The lead story in a recent Wall Street Journal says that borrower fraud “goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy.”
In other words, some significant share for the blame mortgage crisis rests not just on borrowers, but on dishonest, even criminal borrowers.
If the premise of this story is true, we need to seriously rethink the mortgage dilemma and tighten safeguards to protect lenders, Wall Street securities dealers and institutional investors against hordes of unscrupulous borrowers. And yet, the Federal Reserve has neglected to do anything of the kind in proposing new lending rules. Instead, these deal entirely with unscrupulous lending practices.
But, of course, the premise of the story is not true. I don’t know anyone who thinks that. Even Bear Stearns, an alleged victim in the story, if you can believe it, isn’t saying that.
And even if you think it is true, there is a journalistic problem here: The assertion is unsupported. The evidence cited in the story does not make, or come close to making, the case for the idea that borrower fraud is an important driver of the mortgage crisis. To see that, frankly, does not even require a particularly close reading.
For its main evidence—potential dollar losses from criminal fraud—the story relies solely on the word of a consultant who has a direct interest inflating the extent of the problem.
In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training.
How Prieston came up with that figure is not disclosed. That’s another journalistic problem.
But even if this conflicted, previously unknown, and soon-to-be-forgotten source is to be believed and his maximum estimate is taken at face value—“losses on fraud could total a record $4.5 billion in 2006”—that still is a tiny fraction of total losses that will result from the mortgage crisis. The total is not known but is believed to be in the hundreds of billions of dollars. A commonly cited figure is $400 billion.
Multiplying Prieston’s worst case by all six and a half years of the housing bubble gets you to $30 billion. Now, you’re officially in fantasyland, and still under 8 percent.
The full support for the premise is here:
Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department’s Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. ‘We’ve created a culture where a great many people know how to take advantage of the system,’ says Mr. Prieston.
Yes, it is useful to know that banks are reporting suspicious incidents at a rate that is 700 percent greater than before, and that the FBI has stepped up fraud investigations. But those facts support only the unsurprising proposition that criminal fraud increased rapidly as mortgage volume grew. Neither fact demonstrates that the mortgage crisis can be explained to any significant degree by borrower fraud.
As for the assertion that half of foreclosures come from fraud in “some regions,” the sole source is a verbal estimate from an Atlanta real estate agent judging from sixty cases he’s seen.
That’s not “some regions.” That’s not even a single region.
These are issues of basic journalism standards. Readers have a right to feel tricked here.
Is there any reason to think that the new ownership at the Journal has anything to do with this example of apparently sloppy, tendentious reporting?--something we've rarely seen from the Journal in the past? Could it be that, in the future, the right-wing bias of the Journal might extend beyond its editorial page to its formerly straight-down-the-middle news reporting? I'd like opinions on this from people better positioned than I to know.
Posted by kweberlit
on Wed 2 Jan 2008 at 02:40 PM
How bogus is this column. There is ample evidence of borrower fraud in the current credit crisis hitting the markets. The Washington Post has reported on a local FBI investigation of staggering criminal fraud involving local real estate transactions, where properties were hiked up in value, then bought with an inflated mortgage, and the buyer never took occupancy but walked away. There are similar investigations in the Denver area, and in California. There are many cases like Casey Serin of Sacramento, who although jobless managed to obtain mortgages on six properties, all of which were eventually foreclosed. He made a blog out of this iamfacingforeclosure.com, which was an Internet hit, until he sold it. Without borrower fraud, this current crisis would not be possible. I am fed up with reading stories about innocent homeowners bilked out of their life savings because they were ignorant when they signed mortgage documents. Anyone who has gone through the agony (day-long agony in my case) of closing knows that ignorance of what you are signing just is not possible. Also look at what Bank of America is reporting about house speculators who were good credit risks just walking away from their mortgages and surrendering their properties. I am sure Starkman would like to see a continuation of real estate page stories puffing up new developments or new designs for McMansions that everyone is buying, but what I'm reading now about what happened is the first honest reporting about the real estate industry in my life. Finally, yes we do need new protection for lenders. When the financial institutions take risky mortgages and packages them as AAA rated financial instruments to unsuspecting lenders, something is obviously wrong. So Starkman, buy more of your Countrywide shares, or invest more deeply in Citibank or Beazer. I've never such such greed involving individual investors in my life, and yes borrower fraud happened here, and deserves to be exposed.
