Imagine this scenario: a middle aged couple loses their home to a foreclosure, and is forced to pack up their possessions as the bank has taken ownership. For countless families, this is an absolute tragedy that leaves them to try to pick up the pieces and rebuild their financial futures.
Another segment of the population, however, packs up their care and moves back to their primary house. In fact, a large number of foreclosures in today’s market occur on investment property, which does not serve as a primary residence for the owner and was financed by easy credit.
The core problem with today’s foreclosure market is that families are losing their homes and their options, which leaves them to have to declare bankruptcy to protect them from their creditors. These families are the ones we should be fighting hard to protect and help. But, in this market, how can we tell the difference between families that are genuinely in need of foreclosure help and those who are just looking out for the economic interests of their investments?
Under easy credit conditions, many part time real estate investors took the opportunity to take out loans on property. With easy credit, down payment requirements were minimal and long-term loans were extended, allowing for easy financing. While there were situations drive by pure investment speculation, there were also a large set of property investments made under fraudulent conditions, driven by a financing market that gave compensation for loans of nearly any type, independent of whether they would be able to be paid off. As a result, the amount and type of loans issued were out of line with the larger market.
One of the major fraud structures perpetrated on the market were for “straw buyers” where the supposed “buyer” of the property is merely serving as a stand in for an actual buyer. These straw buyers were financed by the original home owner, which led banks to be left on the hook from “home flippers” This trend led to a number of criminal rings in states ranging from Idaho to New York .
As Congress takes action to help alleviate the concerns of legitimate home buyers, it’s important to be able to separate those groups from buyers who are merely seeking the funds as a personal bail out.
As a result, the FBI has had to become involved in the mass rings of mortgage fraud throughout the country Critics contend that the agency has shifted too many resources away from white collar crime in an effort to focus on counter-terrorism and home land security.
Mortgage fraud is not just attributable to greed on Wall Street – in fact, a large portion of fraud can be traced back to deception on the part of borrowers. While greed on Wall Street led to lax oversight that contributed to these trends, a large portion of the fraud can be traced to brokers and investors who profited on false loans that were then sold into securities. These investors were then able to, essentially, pass the buck.
In fact, “ninja loans” where the buyer had to submit very little proof of income and almost no collateral were common for the very same reason: banks could then package and re-sell the loans to investors for a profit, while avoiding direct accountability for the success of the loans. Investors, eager for high returns on the mortgages in light of declining returns in equity markets, jumped at the chance. As a result, investors ranging from hedge funds to private equity firms to public pensions owned mortgage loans that had nearly zero chance of every being paid off.
Ninja or “no income (and) no asset” loans represented to worst of the housing bubble – providing financing that had no basis in reality except to perpetuate a failing system. Today, in difficult financial markets, the notion of easy money seems hard to believe, but it was this very lending source that came to define the housing bubble .
Lender were so eager to lend without full information. As a result of this informational gap, borrowers increasingly failed on their loans, which investors should have foreseen with proper oversight. When banks linked these mortgages in with other legitimate assets and then insured them, when the housing market failed, the large credit market fell along with it.
When credit default swaps, which are insurance contracts on securities, became common, then forms sought to continuously hedge their risk in an effort to pass on any potential losses to counter parties – in light of this, as well as a drastic under estimation of risk, the entire market fell drastically, taking nearly all sources of personal and commercial lending along with it.
In the middle of this crisis were the states with the most booming real estate markets, driven by speculators who assumed that property values would continue to rise for the foreseeable future. Expecting future increases, lenders had no problem financing up sell after up sell, as properties were “flipped” multiple times in a year, all on the back of cheap financing.
At the center of the investment ring was Florida, which once had one of the most active real estate markets and now finds itself with an excess capacity of properties, many half developed, such as the water front condos in Miami.
Part of this increase reflects increased investigations by the FBI and the Department of Justice – a lot of the fraud was not “new” but rather undiscovered, and with the rampant claims, law enforcement became involved. California, which also once had a booming real estate market, had the second highest level of mortgage fraud, followed by Nevada – two states which, consequently, have among the nation’s highest foreclosure rates.
Many still believe that the problem is isolated to the sub-prime market only in certain regions, but recent facts suggest the problem is much larger and affected a larger cross section of the markets. While sub prime gets a lot of the blame, high end transactions accounted for a good deal of fraud for more sophisticated criminal rings.
When the smoke finally clears, there are few parties who are blameless in the crisis. More importantly, when the public interest seeks to solve the mortgage crisis by ensuring that homeowners are able to get the financing they need to restore their credit, the public needs to differentiate between legitimate and illegitimate buyers. Rather than merely pointing at the subprime market or consumer reach, there is a key role played here for buyers who took advantage of credit markets to obtain loans, both legitimately and illegitimately.
Providing affordable housing to hard working Americans was part of the mandate of Freddie Mac and Fannie Mac, but the interaction with the larger credit markets created conditions under which loans (of nearly any type) were highly profitable for those who could pass along the buck.
In the long run, only through proper information disclosure and a level playing field can we finally have a fair housing market in America.