The Bonnie and Clyde of Mortgage Fraud

[EJ]

The Bonnie and Clyde of Mortgage Fraud
November 7, 2006 (Marcia Vickers - Fortune)

A master con artist and his partner went on a six-state crime spree, ripping off homeowners, stealing identities and defrauding lenders.

They desperately wanted to sell the property, which had been on the market for six months. Dr. Brown was starting a new job in Augusta, Ga., in weeks. Just days before, they had amended their listing to offer $201,000 in owner financing, "hoping to broaden the pool of candidates," says Bridget. They did.

Four months later the Browns returned from a trip to Disney World to find a chilling message on the answering machine in their new home in Augusta. It was from a U.S. Secret Service agent named Andrea Peacock. Peacock informed the Browns that their old house had been bought by a con man - an exceptionally sinister one who had committed dozens, possibly hundreds, of mortgage frauds and identity thefts, netting millions of dollars.

The man who had seemed a bit of an earnest loser at the closing was in fact on the Secret Service's Most Wanted list. His real name was Matthew Bevan Cox, he was 34, and he used more than ten aliases. Peacock ended the voicemail with an unsettling directive: By no means should they approach Cox, since he was considered "armed and dangerous."

Now that the market is slowing, fraud is only rising. As business dries up, there's increasing pressure on lenders, brokers, title companies and appraisers to be profitable. That means loan and title documents aren't scrutinized as carefully as they might be, and courts - many of them so low-tech they resemble Mayberry - can't keep up with the volume of paper.

Then there's the mad rush to sell, particularly by people who paid high prices for homes and suddenly can't afford the mortgages.

It's like a tasting menu for con artists and grifters, so tempting that in some cities drug dealers have turned to mortgage fraud, plaguing lower-income neighborhoods with crooked mortgages rather than crystal meth.

AntiSpin: Fraud, as we pointed out in 1999, is a standard feature of asset bubbles, and yet another reason why the Fed cannot continue take a laissez fair approach to them, in addition to the main reason at last admitted by a Fed official yesterday, "Today... the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed's] task of achieving... sustainable noninflationary growth."

Greenspan's position was that the Greenspan tried to actively control an asset bubble–once, in 1994–and failed, as discussed in "The Fed: Dishonest or Incompetent?" One failed attempt does not prove that containing asset bubbles is a bad idea, only that the approach the Fed took at that time to address that asset bubble didn't work. Raising margin requirements may have helped contain the tech stock bubble, and the tech industry might have been spared several years of recession. The housing bubble might have been contained by tightening lending standards, saving millions of households the pain they are going to start to suffer next year, as the decline in housing that started in mid 2005 continues on schedule, with respect to predicted timing and geographical process dynamics.

According to Martin Mayer, in our yet to be published interview, "The Fed lacks the political will to intervene in asset bubbles." Maybe the crisis that I expect next year will give the Fed a justification to intervene next time.

[DemonD]

Re: The Bonnie and Clyde of Mortgage Fraud

According to Martin Mayer, in our yet to be published interview, "The Fed lacks the political will to intervene in asset bubbles." Maybe the crisis that I expect next year will give the Fed a justification to intervene next time.

My time to be a bear for a second. I see this as overly optimistic. The reason is that money talks. If a lot of people are making a lot of money, and a government agency comes in with "regulations" that hamper those people from making a lot of money, you can be assured there will be a huge stink from those people making that money. Direct pressure on the Fed, pressure through lobbyists, pressure, through political parties, and through Congress on both a national and a state level; this is certainly what happened in this most recent asset bubble on real estate. Any time the government warned about too much lending, or wanted to create restrictions, or any time a congressman brought up the subject, they were immediately shouted down by the peanut gallery of millions who are making all that moolah.

I see this as a part of human nature. The time for the Fed to prevent problems within asset bubbles is to have the regulations in place before the asset bubble occurs, and to stringently enforce those regulations. Unfortunately, there are very few Eliot Spitzer's out there to do this, but last time I checked, we haven't had a president that needed to campaign about a chicken in every pot for about 70 years now.

By the way, I just remembered. The Fed has not raised interest rates since July. The stock market is taking off. My guess is that Wall Street likes where the Fed is on their rate policy at the present moment, combined with good corporate earnings, and this is pushing along the rally.