Posted by Edward Allen
on Wed 2 Jan 2008 at 05:38 PM
I read the column with interest. In regards to this line:
"But, of course, the premise of the story is not true. I don’t know anyone who thinks that. Even Bear Stearns, an alleged victim in the story, if you can believe it, isn’t saying that."
I think your column attempts to prove that the WSJ thesis was not supported by evidence. I don't think the column attempts to prove that the thesis was incorrect. It might be a fine distinction, but one worth noting in case irrefutable evidence of widespread fraud does end up being recognized as a factor. I don't believe "No one thinks that" is strong enough evidence in itself to say the fraud didn't exist. Saying that it is an "unknown" as you describe later in the column is probably more accurate.
Anyway, maybe I'm splitting hairs. Thanks.
Posted by Joe Light
on Wed 2 Jan 2008 at 06:17 PM
You claim the WSJ's premise is untrue, but you provide no proof of this assertion. Some "audit."
The real apostasy of the WSJ premise is that it goes against the narrative of evil subprime lenders taking advantage of hapless borrowers. Surely the problem can't be blamed on borrowers lying about their jobs, income and assets as they take out second and third mortgages to buy God knows what.
I believe any lender who provides a mortgage to a borrower without verifying that borrower's job and income, and without having an honest appraisal done, deserves whatever he or she gets. But even if a lender doesn't do his or her due diligence, that doesn't excuse a borrower from providing false financial information to a lender.
With that said, stories in the WSJ often draw sweeping conclusions from very limited data (at least as it's presented in the newspaper). This happens almost every day. Watch how many times a story presents examples from one or two states, then declares that the issue being reported about in the story is national in scope.
A good example of this is the WSJ's stories about the problems of a Florida fund that's used by local governments to park money and get reasonably good returns. Apparently, some of this fund was invested in subprime mortgages, and local governments began pulling money out of the fund. It was a serious, multi-billion dollar run.
All well and good. But the WSJ stories about this claimed it was a symptom of a broad national problem, that almost every state had a similar fund, these funds were having problems, etc.
It wasn't true. First of all, most states don't have these funds. Secondly, the only other example the WSJ mentioned was one Montana county's withdrawal of money from a Montana state fund, and it was a piddling amount when compared to the Montana fund's total assets.
My point is, stories in the WSJ that claim to spotlight a national problem or issue often don't have the evidence to support the claim that the problem is national.
Posted by C.J. Burch
on Thu 3 Jan 2008 at 01:34 AM
How weird is it that of the four comments, two are by fans of the WSJ approach? Not only do they buy big-business propaganda, but they shill for it all over the web? Who would do that? Why not just read the WSJ, whose news columns -- from a partisan view -- have always been full of pro-business bias and certainly will be more so now under the reign of the Australian press baron (I love it that all these good American wingnuts blindly follow a foreigner like Murdoch, it's just too much). As for the two commenters above, does it need to be said? The column doesn't say that we've had no borrower fraud, as Allen maintains, just that it's hardly a cause of the crisis -- looks like you're Mr. Bogus here, Ed. What, do you work for a lender or something? And C.J., it's obvious you can type, but can you read? The Audit's case that the WSJ overstated the importance of borrower fraud is quite clearly made, and altogether too modestly, in fact. If there were a Rush Limbaugh of the Left, he would be crowing that "the WSJ is beginning 2008 by churning out pro-business propaganda on its front page, just like we all knew it would under the right-wing nut Rupert Murdoch"!!!
Posted by walter10021
on Thu 3 Jan 2008 at 09:38 AM
The problem with the Journal article in large measure is that it fails to distinguish between individual borrower fraud and the more well organized collusive borrower fraud being discovered across the country. Link to http://www.mortgagefraudblog.com/
for some good citations of such activities. The collusion is not between individual borrowers, but between lenders or their agents, the mortgage brokers, who organize groups of individuals as "straw" borrowers. A property is repeatedly sold and resold inflating its value and borrowing multiple times on a single property. The borrowers in such cases are not end users, but co-conspirators in the schemes, which also include property appraisers. The banks which might later have purchased these eventually worthless mortgages did so with eyes wide shut. That is to their own discredit.
Those borrowers who were coerced by sales tactics and their own over blown desires to live the American dream were more the victims than the perpetrators of a fraud. Given the ever inflating cost of rents, it is not surprising that so many were so easily led down the garden path. The buyers of a dream are always the most easily victimized.
Posted by Jack
on Thu 3 Jan 2008 at 03:53 PM