Let's Kill This Lie Forever II
The Subprime Swindle and the Foreclosure Fraud Cover-Up
Posted by Zach Carter
There are plenty of reasons why the foreclosure fraud crisis sweeping the nation’s housing market is an economic disaster. Banks are charging borrowers illegal fees, kicking the wrong people out of their homes and even hiring thugs to illegally break into houses. But the fundamental scam is much worse than these shameful acts. Fraud in the foreclosure process conceals a second, more massive fraud: the astonishing levels of mortgage fraud perpetrated by subprime lenders during the housing bubble. These frauds don’t just expose big banks to epic losses, they expose bigwig bankers to prison time.
Clearly, we’re dealing with a lot of different frauds here. Tomorrow, I’ll detail one of the smaller-bore problems with foreclosure fraud: providing cover for illegal fees that lenders charge to troubled borrowers. But today I’ll discuss a much different and much bigger scandal. During the housing bubble, banks falsified documents on a massive scale in order to issue as many toxic subprime loans as possible. This was straightforward mortgage fraud, and the current wave of fraud in the foreclosure process is covering it up.
In 2004, the FBI sounded the alarm about an “epidemic” in mortgage fraud. This was right at the beginning of the real subprime explosion—things got much worse as the housing bubble inflated. What’s more, according to the FBI, 80 percent of mortgage fraud is committed by lenders.
Bankers and mortgage brokers didn’t just make reckless loans to borrowers who couldn’t afford them. They also illegally falsified documentation in order to push borrowers into loans they could not afford. This was not a con perpetrated by irrational poor people attempting to live beyond their means—it was committed by perfectly rational lenders, who knew they could make a handsome profit by selling these garbage mortgages off to investors.
We know about how these frauds were incentivized at specific lenders thanks to anecdotes collected banks that actually went under during the crisis. When Washington Mutual collapsed in September 2008, it was one of the largest banks on the West Coast, with $350 billion in assets. It wasn’t a small-time specialty shop operating off the grid—it was a regulated bank, overseen by the Office of Thrift Supervision, subject to standard consumer protection regulations and federal anti-fraud statutes. Yet the bank engaged in systematic, knowing fraud which its executives allowed to continue unpunished. As Sen. Carl Levin, D-Mich., emphasized in a hearing this April, the company even rewarded some of its employees who committed fraud by promoting them.
Why all the dodgy dealing? Bigger bonuses. During the housing bubble, Washington Mutual CEO Kerry Killinger took home between $11 million and $20 million every year.
This type of mortgage fraud is not the scam that consumer advocates are currently sounding the alarm about. That’s a much different fraud. When banks go to foreclose on borrowers, they do not have the documentation necessary to prove they actually own the mortgage. Banks can’t document their right to foreclose, so they’re fabricating documents, forging signatures and lying to judges to push them through. So how are the two frauds related?
Fraudulent mortgages are, by definition, illegal. Banks that issue them can be sued, and the bankers involved can be tried in court and sent to prison. Bankers very much want to avoid both of these scenarios.
But it’s also illegal to package fraudulent loans into securities and sell them to investors—especially if you don’t tell investors that the security is full of fraudulent loans. It’s securities fraud, and bankers also don’t want to lose huge amounts of money on that line of business.
If you’re a bank that packages mortgages into securities and sells them to investors, and you know your securities are full of fraudulent loans, you might not want to transfer all the necessary documents detailing the loans. Those documents, after all, would reveal that your securities were completely illegal—and that you are responsible for any losses stemming from them.
For intermediaries like securitizers, fraudulent loans are the best kind of loans—they’re literally too good to be true. So long as nobody ever pins the legal liability on you, you can make a lot more money from fraudulent loans than you can make on loans that actually make financial sense. Fraud-packed securities fetched much higher prices than mortgage securities packed full of boring, legal mortgages, and led to much bigger bonuses.
In today’s foreclosure fraud scandal, mortgage servicers—the housing industry’s debt collectors—don’t have the legal documents necessary to move on a foreclosure. They don’t have the documents because the banks who created the securities never handed them over. And without those documents, it’s far more difficult to prove that the securities and the underlying mortgages are illegal.
