A favorite lie from the right is that our current mortgage meltdown is the fault of government policies , laws, and regulations that encouraged poor people to buy houses and that “required” banks to make loans to people for homes they could not afford.
This claim is a lie, through and through. However, as with everything else that pours from the rightwing propaganda machine, the Big Lie has become truth to much of the public.
IN FACT, the major cause of the mortgage meltdown was widespread, deliberate fraud on the part of real estate agents and brokers, loan officers, executives of real estate firms and mortgage originators, and professional “house flippers.” These people knew exactly what they were doing; they didn’t stumble into it, they weren’t misled. They are crooks and need to be treated as such. Don’t hold your breath.
Read on.
Summary of this diary
My rightwing friend tells me the mortgage meltdown is the result of “the government” forcing banks to lend money to deadbeats. Dark-skinned deadbeats, of course.
In fact, almost all the blame for the mortgage meltdown lies with real estate agents and brokers, loan officers, and the executives for whom they worked who put together -- all over the country -- fraudulent loans and fraudulent real estate transactions. When the fraud finally caught up with them, the real estate market crashed and looks as though it will stay crashed for a long time to come.
And now, to make matters much worse, the big institutional investors who purchased securities backed by fraudulent loans are preparing to sue the banks and investment houses who sold them the loans. If these suits are successful – as they likely will be – we stand to see banks and investment house failures that no TARP in creation can cover.
Doesn’t that just sound lovely? Oh, but wait – the details are worse.
It’s all the fault of CRA, Fannie, Freddie, and poor people
Some weeks ago I visited a rightwing friend of mine. He was ready for me. He showed me that day’s Washington Post, the front page of which featured an in-depth story on one house in the DC Maryland suburbs that had gone into foreclosure. The house had been purchased by a Hispanic single mother who ran a small day-care center; she paid over $600,000 for the house. When the adjustable rate mortgage reset a year after she moved in, there was no way she could make the new mortgage payment and the house is now in foreclosure.
“LOOK AT THAT!” he shouted, banging the newspaper with his finger. “This ignorant woman KNEW she couldn’t afford this house!! She’s the reason we’re in this mess.”
I quickly read the article then pointed out to him that three-fourths of the article was spent describing how the real estate agent and the mortgage loan officer had assured and re-assured and re-re-assured the woman – “That’s no problem,” “No, your payment won’t be that much,” “Just sign here.” The real estate agent had written two big checks to the woman’s bank account so her assets would look good. The loan officer had fudged (that is, pulled out of his ass) income numbers that he put onto the woman’s mortgage application in place of her true income.
My rightwing friend was having none of that. The poor Hispanic woman was at fault because “Obama and the CRA forced the bank to make a loan to her!!”
I didn’t choke him but I was tempted.
CRA – Community Reinvestment Act of 1977.
The CRA uses the power of the federal government’s regulation of banks to require banks to operate in their ENTIRE community, not just in the neighborhoods around the country club. Banks earn CRA points for any number of activities:
-- Bank employees volunteer with charitable organizations;
-- The bank makes loans to minority businesses;
-- The bank conducts financial training and assistance for minority business owners and would-be business owners;
-- The bank makes mortgages in low- and very-low income neighborhoods.
When the time comes for a bank to expand, merge, or do anything that requires federal regulatory approval, the more CRA points the bank has, the more likely they will be approved.
Now, this sounds like the feds do, in fact, require banks to lend money to poor people. No. There is nothing in the CRA that requires banks to do anything that is not consistent with good business and financial practices (Section 208, CRA).
When I retired from the Army in the mid-1990’s, I took a job as director of a regional housing non-profit in Appalachia. We built affordable houses for poor people, somewhat on the Habitat for Humanity model. Most of our loans were placed through local banks; we held some of the mortgages.
Our prospective homeowners were required to go through a six-month program of homeowner training: budgeting; family financial management; job hunting; home maintenance; and the like. Then, those who completed the training, applied to local banks for mortgages on the houses we built. These “poor people” were subjected to the same debt-to-asset ratios as anyone else. The only help the banks gave us was waiving some of their fees so the buyer didn’t have to come up with a lot of cash at closing.
