Predatory borrowing?

by on January 30, 2013 at 2:53 am in Economics, Law | Permalink

From Luigi Zingales:

In fact, the authors find that more than 6% of mortgage loans misreport the borrower’s occupancy status, while 7% do not disclose second liens.

…The authors provide some interesting evidence in this context. They show, for example, that the misrepresentation is correlated with higher defaults down the line: delinquent payments on misreported loans are more than 60% higher than on loans that are otherwise similar. Thus, the errors do not seem to be random, but purposeful.

What the authors do not find is also interesting. The degree of misrepresentation seems to be unrelated to the incentives provided to the top management and to the quality of risk-management practices inside these firms. In fact, all reputable intermediaries in their sample exhibit a significant degree of misrepresentation. Thus, the problem does not seem to be limited to a few bad apples, but is pervasive.

Here is more, and here are comments from Arnold Kling, who has extensive experience in this area:
 I cannot tell whether the borrowers defrauded the lenders or the lenders defrauded the investors who bought the loans. I always presume that it is the borrower instigating the fraud. However, Zingales says that the bankers should be prosecuted. He makes it sound as if the lenders would record a loan internally as backed by an investment property and report it to investors as an owner-occupied home. That would require a much more complex conspiratorial action on the part of the lender, and until I learn otherwise, I will doubt that it happened.

1 Jimmy January 30, 2013 at 3:12 am

I’m wondering why both you and Arnold Kling quoted that portion of article and not the portions that make it clear Zingales is discussing non-disclosure/mis-representation of mortgages by banks in trying to foist them on to investors after securitization.

The single-sentence quote, “In fact, the authors find that more than 6% of mortgage loans misreport the borrower’s occupancy status, while 7% do not disclose second liens,” is ambiguous about whether the paper is talking about borrowers lying to banks or banks to investors, but the rest of the article explicitly describes the latter.

Can anyone find the original paper to clear that up?

2 Claudia January 30, 2013 at 8:02 am

Cheer up, Jimmy. As a long-time, in-the-know commenter reminded me yesterday, words mean NOTHING in particular here. The title, the quoted text, this is not an argument. It’s just some bits for you to ponder and argue over. So mentally re-write it. Personally I have a few alternate titles. “Predatory banks hurt Borrowers in the end” or “We’re not as wealthy as securitizers thought” or “How to blow up the financial system and make a lot of money” … See now that was a fun commute. I breezed through the rest of the econ blog articles in my RSS feed without so many games. Seriously, I did appreciate the Zingales piece. The presentation here is non-standard but the content is top notch.

3 Andrew' January 30, 2013 at 9:37 am

Please reproduce the words that Zingales uses to say that the banks’ internal databases differed from their investor prospecti.


4 Claudia January 30, 2013 at 9:45 am

“In a recent paper, the economists Tomasz Piskorski, Amit Seru, and James Witkin compare the characteristics of securitized mortgages as they were disclosed to investors at the time of sale with these loans’ characteristics as they were recorded in the banks’ proprietary databases. The data cover non-agency residential mortgages, which are not the same as those targeted by the settlement, and the data come from a pool of banks, so we do not know which banks were present. But their data are similar enough to enable us to learn a lot about what was going on.

If the massive wave of defaults on securitized mortgages was purely the result of bad luck, we would expect that the characteristics reported to investors would not differ from those recorded in the banks’ databases. This is especially true of characteristics that are relevant to default risk, such as whether the borrower was an owner or an investor, or whether there was a second lien on the property. In fact, the authors find that more than 6% of mortgage loans misreport the borrower’s occupancy status, while 7% do not disclose second liens.

Of course, any database contains errors. Are these errors large enough to be worrisome? And how can we be sure that the banks knowingly misrepresented this information, rather than that they merely were sloppy in reporting it?

The authors provide some interesting evidence in this context. They show, for example, that the misrepresentation is correlated with higher defaults down the line: delinquent payments on misreported loans are more than 60% higher than on loans that are otherwise similar. Thus, the errors do not seem to be random, but purposeful.”

5 Andrew' January 30, 2013 at 2:56 pm

Doesn’t work.

Read my request again, then read your offering.

