Banksters = 90% guilty, FB’s = 10% guilty.
Who’s to Blame for the Mortgage Mess? Banks, Not Homeowners
By ABIGAIL FIELD Posted 6:30 AM 01/20/11
As the foreclosure crisis has escalated over the past several months, one overarching debate has been about who bears the most blame: homeowners or banks?
After everything I’ve learned and written about the foreclosure mess, my verdict is: The banks are responsible for 90% of the problem, troubled homeowners 10%.
Yes, every foreclosure involves a homeowner not paying his mortgage. But every foreclosure also involves a bank that made the loan. And usually another bank, or several more, that profited from securitizing the loan. And still another bank, or several, that profited from servicing the loan. Together, those banks have done three things that created the massive glut of foreclosures choking America’s legal systems and laying waste to its real estate markets:
* They knowingly made millions of loans doomed for foreclosure as soon as the check was written.
* They deliberately and/or incompetently failed to modify many salvageable mortgages.
* They were so careless with their paperwork and processes that they’ve undermined the rule of law, clouded the title to untold numbers of properties and complicated the processing of the massive backlog of foreclosures that hurts the economically crucial real estate market.
Let’s take a closer look at each factor.
What Happened to Underwriting?
Getting a mortgage isn’t supposed to be as easy as getting cash from an ATM. Banks are supposed to make applicants prove they can repay loans before giving them. The process is called underwriting, and it’s one of the most basic in banking.
Yet during the housing bubble, banks largely stopped underwriting in any reasonable way. Indeed, if the banks had been underwriting throughout, the bubble could never have inflated so much.
If you want to get a vivid and entertaining overview of the dynamics that eliminated underwriting, listen to Planet Money’s interviews of people at every stage of the process, from making the home loan through its ultimate securitization.
The mortgages made without underwriting have lots of names: Low-doc loans (the borrower stated her income without proof, but proved the assets she claimed to own, or vice versa), no-doc loans (borrower stated both income and assets without proving either), NINJA loans (no proof of income, job or assets). They’re all known as liar’s loans. According to a recent Forbes article, in 2006 and 2007 liar’s loans accounted for 40% of new mortgages, and more than 50% of new subprime mortgages.
The Banks Knew Mortgage Applications Were Fraudulent
Now here’s the thing: No one forced the banks to make those loans, even if the applicants were lying about their ability to repay.
People shouldn’t be sympathetic to banks that effectively say: “Hey, we knew the applicants were lying and wouldn’t be able to repay the loans. We didn’t care because we didn’t hold onto the loans. We offloaded the risk to investors through the securitization process. But so what? Blame the deadbeat borrowers for the volume of foreclosures today.”
Why is it fair to say the banks knew they were being lied to? Well, beyond the obvious — everybody in the business used the term liar’s loan — the FBI warned about mortgage fraud back in 2004. And take a look at this 2006 fact sheet from the Mortgage Brokers Association for Responsible Lending that analyzed data from 2004 and 2005. By doing a quick check, the group found that 90 out of 100 stated-income loans exaggerated the applicant’s income, and 54 of those loans inflated it by more than 50%.
Or consider this Chase loan officer’s email acknowledging that he had made up an inflated income amount to make a borrower’s debt-to-income ratio “work.”
By 2007, the FBI reported that industry insiders — loan officers, mortgage brokers, real estate agents, appraisers and lawyers — not wannabe homeowners — were involved in some 80% of mortgage fraud. The FBI calls that “fraud for profit” as opposed to “fraud for housing,” which is when a homeowner lies to get a house he can’t afford. As Calculated Risk’s Tanta showed in 2007, that distinction started breaking down as the absence of underwriting by the banks enabled both types of fraudsters to join forces.
Tanta also explained that in addition to being directly complicit in mortgage fraud, lenders engaged in massive cost-cutting efforts that gutted their ability to underwrite loans:
So many of the business practices that help fraud succeed — thinning backoffice staff, hiring untrained temps to replace retiring (and pricey) veterans, speeding up review processes, cutting back on due diligence sampling, accepting more and more copies, faxes, and phone calls instead of original ink-signed documents — threw off so much money that no one wanted to believe that the eventual cost of the fraud would eat it all up, and possibly more.
Beyond the idea that the banks knew, in real time, that they were making loans that couldn’t be repaid, evidence shows that banks went a step further and tried to conceal that information from others.
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