations, laws it must follow, standards it is obligated to meet.

When a bank doesn’t ask for an Income or credit check, they are telling the borrower they we don’t care what your income is. What some people have foolishly termed “predatory borrowing” is in reality a poor excuse for what is nothing more than half arsed, incompetent banking.

Not All Milk and Honey
Barron’s April 5, 2010

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