6 Jon Rodney January 30, 2013 at 9:59 pm

I thought the offering pretty clearly fulfilled your request. This is a reading comprehension fail.

7 bxg January 31, 2013 at 12:07 am

I agree; I was taken aback at how fully responsive Claudia’s response was to your apparent request. If you are unsatisfied, which I find astonishing, it has to be that you meant the request differently than how several of us read it. Instead of asking us to read it again, maybe you can be more constructive in restating what you are looking for. Mention of why Claudia’s quotes don’t answer your real question (whatever it is) would be helpful.
Claudia’s response either (a) answers your request fully or (b) your request is ambiguous and allows multiple parallel interpretations and she’s answering the one that (while a reasonable reading) is not the one you intended. Asking her or anyone to reread it because the answer “doesn’t work” (against whatever real question in your head) is arrogance. Help us. Your question needs clarification.

8 The Original D January 31, 2013 at 11:57 am

Translated Andrew’: LA LA LA I CAN’T HEAR YOU!

9 Rich Berger January 30, 2013 at 12:18 pm

I’ve read Zingales’ post several times and I agree with Kling that is not clear whether the misreprentation started with the homeowner or started with the banks selling the loans to investors. There is a gap in the logic in Zingales’ post.

10 Claudia January 30, 2013 at 1:00 pm

Rich, from the article “we compare the characteristics of securitized mortgages as they were disclosed to investors at the time of sale with these loans’ characteristics as they were recorded in the banks’ proprietary databases” … Note the ‘truth’ here is the bank’s own database, not an independent check of the mortgages. If the banks learned that the mortgage holder lied to them, they should fix both accounts. Of course, errors happen and there could be good reasons why the two records differ, but the question is why they differ systematically. No one is saying that borrowers are always honest and banks are always cheat … just that this article and the study it cites tell us next to nothing about borrowers’ behavior. It may be relevant to point out that borrowers cheat too, but this is an odd setup for the point, in my opinion.

11 afinetheorem January 30, 2013 at 3:14 am

You and Kling are both completely misunderstanding what Luigi is saying. The original paper is not publicly available, but the gist is that banks are lying to MBS investors, not that borrowers are lying to banks. And further, that even “well-run” banks appear to lie over and over again. The lying is measured by just comparing what the banks wrote down about a borrower in their own databases to what they showed to the investors. And the numbers are too big to big simple transcription errors – this looks like evidence of widespread fraud by the banks. Nothing in this paper has anything to do with whether borrowers lied on their applications.

12 Tom January 30, 2013 at 4:50 am

Like the other commentators I struggle to see how this is “Predatory Borrowing” and would welcome any supporting comment.

13 Andrew' January 30, 2013 at 9:40 am

“In fact, the authors find that more than 6% of mortgage loans misreport the borrower’s occupancy status, while 7% do not disclose second liens.”

Zingales says “loans.” He does not say “investor prospectus versus loan origination database.” So, maybe he means that the originators correctly accounted but then this correct accounting was fudged for investor sales materials, but what he says is ‘loans.’

14 john personna January 30, 2013 at 10:59 am

If you were walking into this question fresh, without previous knowledge or opinion, would 6% really jump out at you as a smoking gun? Wouldn’t you really rather have something like 26% or 36% to hang your hat on? (I am not a domain expert, but given the ability of borrowers and loan agents to play sharp with occupancy, 6 percent of a pool does not seem large. It sure as heck is not the defining characteristic of the pool. After all, 94% of loans had correct occupancy, right?)

15 bluto January 30, 2013 at 1:11 pm

Investor owned mortgages are a pretty small part of the market generally if 6% of total mortgage market is misrepresented, that might be a quite sizable portion of the investor owned mortgage market.

16 Cliff January 30, 2013 at 9:49 am

Maybe this is evidence there was less predatory borrowing than previously thought.

17 Andrew' January 30, 2013 at 5:12 am

The borrowers were complicit. However, everyone wanted to believe the boom times would continue and that incomes would rise- partly because of the boom in money and credit (possibly due to securitization of debt?). Then, all of a sudden everything wasn’t.