Grants from HUD and state housing agencies provided down payment money.
Of the 45 homes that we built and sold in the 5 years I was director, ONE went into default – because husband and wife both lost their jobs when a local factory closed. One default out of 45 loans made to people whose incomes were BELOW 50 PERCENT OF THE LOCAL MEDIAN INCOME -- not bad.
Nope, the CRA didn’t cause a goddam thing.
Now, let’s turn out attention to what really did cause the mortgage meltdown: Fraud and greed on the part of people with lots of money who wanted more money and who didn't care what they did to get it.
Let’s look at two examples of how the mortgage meltdown really came about: The 2008 collapse of Seattle-based Washington Mutual, and, the Sarasota, Florida, real estate market collapse. Each of these financial disasters has its origin in fraud and greed and each has been thoroughly documented. I will not attempt to tell the whole stories here – I’ll simply point you in the right direction and you can read the details for yourself.
The Collapse of Washington Mutual as reported by the NYTimes.
WASHINGTON — New documents released by a Senate panel show how entrenched Washington Mutual was in fraudulent and risky lending, and highlighted how its top executives received rewards as their institution was hurtling toward disaster.
The problems at WaMu, whose collapse was the largest in American banking history, were well known to company executives, excerpts of e-mail messages and other internal documents show.
The documents were released on Monday by the Senate Permanent Subcommittee on Investigations, which began an inquiry into the financial crisis in November 2008. The panel has summoned seven former WaMu executives to testify at a hearing on Tuesday, including the former chief executive Kerry K. Killinger.
. . .
Loan officers received more money for originating higher-risk loans, and loan processors were rewarded for speed and volume, rather than quality, the Senate panel found. Loan officers and sales associates were paid even more if they overcharged borrowers through points or higher interest rates, or included stiff prepayment penalties in the loans they issued.
. . .
“They built a conveyor belt that dumped toxic mortgage assets into the markets like a polluter dumping poison into a river,” Mr. Levin said. “Down river, there was Wall Street, with its huge appetite for these mortgage-backed securities. They bottled that polluted water, slapped a label on it from the credit rating agencies that said it was safe drinking water, and sold it to investors.”
. . .
For example, one internal investigation found high rates of “confirmed fraud” in two top loan-producing offices in southern California. But the subcommittee said that “no steps were taken to address the problems, and no investors who purchased loans originated by these offices were notified.”
Here’s a quote from a Washington Post report on WaMu.
. . .
Investors who bought mortgage securities from Washington Mutual were not informed of the fraudulent practices, the Senate investigators found. The company "dumped the polluted water" of toxic mortgage securities into the stream of the U.S. financial system, Levin said.
In some cases, sales associates in Washington Mutual offices in California fabricated loan documents, cutting and pasting false names on borrowers' bank statements. The company's own investigation in 2005, three years before the bank collapsed, found that two top-producing offices -- in Downey and Montebello, Calif. -- had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.
. . .
Got that? The Senate investigation
. . . found that two top-producing offices -- in Downey and Montebello, Calif. -- had levels of fraud exceeding 58 percent and 83 percent of the loans. Employees violated the bank's policies on verifying borrowers' qualifications and reviewing loans.
Levels of fraud exceeding 58 percent and 83 percent of the loans?!?!?!? 58 to 83 percent of loans in one office were fraudulent?? Must have been a lot of poor people cranking out those phony loans. Right?
Here are more links about the WaMu affair.
http://www.cbsnews.com/...
First of two parts: http://seattletimes.nwsource.com/...
Sarasota, Florida, real estate market collapse and the “King of the Flip”
Thank God for real journalists – like the ones at the Sarasota Herald-Tribune.
Start here:
Florida's real estate boom produced thousands of bogus land deals that helped exacerbate the nation's worst economic crisis since the Great Depression, a Herald-Tribune investigation has found.
All over the state, investors orchestrated phony property sales that drove up values and tricked banks into loaning more money than the properties were worth
The investors pocketed the borrowed money then walked away from their mortgages, leaving banks to foreclose on properties worth far less than the outstanding loans.