[Uncle Jack]

Re: The Bonnie and Clyde of Mortgage Fraud

Hold your breath. And later next year, after the Fed has still failed to act, I'll see if you're still holding your breath.

[EJ]

Re: The Bonnie and Clyde of Mortgage Fraud

My time to be a bear for a second. I see this as overly optimistic. The reason is that money talks. If a lot of people are making a lot of money, and a government agency comes in with "regulations" that hamper those people from making a lot of money, you can be assured there will be a huge stink from those people making that money. Direct pressure on the Fed, pressure through lobbyists, pressure, through political parties, and through Congress on both a national and a state level; this is certainly what happened in this most recent asset bubble on real estate. Any time the government warned about too much lending, or wanted to create restrictions, or any time a congressman brought up the subject, they were immediately shouted down by the peanut gallery of millions who are making all that moolah.

I see this as a part of human nature. The time for the Fed to prevent problems within asset bubbles is to have the regulations in place before the asset bubble occurs, and to stringently enforce those regulations. Unfortunately, there are very few Eliot Spitzer's out there to do this, but last time I checked, we haven't had a president that needed to campaign about a chicken in every pot for about 70 years now.

By the way, I just remembered. The Fed has not raised interest rates since July. The stock market is taking off. My guess is that Wall Street likes where the Fed is on their rate policy at the present moment, combined with good corporate earnings, and this is pushing along the rally.

If readers learn nothing else from iTulip, I hope at least it is that in the matter of the politics of money, there is nothing new under the sun. To bring the quotation below up to date, substitute "credit-based dollar standard" for "gold standard."
Eric

From Chapter 9: The Price

The Gilded Age and Hard Money

Extracts from "Money: Whence it came, where it went" by John Kenneth Galbraith (First Published 1975), Page 111 to 112

"There can never have been a time when it was as good to be rich as in the late years of the last century, the first decade of the present one. There was no income tax, the Civil War impost having been obliterated soon after the war. There was the rewarding contrast with the vast majority, which was still very poor. Writing in 1899, Thorstein Veblen observed that property was then 'the most easily recognized evidence of a reputable degree of success as distinguished from heroic or signal achievement. It therefore becomes the conventional basis of esteem.'

"With sound instinct, historians refer to these years at the Gilded Age. They might as accurately be called the age of gold. For some, and perhaps much, of the esteem ascribed by Veblen to wealth was given by the nature of money. If money is weak and wasting in value, even the rich lack something in certainty as to their worth. Their minds, like those of others, leap forward to the day when their money will be disintegrated, as did the Continental notes or the reichsmark. They have a strategy for protecting themselves but maybe it will not work, and for what then does money count? No such question arises either in the mind of its possessor or of those who would denigrate him if money is hard and eternal.

"The ability of the rich and their acolytes to see social virtue in what serves their interest and convenience, and to depict as ridiculous or foolish what does not was never better manifested than in the support of gold and their condemnation of paper money. The parallel tendency of economists to find virtue in what the reputable and affluent applaud was similarly evident. But there were also a precision and harmony and a unifying tendency in the operation of the gold standard that commended themselves even to those who were neither consciously nor wittingly servants of the rich. It did make simple and certain the relations between the currencies of different countries and gave the industrial countries and their empires a single money. It was sad that it also had serious, even fatal, flaws, that it could inflict heavy punishment on the ordinary person and, as time passed, also on the affluent themselves. These flaws were especially serious in the context of the compromise that ruled in American monetary affairs."

[jk]

Re: The Bonnie and Clyde of Mortgage Fraud

great, apposite quote from galbraith. i remember devouring his "the great crash." it's interesting to think that someone like him served in several administrations, and compare the quality of his thinking and writing to more recent office holders.

[DemonD]

Re: The Bonnie and Clyde of Mortgage Fraud

If readers learn nothing else from iTulip, I hope at least it is that in the matter of the politics of money, there is nothing new under the sun. To bring the quotation below up to date, substitute "credit-based dollar standard" for "gold standard."
Eric

Eric, I've learned a ton from reading itulip and I expect to continue to learn more. One of the things there is little information on is how and when to exit positions, and market timing. The old adage is "You cannot time the market, so don't try."

I think itulip is doing a pretty damn good job at educating at least a small band of dedicated readers on this type of issue. Plus the discussions around here come from a very broad array of people with vastly different investing styles, it's good to get different opinions and viewpoints presented in such rational ways.