10/19/10

Bill Black on Foreclosures and the Obama administration

It does not appear that ...any senior official in the Obama administration, has focused on the fact that it has been standard operating procedure, for several years, for lenders, CDO holders, and courts to “jump to any conclusion” necessary to foreclose on homes regardless of whether the loan was fraudulently induced by the lender and regardless of whether the entity foreclosing on the mortgage engaged in foreclosure fraud.

[They]...also frame the problem euphemistically as limited to – “process” – instead of the known facts, which constitute fraud by the entities that are foreclosing.

...The problem is that the “neighbor down the street” is the problem. Liar's loans became the norm (Credit Suisse reported that they represented 49% of mortgage originations in 2006). Liar's loans were typically fraudulent. A borrower typically used the proceeds of a liar's loans to buy “a house he could never hope to afford.” The lenders and their agents typically made or directed the false statements about income and occupation. (The lenders and the loan brokers knew the term sheets and the ratios to hit.) While the lenders and the agents typically took the lead in providing the lies that made liar's loans worthy of that name, this does not mean that the borrowers were blameless. Many borrowers knew that the loan application contained false information and that they could not afford to purchase the home. We are talking about millions of homeowners, most with families.

But how are we to know that the borrowers knew the loans applications were false and that they could not afford to buy the home? We can infer a lender's fraudulent intent because it is financially sophisticated and has expertise in lending. An honest mortgage lender would not make liar's loans because not underwriting loans inherently produces intense “adverse selection” and means that the loans have a “negative expected value.” In plain English, that means that mortgage lenders that make liar's loans will go broke.

...We cannot make the same inferences about the borrowers' intent and knowledge. The policy issue is whether to foreclose on over 10 million people (counting family members) where we do not know what the borrower knew but we can infer that the lenders engaged in “fraud in the inducement.” The economic and societal consequences of such mass foreclosures, and the moral issues posed by the lenders' “fraud in the inducement” are massive.
The Obama and Bush administration have refused to deal with the pervasive role of lender fraud and the ambiguous role of borrower complicity in such frauds. This is contrary to Obama's critique of the policy failures that led to the financial crisis: “critical debates and difficult decisions were put off for some other time on some other day.” True; and those failures continue.


President Obama was unwilling to use the “f” word (fraud) when describing the financial crisis, but he did promise:

“It is time to put in place tough, new commonsense rules of the road so that our financial market rewards drive and innovation and punishes shortcuts and abuse.”

The administration, however, has not punished the elite financial frauds that made the hundreds of billions of dollars of liar's loans that drove the crisis. Obama was willing to use the “f” word in one context: “[We] will root out the waste and fraud and abuse in our Medicare program….” President Obama could “root out the waste and fraud and abuse” in banking (which is vastly greater than Medicare fraud losses) without new rules or laws. He could appoint regulators and prosecutors that would find the facts and act against the elite frauds that drove the fraudulent nonprime mortgage crisis and the foreclosure fraud crisis...

Bill Black...spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement...

 

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