Sunday, January 4, 2009

The underlying premise was that real estate values would always go up

From the Oregonian:

The same real estate boom and bust that delivered a devastating body blow to the U.S. economy also brought an enormous wave of failed and allegedly fraudulent investment schemes.
There are plenty of reasons besides fraud and bad faith that real estate deals failed in recent months. Falling prices and lenders' wholesale retreat from the market killed countless legitimate transactions. Unscrupulous opportunists only made matters worse.

From Portland to Albany to Bend and beyond, Oregonians hoping to cash in on the boom have instead suffered major financial setbacks in real estate deals gone awry.
Mortgage fraud emerged as the trademark crime of the boom. Unscrupulous brokers worked through straw buyers to obtain bank loans, pocketing thousands of dollars for themselves from the loan proceeds while the "buyer" often never made a single payment.
But the ever-rising tide of escalating real estate prices hid the problem.
"The underlying premise was that real estate values would always go up," said Karin Immergut, U.S. attorney in Portland. "If they got into trouble, they could always sell it.
If the bank had to repossess it, they could put it on the market and make money.
"Now, we're seeing the whole house of cards crumble."

The feds were well aware of the mortgage industry issues before the house fell down.
Chris Swecker, former assistant director of the FBI in Washington, D.C., warned in the boom year 2004 of widespread fraud in the industry. Swecker, now retired, predicted bogus home loans could cause multibillion-dollar losses to financial institutions.
Swecker's prescient warnings were wrong in only aspect: He vastly underestimated the losses and the impact on the broader economy.
But the feds didn't intervene in a more forceful way in part because much of the FBI's
resources were diverted to combat terrorism. Besides, rising real estate prices kept losses to a relatively low level -- at least until 2006 and 2007.
Federal sentencing guidelines are based on provable financial losses. Absent a large tangible loss, perpetrators are unlikely to get much of a sentence beyond probation, which gave prosecutors little motive to push mortgage or real estate cases.
Even the most bogus mortgage deal didn't lose much money as long as homes continued to appreciate in value -- which they did in Oregon until mid-2007.
Now, only time and the courts will determine whether the cases addressed here are bad luck, bad faith, or worse.

One of the principals of economics is that people respond to incentives and it is clear the FBI didn’t have an incentive to stop the crimes.