Monday, February 09, 2009

Subprime Lending Fraud Straw Man

I’ve written quite extensively regarding subprime lending, and commented, also, on allegations of fraud in the subprime lending industry.

While I will not argue there was no fraud in the subprime lending industry, I will argue, once again, that prosecutable subprime lending fraud was not the cause of the collapse of the subprime lending industry.  The overriding cause of the collapse of the subprime lending industry was over generous lending guidelines resulting in loans given to borrowers who should not have been lent to.

This subject comes to my attention again today after reading an article at SeattlePI.com under the headline FBI saw mortgage fraud early, which I was pointed to by Greg Ransom.

Let’s take a look at some of the things stated in the SeattlePI.com piece.

“We knew that the mortgage-brokerage industry was corrupt,” the first of the retired FBI officials told the Seattle P-I.

Reading that, one could surmise that the entire mortgage-brokerage industry was corrupt.  Nothing could be further from the truth.  I worked many years in the mortgage-brokerage industry, and while there were corrupt individuals within the industry, they were a minority, as all criminals are a minority.

The sentence quoted above, is then immediately followed by this sentence.

“Where we would have gotten a sense of what was really going on was the point where the mortgage was sold knowing that it was a piece of dung and it would be turned into a security.

While I am inclined to agree that many subprime mortgages were “dung,” the fact of the matter remains that each and every individual subprime mortgage had been underwritten and approved per guidelines established and approved by the big players in the subprime market.  And these lax and over generous underwriting guidelines were known from top to bottom in the industry, from mortgage broker, to mortgage securitizer.  And these over generous underwriting guidelines were put in place in the lending industry by continual calls from the government to get more people in homes.

Further reading of the SeattlePi.com piece, whose premise seems to be that if more FBI agents were not off chasing terrorists, but rather chasing white collar criminals, specifically in the subprime lending industry, the current global financial crisis might not have occurred.  At least one FBI big whig is not falling for this.

FBI Assistant Director Ken Kaiser—in a statement - took issue last week with any implication “that if the FBI had made more arrests for mortgage fraud, the crisis could have been averted. To even suggest that is a cry for a lesson in both civics and basic economics.

“It is not a fair or realistic assessment.”

And Kaiser would be correct, so don’t you fall for it either.  The SeattlePI.com piece is simply a subprime lending fraud straw man, propped up for us to view, and then to clamor for more governmental control.

I’ve said it here twice, and I’ll say it a third time, now.

While the FBI may find a few prosecutable mortgage lending fraud cases, what will mostly be brought to light by their investigations will be the foolishness of the underwriting guidelines utilized by the subprime lending industry, and the unethical, but not illegal, methods which were utilized to suck subprime borrowers in.

Posted by John Venlet on 02/09 at 12:29 PM
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