So this isn’t about “paperwork” or technicalities. This is about preventing the basic fraud at the heart of the financial crisis and the Great Recession from being prosecuted.
That, ultimately, is the big danger for Wall Street, and for the policymakers who have provided economic cover for megabanks. Wall Street banks aren’t worried that their mortgage servicing costs may increase while they “track down” paperwork—they’re worried that the entire $2.6 trillion mortgage-backed security market is about to land on their doorstep, with punitive damages and prison sentences tacked on.
Apologists for CEOs spent much of the summer complaining about the “uncertainty” that new regulations and tax policies supposedly create for businesses and investors. If potential taxes were an economic problem, just wait to see how financial markets respond to a fresh $2.6 trillion hole in the banking system created by fraud.
Worst of all, U.S. taxpayers own a huge portion of these securities. Fannie Mae and Freddie Mac have enormous portfolios of subprime-mortgage backed securities, and the Federal Reserve purchased large volumes of mortgage securities in order to sustain the housing market as it collapsed. The government has no choice but to deal with this mess, if only to cut its own losses. Whatever the policy the government pursues, Rick Santelli and his friends will be sure to complain about a bailout for “losers,” but something has to be done. It’s not a question of bleeding hearts, it’s a question of basic justice for homeowners, investors and taxpayers.
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Just get the money, get the money, get the money. It's what unchecked (and we like it that way) capitalism is all about - don'tcha know.
Gallup's Implausible Likely Voter Results
Alan Abramowitz
Alben W. Barkley Professor of Political Science, Emory University
It's a shocking result. According to the Gallup Poll, a generic Republican candidate currently leads a generic Democratic candidate by 17 points among likely voters in a hypothetical House matchup. A margin of that magnitude on Election Day would almost certainly result in a Republican gain of at least 80 seats in the House of Representatives and the largest GOP majority since the 1920's. But how plausible are Gallup's results?
An examination of some of the internals from the latest Gallup survey of likely voters leads to the conclusion
that these results are wildly implausible. First, Gallup shows a much larger percentage of Republicans (55% Republican identifiers and leaners vs. 40% Democratic identifiers and leaners) and conservatives (51% conservative vs. 28% moderates and 18% liberals) than we've ever seen in a modern election. They also show
a smaller percentage of voters under the age of 30 (7%) and a larger percentage of voters over the age of 65
(27%) than we've seen in any modern election. But that's not all. The candidate preference results for some subgroups of voters are just wildly implausible.
Gallup's latest likely voter survey shows a generic Republican leading a generic Democrat by a whopping 28 points among whites, 62% to 34%. To put those numbers in perspective, in 1994, according to national exit
poll data, Republicans only won the white vote by 16 points, 58% to 42%, and that was their best showing
since the advent of exit polling. Gallup is telling us that right now the Republican lead among whites who are likely to vote is 12 points larger than the GOP margin among whites in 1994.
But that's not the most implausible result in the latest Gallup likely voter survey. Among nonwhites other than blacks, a group that comprises about 13% of likely voters, a generic Republican is leading a generic Democrat
by 10 points, 52% to 42%. That's a group that voted Democratic by a 2-1 margin in the 2006 midterm election. Moreover, it's a group that has never given a majority of its vote to Republican candidates for Congress in any election since the advent of exit polling. According to the 2006 exit poll results, about two-thirds of these "other nonwhite" voters are Latinos. How plausible is it that at a time when the Republican Party is closely associated with stridently anti-immigrant policies that Latino voters are moving in droves toward Republican candidates? Not plausible at all, especially when Gallup's results are directly contradicted by other recent polls of Latino voters.
The Gallup Poll should be commended for making their internals available to interested observers for secondary analysis -- few other polling organizations are so generous with their data. And to be fair to Gallup, they have cautioned that these results are not a prediction of what will happen on Election Day, only a snapshot of current voter attitudes. But what is the value of putting out results that defy logic but which can influence perceptions of the current electoral climate among political elites as well as the public?
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After all this work, I'm exhausted. And that, SL, is what's necessary to begin to understand complicated subjects.