The mortgage mess: What about the evil borrowers?

For months, I've been listening to the analyses, by every talking head on the air, regarding real and potential mortgage defaults.  All I hear is sympathy for the borrowers, all of whom were supposedly innocent victims of unscrupulous lenders.  All of the government bureaucrats, officials, and bailout programs are designed to assist the borrowers who got shafted.

Just curious: How come I'm hearing nothing about the lenders who got shafted?  Does everyone really expect me to believe that 100% of the victims were on the borrowing side?  How naive is that?

Many fraudulent borrowers, from the very beginning, never intended to make payment 1 on the house they bought.  They were just in it to flip the property, or to pocket the money they secretly obtained in an illegal side letter that was hidden from the closing process.  The FBI has known about this problem for years. 

Fraud and deception in home mortgages has been a two-way street.  So why is the dialog so one-sided?  Why are all borrowers being lumped together as seeming "innocent victims"?  (Were the fraudulent buyers counting on this kind of reaction?  Sheesh, maybe they were smarter than I'd thought.)

Just curious.

Comments

[Fat Man]

"Speculators May Have Accelerated Housing Downturn" by Ruth Simon and Michael Corkery in theWall Stree Journal on February 6, 2008 at Page B8

As lenders pore over their defaulted mortgages, they are learning that the number of people who bought homes as investments is much greater than previously believed. ...

Roughly 20% of mortgage fraud involved "occupancy fraud," or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in. ...

The high number of hidden speculators helps explain some of the problems roiling the housing and mortgage markets. ... Investors tend to be more likely than borrowers who live in the homes to walk away from their purchases when home prices fall. ...

In Las Vegas, as many as 60% of the foreclosures last year involved non-owner-occupied homes, according to Applied Analysis, a real-estate-research firm. ...

The temptation to lie can be substantial and may have been encouraged, or at least tolerated, by mortgage brokers and real-estate agents eager to close a home sale. Standards tend to be tougher for borrowers purchasing investment properties, since these loans are considered riskier.

***

[T.Pettinger]

It is always a 2 way process. But, the number of defaults in the US is much higher than anywhere else because lending standards were so much slacker. In Europe there is much more regulation of mortgage lending.

[Aaron]

Speculators created 'artificial' demand, so that when the market popped, it would pop big as suddenly there is oversupply.

T. Pettinger, some US states were laxer than others. California had lots of no doc/lo doc mortgages. I would also wonder about, say, Spain where housing has been in a boom for quite some time.

Steve, could you explain more about the fraud aspect, I recall reading about that, but forget how the details went.

[Bob]

Many participants in this mess. Hamilton over at Econbrowser has a primer on how the CMO's were packaged....and the rating agencies
gave the securities high grade status!

Who rates the rating agencies?

[Ken]

I for one, can't bring myself to understand why the gov't should do anything about this mess.
Perhaps I am misunderstanding the nuances, but the gross oversimplification is that a bunch of people got to greedy. Borrowers took on bad deals, and lenders offered them, and now both sides lost. Seems like the loss itself should be incentive enough for the lenders to be more selective about whom the lend to, and borrowers to shy away from anything resembling a variable rate loan. If the gov't steps in with a bail out, it will just keep one or both sides from learning their lesson.
But, some might say, what about all the people who got hurt when the economy as a whole went down? They had nothing to do with it. Well, It seems that economies move is cycles. They boom, and the contract, so if we somehow wave a wand and make this contraction go away, we are just buying ourselves a few months before the next one comes along. We can't keep on booming forever, those contractions have a point. And its not like this was some earth shattering, great depression causing event. So far we have 1 quarter of less than stellar growth. We still have growth, so what’s the problem?

Am I missing something?

[Luis Busquets]

Are you kidding Steve? The business of the banks is managing the risk. They should not simply say you want money then here it is and if you do not give it back to me, two big guys will go for you and will break your legs. Or simply, sell that to a third person saying, he is going to pay beleive me. In Spain, Belgium and I would bet that all other European countries, before you get a mortgage, the bank gets sure that you can return the money. Looks for your payroll, properties, debts, ... Yes, there are people who cannot return the mortgages, but very little number and you can always sell the house and get back the money. Not in the US I know because of the crack in the prices of houses. The US banks have not managed the risk correctly and now there are banks who have problems. Let's be more cautious next time before happily lending money.

[Morgan]

Luis:

No, the business of the banks is making money - managing risks is one aspect of that, but the banks don't (and shouldn't) base their decisions on their assessment of whether the loan is a good idea for the borrower, only whether it is good for the bank. Please don't ask the banks to participate in the paternalism the government seems to exist to further.

