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Tags: mortgage | fraud

Recession Fueled by Mortgage Fraud

Arnaud de Borchgrave By Monday, 28 January 2008 09:51 AM EST Current | Bio | Archive

Sex sells. So does baloney and now globaloney, which is complete falsehood told with bravado.

The world is flat for some, flat broke for many more. America's predatory lenders, subprime mortgage brokers, and sundry con artists, combined forces to blind America's monetary sentinels, rip off the world, and give America's democratic capitalism a bad name.

Last week, as stock prices nosedived, Fed Chairman Ben Bernanke suddenly announced the largest U.S. rate cut in more than 20 years. He had been advised the previous Friday of the largest bank fraud in history, a secretly reported $60 billion heist at France's second-largest institution, Societe Generale. It was actually a $7.4 billion rogue trading fraud by a 31-year-old junior options trader the bank was paying $150,000 a year.

In the United States, the subprime mortgage heist compelled major financial institutions to write off tens of billions of miscalculated dollars and seek salvation from the world's new gold standard — SWF (not single white females, but Sovereign Wealth Funds, or about $1 trillion accumulated by China and the Gulf's oil producers).

The law of unintended consequences knocked the dollar off its pedestal as the world's reserve currency; tipped the world's most powerful engine for growth into recession territory; and produced an apathetic bipartisan bailout package that conjured up a teaspoon to bail out a leaky lifeboat.

Real estate scam/scum artists in for the quick buck make up 80 percent of the total number of reported mortgage fraud cases, says the FBI. But these bilkers took advantage of an FBI whose investigative skills were redirected to chasing down al-Qaida leads.

In the last 10 years, mortgage fraud has skyrocketed. According to the FBI, mortgage fraud is the country's fastest-growing white-collar crime. The Legal Times reported the Treasury Department's suspicious activity reports were up 35 percent in 2006 while the Internal Revenue Service's mortgage fraud case load doubles every two years.

The fraudsters kept doubling the pot with an army of insiders who are experts in the loan origination process. These can then select loan products with flimsy underwriting standards. Enter corrupt appraisers who overstate the value of the properties, loan applicants who lend their names and credit histories for a fee, and finally closing agents who keep lenders in the dark about palpably fraudulent transactions.

Property values were jacked up by mortgage flip schemes — buying condos and houses before ground is broken and flipping them upon completion, which translated into higher fees for brokers, lenders, realtors, and loan settlement officers.

Sleights of hand get a powerful assist from the absence of national standards for oversight of mortgage brokers. Twenty-four states have no educational or experience qualifications. Nor are criminal background checks required in most states. So with no ethics impediments, the predators moved effortlessly from one mortgage brokerage company to the next. Exaggerated, even fictitious, income became routine for worthless subprime mortgages.

Predatory lenders concluded subprime loans were the ultimate key to large-scale mortgage fraud schemes — "but also to potential predatory lending predicated by loan originators." So it became a disaster for both lenders and the consumer public — and the world economy.

Fraud got out of hand nationally and internationally as banks and mortgage companies erected attractive instruments that passed muster even with ratings agencies. Hedge funds, hungry for high risk, also took big bites out of what had rapidly become a global rotten apple.

Subprime loans were sliced and diced and repackaged to look attractive to the uninitiated. Predatory lenders hoodwinked millions of individual American borrowers who were led to believe their homes would keep appreciating and therefore they could easily afford to go deeper into debt.

The bubble first burst in June. But the sages kept assuring us we had turned the corner, that the size of subprime mortgages was limited in scope. The day of reckoning for a maelstrom of mortgage fraud didn't come until the New Year. And now we face a global peril — due entirely to the way predatory loan sharks abused one of civilization's most equitable ways of rewarding human endeavor.

So instead of seeing your home appreciating in value, housing is headed for a 25 percent drop this year, possibly another 10 percent next year. Some 1.5 million foreclosures are forecast.

Major U.S. banks have written down $100 billion in securities backed by the illusionary art of creative mortgage products. These losses should exceed $150 billion with subprime auto loans, credit cards, and home equity lines of credit, or second mortgages. Evidently there are lots of intelligent people who are yet to grasp subprime is synonymous with garbage.

At this year's annual Global Economic Forum in Davos, kind words about the United States were hard to come by. David Rosenberg, chief economist for Merrill Lynch, echoed a collective fear that the U.S. is heading for the worst consumer-driven recession since 1980.

Today, none of the traders juggling three terminals and a couple of GSM mobile phones on the trading floor of a major New York-based financial institution has any hands-on experience going back 28 years.

The deficit for the current federal budget, including bipartisan stimulus package costs, should hit $400 billion. Iraq war bills are approaching half a trillion dollars — and the U.S.-supported Iraqi government has invited Iran's President Mahmoud Ahmadinejad to Baghdad for a friendly visit, the first since Saddam Hussein's Iraq attacked Iran in 1980, in a war that lasted eight years.

Russia, for its part, delivered yet another snub to President Bush by shipping its sixth consignment of nuclear fuel to Iran.

Under U.S. pressure, Pakistan is gradually being drawn into a civil war against the Taliban that now controls part of the tribal areas on the Afghan border. Godfathered by Pakistan's Inter-Service Intelligence (ISI) service after the Soviets pulled out of Afghanistan in 1989, Taliban's influence is seeping through two of Pakistan's four provinces — Baluchistan and the Northwest Frontier Province (NWFP).

As long as Taliban is ensconced in the Pakistani-Afghan border's mountain fastness, the U.S.-NATO objectives in Afghanistan will remain out of reach. The future of the Atlantic alliance itself is at stake in Afghanistan as Canada and the European allies conclude the undertaking is a much greater than they bargained for. Costs are mounting — as well as domestic opposition.

Next to all this, the daily and nightly gab fest on the presidential TV hustings seems hugely irrelevant. Presidential aspirants tread gingerly lest they step on toes that belong to a current or future donor. So far, Wall Streeters have coughed up $50.4 million.

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Sex sells. So does baloney and now globaloney, which is complete falsehood told with bravado. The world is flat for some, flat broke for many more. America's predatory lenders, subprime mortgage brokers, and sundry con artists, combined forces to blind America's monetary...
Monday, 28 January 2008 09:51 AM
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