Were the Banks Complicit in the Mortgage Fraud?
November 7, 2007 by Lucas Lechuga
Shares of Washington Mutual tumbled a little over 17 percent today as a result of a probe initiated by New York Attorney General Andrew Cuomo. Subpoenas were issued today by Cuomo to Fannie Mae and Freddie Mac, two large government-sponsored mortgage investors, to investigate mortgages that they purchased from Washington Mutual. Cuomo alleged that Washington Mutual pressured a major real estate company to inflate home appraisals. The New York Attorney General stated, "Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender's interest. Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals."
This puts a whole new spin on the mortgage fraud fiasco. Everyone has been saying for months that banks were unaware that they were being defrauded. The wool was pulled over their heads, so to speak. This may not have been the case after all. In fact, they may have been pulling the wool over someone else's head and running them into a wall. Ouch!
If these allegations turn out to be true then Washington Mutual will be in a world of pain. Fannie Mae and Freddie Mac will no longer buy their mortgage loans which will leave Washington Mutual with no other choice but to leave these loans on their books. Not a good scenario.
To be fair, secondary marketing and higher probably did not know they were being defrauded until it was already getting too late to do anything about it, but certainly the account executives pushing these deals through knew they were fraudulent and either had a underwriter who was an idiot or who was an accomplice.
As a former account executive, I was not above massaging a deal to meet guidelines or finding loopholes to get them through that in these days of stricter guidelines might be considered fraudulent. I have seen both types of underwriters, though to be fair the underwriters I have worked with did their best to be diligent to the investor, but it does not mean the wool could not be pulled over their eyes. Other banks, though, I know had underwriters who were rubber stampers.
On the retail side, where I now spend some of my time and from my previous experience in wholesale, certainly the brokers, LOs, and processors were all complicit in great numbers regarding fraud, with many sweatshop offices being notorious for dirty deals. As a wholesaler, I never worked with those offices — too much effort expended for shady deals that just made you look bad. As a retailer, I only deal with A paper people so my deals, what little I might have in this current downturn, are clean.
Still, the last three years in real estate were filled with sketchy individuals pushing the limits of legality and with unscrupulous ethics. We are paying for it now.
The thing is, during the boom when prices really were going up at double-digit rates every year, many of the comps that appraisers could use at any given time were already outdated and didn’t reflect true market value at the time of purchase. One townhome subdivision near me (north Palm Beach County) went up 50% in value in less than 6 months.
I mean, a property’s true value is the amount of money someone is willing to pay for it. So, getting an appraisal to fall in line with the contract price isn’t way off-base, if you ask me.
The REAL issue here is that banks never should have done 100% loans. By not requiring people to put their own money at risk, they were practically inviting rampant fraud–not to mention allowing people to buy stuff they never could really afford in the first place. If banks had stuck to the old 20% down rule, we probably wouldn’t be talking about the “mortgage meltdown”–it probably never would have happened.
And besides–let’s say that the bank influence didn’t happen and all of the appraisals were indeed accurate. Prices on houses would have still been bid up higher than their fundamentals and we would still have a housing bust on our hands–just not as big. You would still have falling prices, people would end up underwater, and people would be defaulting on their mortgages. No appraisal fraud needed.
This was certainly one of the factors that fueled the real estate boom–but it was only one of many. The main reason for this recent real estate boom is the same as all the others that came before it: people saw investing in housing as a way to quick riches and got greedy. The Fed, banks, mortgage brokers, etc. all contributed to it but greed is the fundamental reason behind it all. People went crazy for houses the same way they went crazy for dot-com stocks in the 90’s.
The end result is always the same: prices will go back to the levels where they make sense.
I see a lot more of this in the near future, I see Goldman Sachs releasing more losses from defaulted loans sometime before the end of the year…