I'm not crying for the financial institutions - Merril Lynch may have written off $14 billion last year, but they still managed average net income of almost $2.5 billion per year from 2002-2007. No sympathy for them.

But it's hard to work up sympathy for people who took on loans they couldn't pay back, either. Borrowers know their own financial prospects better than the bank ever can, regardless of how much risk assessment they perform. Even when they didn't commit any fraud, they took a chance on a get-rich-quick scheme. The banks saw loans to people like them as profitable in the aggregate - they made stellar profits, now they're taking their lumps. Same with the borrowers. Many got rich quick. Many others are now taking their lumps.

Why is it so difficult to see that both were acting in what they believed to be their best interests by taking on risk. And doesn't risk imply that sometimes you win, sometimes you lose?

[Devin]

Kindof like this lady:

http://tinyurl.com/yuwmsq

who leased a $100,000 BMW for $1,300/month with her $2,500 monthly disability income. She knew that the finance officer at the dealership had falsely inflated her income to $6,000 per month on the application, but she is now blaming the evil dealership for again inflating her monthly income to $8600 without her knowledge in order to qualify. Apparently agreeing to fraudulently by 2x is fine, but when the dealership inflates your income by 3x they are way out of line.

Too many people are trying to paint people like this lady as the "victim". What happened to personal responsibility?

My favorite line from the article:

"'I witnessed that sale. I saw her and congratulated her. She was so thankful. She was so passionate about wanting that car and would have done anything to get that car,' Long said.

[Luis Busquets]

The bank, takes money from people who deposit it and gives it to people who are going to use it. The responsibility of the bank is making sure that the money with which it has played (incidentally its customers money) will be refunded. By the way if any of you can lend me $1MM I promise I will be returning it with a 5% interest. You can be sure of that. Cannot the banks be accused of being silly?

[Joe D]

Pretty Naive
============
@SO
"All I hear is sympathy for the borrowers, all of whom were supposedly innocent victims of unscrupulous lenders. All of the government bureaucrats, officials, and bailout programs are designed to assist the borrowers who got shafted.

Just curious: How come I'm hearing nothing about the lenders who got shafted? Does everyone really expect me to believe that 100% of the victims were on the borrowing side? How naive is that?"

"Reserve Bank" should have "wealth" something that sustains life in reserve isn't it? That something is Food/Fuel/Energy essential ingredients that sustain life.

If the Federal reserve bank does not have food/fuel/energy reserve then what are they lending? Have you seen children play shop? when fake lenders lend fake borrowers will borrow, it is a universal reality isn't it?

All bailout programs are to bailout the Fed bank....

BTW all who accepts fiat currency circulated by reserveless bank run by a kleptomaniac tribe are pretty naive......

[Aaron]

Luis,

When can we expect the superior European banks who know how to manage risk to take over the US market? I hear Societe General is a very reputable enterprise with strict rules that make it unthinkable that fraud could occur.

Sarcasm aside, there was genuine fraud from the buyers - I forget how it was done, but I believe they used proxy buyers who would buy at an inflated rate and the seller would split some money with them. Then the buyer would default.

[luis busquets]

Sarcasm aside, I feel that US banks who got lied by borrowers should improve their controlling systems. In my opinion, this is innate to the different way of doing things; the US is more willing to accept risk than Europe and obviously risk goes together with reward.

BTW, is it believable that one sole junior guy (around its 30) working at Société Générale is able to manage without consent 50 billion EUROS (more than 70 billion USD? Is this guy a scapegoat? I bet that there are more people involved

[woodchuck64]

Steve, from a business point of view, the best decision many underwater homeowners should make is to walk away from their homes; i.e. mail in the keys. Banks/lenders are deathly afraid of that and are actually behind many of the "bailouts" you see proposed as a way to negotiate with the homeowner. These are bailouts benefiting the banks/lenders, not homeowners.

[Aaron]

Luis,

We don't know if he did it by himself, but Barings was bankrupted by Nick Leeds (?) so I imagine it is not impossible. It also happened to Chinese and Japanese companies before as well.

I don't know enough about mortgages to say if the US or Europe is stricter - I suspect it would depend on the country/state. We also have laws about discriminating in giving loans.

http://www.altrust.com.au/page.php?id=53
Hmmm, Australia seems to have these lo-doc no-doc deals as well.

Anyways, I found a great blog which about mortgage fraud, so you can see how borrowers can be just as at fault as the bankers.

http://www.mortgagefraudblog.com/

Apparently a lot of people are involved in complicated schemes to defeat all of the supposed controls that are in place.

[Dave]

"Fraud and deception in home mortgages has been a two-way street. So why is the dialog so one-sided? Why are all borrowers being lumped together as seeming "innocent victims"? "

Because its an election year and pandering polls well :(