Opher BanarieMortgage Collapse - Part 2
June 19th 2008 18:43
In Mortgage Collapse - Part 1 I discussed how mortgages are bundled for resale to investors, eventually ending up in investment funds that individuals can invest in. Two former Bear Stearns managers of such funds were arrested today.
At the end of the Part 1 I wondered just how much the fund managers would know about the risk in their portfolio of mortgages, especially after all of the bundling and re-selling that went on before becoming part of their funds assets.
But there was also something else going on: Fraud. There have been many stories in the news about people being unable to make their mortgage payments and being foreclosed on. And many of those stories tell tales of fraudulent claims made in order to get the mortgage in the first place.
A quick search found eleven posts in the Orange County Register's "Mortgage Blog" alone. The NY Times has 79 stories in a Google search.
And while a certain amount of fraud has always existed in any aspect of lending (or borrowing) the easy credit markets of 2001-2007 made it easier to commit more outrageous fraud. There were stories of people earning $50,000 a year buying million dollar houses with no money down. How is this possible? Well, if the loan originator is intent on selling the loan in a package, it could be that they hid the risky loan among a batch of good loans. Or maybe the paperwork shows the borrower is making $250,000...just a little typo on the loan report....
Since these loan originators were able to get their money out of the loan by selling it to others, they had an incentive to make as many loans as they could. They collected fees for the origination work, and sometimes additional fees for offering services such as escrow, title search, inspection referal fees (or kick-backs), etc. There was money on the table for them to collect - and there was a systematic effort to collect as much of it as they could.
Given all of these activities during loan origination, followed by several rounds of re-sale of the individual loans to investors, how much could a fund manager know about the risk in the portfolio? How much criminal liability can they be charged with? When will the crimes committed by the originators be prosecuted?
We are all suffering in the wake of the mortgage/credit issues now going on. Will all the people responsible be prosecuted? We can only wait and see.
At the end of the Part 1 I wondered just how much the fund managers would know about the risk in their portfolio of mortgages, especially after all of the bundling and re-selling that went on before becoming part of their funds assets.
But there was also something else going on: Fraud. There have been many stories in the news about people being unable to make their mortgage payments and being foreclosed on. And many of those stories tell tales of fraudulent claims made in order to get the mortgage in the first place.
A quick search found eleven posts in the Orange County Register's "Mortgage Blog" alone. The NY Times has 79 stories in a Google search.
And while a certain amount of fraud has always existed in any aspect of lending (or borrowing) the easy credit markets of 2001-2007 made it easier to commit more outrageous fraud. There were stories of people earning $50,000 a year buying million dollar houses with no money down. How is this possible? Well, if the loan originator is intent on selling the loan in a package, it could be that they hid the risky loan among a batch of good loans. Or maybe the paperwork shows the borrower is making $250,000...just a little typo on the loan report....
Since these loan originators were able to get their money out of the loan by selling it to others, they had an incentive to make as many loans as they could. They collected fees for the origination work, and sometimes additional fees for offering services such as escrow, title search, inspection referal fees (or kick-backs), etc. There was money on the table for them to collect - and there was a systematic effort to collect as much of it as they could.
Given all of these activities during loan origination, followed by several rounds of re-sale of the individual loans to investors, how much could a fund manager know about the risk in the portfolio? How much criminal liability can they be charged with? When will the crimes committed by the originators be prosecuted?
We are all suffering in the wake of the mortgage/credit issues now going on. Will all the people responsible be prosecuted? We can only wait and see.
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