18 Andrew' January 30, 2013 at 5:15 am

Why everyone didn’t see it as soon as they heard the first person say something like REFI ATM is what we need to ask ourselves. The borrowing against houses to raise house prices to increase refi values in order to increase consumer spending just seems so easy.

19 Andrew' January 30, 2013 at 6:29 am

Per Zingales, so our deal is that for the privilege of never finding out exactly what happened ‘our’ banks give the government money. That’s fantastic. Well, at least they national defense our borders…

20 Andrew' January 30, 2013 at 8:33 am

Occam’s razor dictates that the bank’s best idea for fraud was to trick borrowers into lying on their applications so that they could ultimately fail to offload their securitized loans and go bankrupt?

21 doctorpat January 31, 2013 at 1:43 am

The bank mortgage officers best idea for fraudulently boosting their own personal income was to trick borrowers into lying on their applications so that the bank, that they probably don’t even work for any more, could ultimately fail to offload their securitized loans and go bankrupt?

Does it make more sense now?

22 Jon Rodney January 30, 2013 at 10:04 am

Borrowers were certainly complicit in irresponsible behavior in terms of taking out mortgages they knew they could not afford if the market went down. That’s poor judgement, but not necessarily reflective of dishonest or illegal behavior — mortgage originators knew what was going on and were only too happy to give out loans to anyone with a pulse. That kind of complicity is very different from lying to investors about the content of loans to make a few (billion) bucks.

23 derek January 30, 2013 at 10:52 am

So if I sign a paper declaring my income, assets and debts, and the numbers are purposely wrong, it isn’t illegal or dishonest?

If I do it with someone else, doesn’t that make it a conspiracy to defraud?

There is a desire to blame one party for the mess, which misses the important point; you don’t get a failure of that magnitude without multiple points of failure. Any one practice would not result in a financial collapse, there is enough resilience in the system. But when people lie on their mortgage applications, the originators conspire to lie, the banks lie about the details, the rating agencies lie or repeat lies they get from the bond creators, the bureaucrats lie about their risk, etc. etc., everything falls apart. Everyone is guilty.

24 Jon Rodney January 30, 2013 at 2:29 pm

This article isn’t about people lying on their mortgage papers. It is about the differences between the mortgage papers that were submitted to the banks and the information that was passed along to investors. I’m sure fraudulent behavior by borrowers was non-zero, but there’s no evidence to suggest it was a significant part of the problem. What incentive did they have to lie? Originators would grant them the loan with no income and no money down.

Saying ‘everyone is guilty’ may have some truth to it, but that oversimplifies and obscures what went on. By and large, borrowers appear to be guilty of bad judgement and irresponsible borrowing. Creditors, marketers, and ratings agencies appear to be guilty of massive felony fraud in pursuit of profit.

25 Andrew' January 30, 2013 at 3:41 pm

I can’t tell that from the Zingales description. This smells of agenda paper, which is disappointing because the unvarnished truth is plenty interesting. As I tell my toddler, we aren’t that bored (to clime on the fridge, etc.)

26 Robert January 30, 2013 at 5:08 pm

I honestly have to disagree with you. It would be very easy to say that the banks appear to be guilty of bad judgement and irresponsible lending while borrowers appear to be guilty of massive felony fraud in pursuit of profit. Many Germans felt that England started World War II, and your statement that borrowers did not rip off the banks sounds similar to my ears. The borrowers got the money, and the banks and investors lost the money. I think we should look at the facts.