Some of it was illegal. Some may have been within the letter of the law. But it all manipulated the real estate market for the sole purpose of borrowing more and more money from banks.
Following the collapse of the Sarasota area real estate market and similar markets all over Florida, the Sarasota Herald-Tribune set out to investigate what caused the collapse. What they found was ugly. Very ugly. The paper published a seven-part series that dug very deeply into the market collapse. They named names. They described exactly how huge fraud was perpetrated by real estate agents and brokers, loan officers, and bank officials.
The full series is on the paper’s website where you can download and print the articles in pdf format for your reading pleasure. And to distribute to your rightwing friends.
Here’s the intro to the series:
As communities across the nation continue to struggle with the fallout from this decade's housing bubble, the Herald-Tribune reviewed more than 19 million Florida real estate transactions to determine how much of the bust had its root in housing fraud.
The year-long investigation found that more than 50,000 Florida properties flipped under suspicious circumstances from 2000 through 2008. Those flips artificially drove up housing prices and tax bills and contributed to the crush of foreclosures that has gutted the real estate market.
All over the state, professional property flippers made billions in profits on the back of concocted land deals. When the market crashed, they left banks and the American public to clean up the mess.
Finally, here’s something from one of my favorite NPR personalities – Ira Glass and his This American Life.
In January 2010, reporters from Planet Money bought a toxic asset—you know, the things that blew up wall street banks, sank the economy and brought the global financial system to a halt—one of those. And "Toxie" turned out to be an encyclopedia of the financial crisis.
On 7 November, NPR broadcast Ira’s interview with the reporters who purchased “Toxie,” the toxic asset.
Listen here.
Download a podcast here.
And here’s a description of Ira’s program.
PROLOGUE.
Host Ira Glass explains how the Planet Money team spent a thousand dollars of their own money to buy a toxic asset, and introduces Planet Money reporters David Kestenbaum and Chana Joffe-Walt. Their stories about "Toxie" have appeared on the Planet Money podcast and daily public radio news shows, and are collected here for the first time, into one epic, Dickensian tale. (3 1/2 minutes)
ACT ONE. FIRE SALE IN KANSAS CITY.
David and Chana buy a toxic asset, from a guy named Wit Solberg, who used to work on Wall Street and now helps small banks who've been saddled with toxic assets. Turns out...it's hard to buy a toxic asset. But, they eventually find one that looks good, and looks like it will actually make them and the team money. (9 minutes)
ACT TWO. AN OLD MAN CHOOSES BETWEEN LOGIC AND MORALS. LOGIC WINS.
David and Chana try to track down the actual homeowners in their toxic asset. The toxic asset is made up of 2000 mortgages all over the country. Of those, half—1000 homeowners—are NOT making their payments. They eventually track one down. A retiree named Richard Koenig, who doesn't fit any of their preconceived notions of what a person facing foreclosure would look like. (13 minutes)
ACT THREE. FLIPPER. NOT THE DOLPHIN.
David and Chana discover a dark criminal plot inside their toxic asset. They do this with the help of several reporters from the Sarasota Herald-Tribune, who turn them on to a Florida mortgage fraud mastermind nicknamed "The King of the Flip." (11 1/2 minutes)
ACT FOUR. VILLAINS AND HOW TO SUE THEM.
David and Chana meet another toxic asset owner, like themselves. Only difference, David and Chana bought theirs after it was already toxic, for a steep discount, 99% off. George Laufenberg bought his for full price. Now, it's almost worthless, and George is trying to figure out who to sue. (10 1/2 minutes)
ACT FIVE. TOXIE IN A COMA. I KNOW. IT'S SERIOUS.
David and Chana's toxic asset, which has acquired the nickname Toxie, gets sick. And the payments that it's supposed to provide them every month stop. They try and figure out why. (10 minutes)
Now, as they say on late-night TV: “But wait!! There’s more!!”
