Who Will Clean Up the Mortgage Mess?

As the subprime mortgage mess continues to play itself out, certain words that ought to pop up in the discussion are not to be heard. These are words like “fraud,” “conspiracy,” “misrepresentation” and “felony.”

We are looking at more than greed gone awry. We are looking at an industry that tolerated and fostered what the trade calls “ninja loans.” The Wall Street Journal defines a ninja loan as one that “required no income, no job, and no assets.” Anyone issuing a ninja knows damn well that there is a good chance that the home buyer will default. Nevertheless, the ninjas were sold to mortgage bankers who mixed them in with other mortgages, turned the package into bonds and sold them. If the bankers did not know that they were trading in worthless paper, their ignorance has to be willful, and that’s a crime.

Other subprime mortgages are called “no docs.” Such loans, according to The Journal, “didn’t require the lender to verify the borrower’s income.” Until 10 or so years ago it was absolutely impossible to obtain a no doc mortgage in the United States of America. The people and institutions issuing the loan and selling and/or reselling it demanded verification of the borrower’s ability to make the monthly payments. The only reason to issue a no doc loan is to deliberately choose not to know that the home buyer will more than likely not be able to carry the mortgage. Fraud again.

There is every reason to believe that other kinds of fraud were being committed. The chain of crime probably began with the real estate appraisers, thousands of whom must have been paid extra to come in with higher-than-market appraisals. They were indispensable in perpetuating bigger and bigger prices for housing, without which this long chain of chicanery, deception and dishonesty would have snapped years ago.

Thanks to the puffed-up appraisals, mortgage brokers got large fees as they placed the fraudulent loans with bankers who got their cut as they passed the mortgages on to the next link in the chain. That the home purchasers did not have the income to keep their payments up to date was no problem since, with the assistance of the appraisers, the value of their property was going up all the time; they could make good on the payments by refinancing rotten mortgages with rotten-er mortgages. The yet-more-rotten instrument was the adjustable rate mortgage (ARM), which in and of itself, when ethically used, is a useful financial tool.

The whole thing was too rich for words. Not only did these people clean up with the original mortgage, but more fees and more thieving hanky-panky was there for the using when refinancing time came around. The refis were low-interest ARM’s that after two or more years would reset into high-interest ARM’s, unless of course the value of the property had risen again, thus making a second refi a profitable possibility.

Profitable is hardly the apt word. High on the hog does not describe it. Last year Angelo Mozilo, the founder and boss man of Countrywide Financial Corporation, took home $114 million in his pay envelope.

Apparently the crooked-business crowd thought that their squirrel-in-the-cage financing operation would go on forever. In the end, however, the rodent could no longer keep the cage revolving and collapsed exhausted. Finally, the government stepped in to stop the spinning cage but it was too late.

What was going on was no secret. Inside the housing and finance sectors, and outside of them, there were enough people who understood the essence of this racket. Talk, often intoxicated, greedy talk, about the real estate bubble abounded. We are not looking at another Enron, a case of the books having been cooked in such a manner that it was difficult to tell that this seemingly impressive corporation was in the death rattle phase.

Who Will Clean Up the Mortgage Mess?