After extensive reading and personal experience, here is what I know. The housing boom started when the baby boomers lost money in the dotcom bubble and wanted a more tangible asset to invest it. Low interest rate not only increased house prices but also provided an incentive for banks to find riskier assets to invest in. The Basel I regulation from Europe, which was being implemented by the US banks had a due affect. First, it encouraged the banks to hold AAA securities. Second, a loophole allowed the banks to keep on 8% of the 20% equity stake of the mortgage back securities CDOs, which increased the demand for these since they could get a higher yield and worse case scenario based on historical models was no where near as bad as it turned out to be. Market share and political pressure encouraged the banks to lower underwriting standards. There is no way a back can take character into account, and we know that collateral was low. Only the credit score was taken into account, but the originators found ways to trick that. The banks were definitely at fault for failing in their fiduciary duty. Certain banks, i.e. Countrywide (not Bank of America) and Ameriquest were actively defrauding their investors by writing liar loans. I believe they took advantage of poor people, which provided them cover under the name of affordable housing. Not all borrower were innocent victims. In Florida where I lived in the beginning of the bubble, my real estate agent was actively flipping houses as the price increased. The real estate agent and the loan broker were actively encouraging no money down loans with very limited collateral, i.e. ARMs, in order to increase the return on equity. There were a lot of people like that, and how did the bank steal from them? Another example, a friend lives next door to a guy who lives a construction firm in one of those McMansions, and the neighbor had not paid anything in over two years, no mortgage, no taxes. He could sell the place, and at least the bank would get some of the principle back instead of nothing. Lastly, I remember reading an article in the Wall Street Journal about a biography of a house where the last owner lied about how much she bought the house for so she could get extra money from the bank. She put no money down, pocketed the money and never made a payment.

It bothers me to hear “blame Wall Street” on an economics blog. I think the whole bubble was a lot more complicated than that.

27 Jon Rodney January 30, 2013 at 9:53 pm

Ok — I’m not sure why you think accusing creditors and marketers of fraud in the housing bubble is similar to saying England started WWII, but I’m always happy to consider the facts.

Did borrowers get money, and banks/investors lose money? Actually, no — this is definitely not a case of money being transferred from lenders to borrowers. Roughly, a borrower gets a house and an amount of debt that offsets the value of that house, with the house used as collateral for the debt. It’s pretty simple here — when housing prices tank, borrowers and lenders are both hurt. When housing prices rise, they both benefit. What the borrower really gets from the deal is leverage. Did your house-flipping real-estate agent act irresponsibly? It sounds like it. Unethically? Maybe. But it doesn’t sound like s/he did anything fraudulent, which is exactly my point. The bank wanted to lend your real estate agent money and your agent wanted to flip houses, so they did business together. There’s no fraud there on either side, just a lot of bad judgement.

The fraud starts to come in when you ask why on earth banks would make such dubious loans on such a large scale, and the answer is again pretty simple — they were able to sell the loans off to investors so they had no skin in the game. I agree with you that regulatory issues allowed banks to keep larger stakes in the loans than they otherwise would have, but it really doesn’t matter whether the investors were pension funds, hedge funds, or another division of the bank. The originator didn’t have to worry much about credit risk. Zingales’ whole paper is discussing a pattern of deception — certain loans appear to have been fudged when presented to the investors who took on the default risk, and those loans ended up defaulting at an uncannily high rate. This is like the story you’re telling about Countrywide, but extended to about 7% of the industry. Without massive speculative demand for what turned out to be terrible loans, the housing bubble could never have inflated to the extent that it did. To the extent that creditors and marketers enabled that demand by lying to investors, they are clearly guilty of widespread fraud. My point is not that borrowers were not part of the process, but that without fraudulent polishing of turds the process would not have been so destructive.

Look, I have no ideological axe to grind against Wall Street. I’ve worked there for the past 15 years, and it has been a positive experience for the most part. When I lay blame at the doorstep of the financial services industry it’s because it seems plain and uncomplicated that they deserve the lion’s share of the blame. If you have some evidence that a significant part of the housing bubble was due to individual borrowers lying on their loan documentation, please pass it on. I can’t find anything of substance to support that view — anecdotal WSJ articles aside — but I see a lot of evidence pointing at fraudulent marketing of mortgage derivatives. Apparently Luis Zingales sees that evidence as well.

28 Robert January 31, 2013 at 9:34 am


I feel that the article was intentionally deceptive. It seems that he is stating that 6% of the occupancies on the mortgage contracts do not match the borrows occupancies. However, he seems to imply that 6% of the occupancies in the databases do not match the occupancies in the prospective. Does he need to revise what he wrote. Also, he conflates Bank of America with Countrywide. Countrywide is not even on Wall Street. It was based on Orange County.

Without the speculative demand for real-estate there would be no demand for the mortgages. I would love for there to be a real study of why people purchased home they could not afford. How many were speculators? How many were caught up in the hype and didn’t want to not be able to afford a house in the future? How many were really used as pawns by subprime lenders to defraud investors?

