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The Rise and Fall of Mortgage Fraud

A look at how mortgage fraud contributed to financial crisis


During the middle part of the decade, the real estate market was on fire. As soon as an agent had a property listed -- multiple offers came in, ultimately leading to a quick sale above the listing price. This lasted for about four to five years, when unfortunately it all came crashing down.

The crash in the real estate market was mostly due to the fact that those who had bid on these homes had no real way of paying for them. They might have had a few months worth of cash on hand to hold the property, but the new home buyers figured that since prices were appreciating so rapidly that they would surely make a quick profit by selling the house in a few months.

The reason that so many buyers were able to secure financing was because of widespread mortgage fraud.

Many of the lenders during the boom years required no down payment when purchasing a property. On top of that, these lenders were giving loans to people who provided no income or proof of job to the bank. These loans were given the title NINJA meaning, No Income No Job/Assets.

The banks and loan officers simply did not care if the borrower had any means of paying the loan back.

The loan officers during this time were paid on commission, so the more loans they originated the more money they made. They had no reason not to give loans to people, because everyone thought that real estate prices were going to consistently rise for years to come.

Another reason for the banks not to care was the loan securitization process. When the bank created a loan, it was then bundled up with other loans and sold off into the secondary mortgage market for investors to buy. These securitized mortgage bonds were labeled investment grade rating by the major ratings agencies -- giving the investors who were buying them the false idea that they had little risk to default. If the banks creating the loan did not have to actually keep them on their books; the bank had no reason to ask for proof of a job or income statements.

The fraud that occurred in the mortgage market was some of the most astonishing lapse of judgment that the American public has seen.

Other types of fraud, like currency trading fraud, rarely exist because of the foreign exchange brokers requiring clients to have a funded account when placing trades. No broker would ever let a client just buy an asset if they did not have some kind of capital in their account to protect against a loss.

In the financial markets assets have the ability to lose their value just as they have the ability to appreciate in value. If more lenders had required a down payment and verified the borrowers income and assets the real estate crisis would not have been as bad as it turned out to be.
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