The latest development in the toxic-asset-mortgage-meltdown saga is this: Investors who purchased these toxic mortgage assets from folks such as Bank of America, Citigroup, Lehman, Royal Bank of Scotland, and the like are suing to get their money back. These investors are not little folks like us – they are state pension funds, company pension funds, mutual fund companies – people with deep pockets and Great White Sharks for lawyers.
These plaintiffs are pointing to the fine print in the documents that came with the zillion dollar toxic assets they bought that says the bank or investment house selling the security has done the proper due diligence to support the good credit rating that’s attached to the security. Turns out, no one did any due diligence and the institutional investors who are looking at a mountain of losses are now suing TO GET THEIR MONEY BACK.
If the investors win their suits, the banks and Wall Street houses who sold these assets may be required to reimburse the investors for their initial investments. Does anyone believe that BOA, Citi, RBS, or any other financial giant can afford to buy back zillions of $$$ in non-performing securities??
Consider this exchange from an NPR report on the suits.
Mr. LAITMAN: You have to read the whole thing many times of these underwriting guidelines, that the perspective...
JOFFE-WALT: But where are the underwriting guidelines...
Mr. LAITMAN: All of this.
JOFFE-WALT: And then Joel Laitman found it - page 81 of the offering document, three lines stating that the underlying collateral in the mortgage-backed securities had underwriting guidelines that required a credit check, a credit check that does not seem to have been performed on all of these loans. Ladies and gentleman, we have a case. The suit is working its way through court right now.
If you win, who pays you?
Mr. LAITMAN: It'll be the defendants who are in the case. So we're talking about...
JOFFE-WALT: RBS.
Mr. LAITMAN: RBS. RBS made significant money churning out these triple-A mortgage-backed securities, and they should be made to pay.
Talk about a kick in the ass. If BOA, Citi, RBS, and God-only knows who else are ordered to pay back zillions to investors, and if they fail as a result, who will bail them out?? The banks and investment houses don’t have anywhere near the money to meet investor demands for payback.
So, where will the money come from to pay back the investors?
Can anyone spell T A X P A Y E R ?????
Can anyone spell REALLY BIG, HUMONGOUS TARP???
There is one bright spot: Eric Holder is on the case
Now, before you jump out any windows, I should report that DOJ is on the case. According to this AP report from Vegas, DOJ has bagged 1,215 defendants in mortgage fraud schemes and that's only a start.
LAS VEGAS (AP) — Some 500 people have been arrested in a nationwide crackdown on mortgage fraud, and federal officials pointed to Las Vegas as one of the centers of the scams that pumped up home prices until the housing market bubble finally burst.
“I heard this many times,” said Scott Hunter, a Las Vegas FBI agent who has interviewed hundreds of so-called “straw buyers” lured into buying homes by unscrupulous real estate agents, brokers and loan officers. “They said, ‘Don’t let your good credit go to waste. You can purchase these properties. This is how you acquire wealth.’ ”
“What happened here was, when the party stopped and they were not able to keep inflating the prices on these houses, the whole thing collapsed.”
Nevada’s U.S. attorney, Daniel Bogden, counted 123 defendants charged, convicted or sentenced in the Silver State since March 1 as part of a national crackdown dubbed Operation Stolen Dreams. Bogden put losses in Nevada alone at almost $250 million.
In Washington, the Department of Justice linked nearly 500 arrests nationwide to the crackdown. U.S. Attorney General Eric Holder called the push the largest collective enforcement effort aimed at confronting mortgage fraud.
Holder said 1,215 criminal defendants had been netted in cases that uncovered more than $2.3 billion in losses and said the Justice Department also engaged in civil enforcement actions to recover more than $147 million in the operation.
FBI Director Robert Mueller called mortgage fraud “a risk to our economic stability” as a nation.
A DOJ mortgage fraud task force is meeting regularly and seems to be arresting people.
Do a Google search for "Department of Justice investigates mortgage loan fraud." You'll get hundreds of hits on articles describing arrests, indictments, and convictions.
I know. This diary is too damn long, uses too many block quotes, and is too disorganized. But, friends, this is a story that needs to be told.