My main point for the people reading this blog is that the whole bubble is a lot more complicated than just blaming Wall Street. I am very concerned that people are getting lazy in their analytical thinking by buying into a simple narrative, which distracts from a lot of the corruption because it benefits the people in power. Why know why Mozilo is not being prosecuted. He would reveal the names in his black book. My point about German’s thoughts about England is that I hear people just recite what they hear because it is what is being pounded into their heads.

Groucho Marx “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies”

29 Jon Rodney January 31, 2013 at 10:47 am

I don’t read any deception in the Zingales article … perhaps the wording wasn’t completely precise, but in context it seems clear that he is discussing a mismatch between bank databases and investor reports, and not a mismatch between bank databases and actual borrower qualifications. And nowhere that I see does he conflate Bank of America and Countrywide. He doesn’t even use the words ‘Wall Street’ in the article, so what difference does it make where Countrywide is based? If you’re implying that deceptive activity was limited to a few bad actors like Countrywide, Zingales specifically references evidence to the contrary: “In fact, all reputable intermediaries in their sample exhibit a significant degree of misrepresentation. Thus, the problem does not seem to be limited to a few bad apples, but is pervasive.”

So I guess I’m not sure what your message is here — I agree with you that the situation is more complex than just saying everything is Wall Street’s fault, but I think you are going too far in your effort to avoid casting blame. All sins are not equal. There is little doubt that speculative fever from borrowers helped fuel the bubble, but speculating in the housing market is not illegal, and I would argue not even unethical. Lying to investors is definitely illegal, and likely fueled the bubble to an equal degree. That kind of fraud should be prosecuted, and the lack of consequences for this widespread illegal behavior continues to astound me.

30 john personna January 30, 2013 at 11:01 am

I pretty much covered this above, but God in Heaven … 6% of borrowers get tagged and from that you generalize to “The borrowers were complicit.” Confirmation bias much?

31 Curious January 30, 2013 at 6:49 am

I am with Jimmy, afinetheorem and Tom. Why are you misrepresenting what Zingales is saying in his article?

32 prior_approval January 30, 2013 at 7:14 am

Shh – don’t ask too hard, or this thread will disappear too.

33 Andrew' January 30, 2013 at 7:49 am

Misrepresentation by paste. That’s a new one.

Maybe he assumes your index finger works to click the link and that you can read the rest of the article you probably didn’t know existed until he provided the link.

Btw, in Luigi’s article are no facts of evidence that the originators were complicit in the facts of evidence that the borrowers lied.

34 prior_approval January 30, 2013 at 10:07 am

You are very well aware how comments, threads, and post disappear here – please don’t be disingenous, as some of your own comments were part of one of those actions.

Which is why I referenced ‘thread’ and not ‘link.’

35 JWatts January 30, 2013 at 10:44 am

Actually, I’m unaware of how “comments, threads, and post disappear here”. I don’t see other posters commenting on having posts disappear. Perhaps the problem is very localized?

36 Andrew' January 30, 2013 at 3:40 pm

” some of your own comments were part of one of those actions.”

That’s only when I call people fucktards.

37 F. Lynx Pardinus January 30, 2013 at 6:51 am

Did any of you all watch the “Untouchables” episode of Frontline last week?

38 prior_approval January 30, 2013 at 7:12 am

All of this is provable fraud, with a clear paper trail. And when the paper trail is missing, that too is against applicable laws.

Anyone care to speculate why such clear cases of fraud have not been prosecuted, under two separate administrations?

And anyone want to further speculate why it is supposed to be the borrowers that are to blame, and not those who so clearly failed to meet the minimum legal standards required of them?

Maybe we could ask a certain well-off New Yorker – Eliot Spitzer certainly did not used to be media shy.

This link does a nice job explaining how he use to work –

‘As Attorney General, Spitzer stepped up the profile of the office. Traditionally, state attorneys general have pursued consumer rights cases, concentrating on local fraud while deferring national issues to the United States Government. Breaking with this traditional deference, Spitzer took up civil actions and criminal prosecutions relating to corporate white-collar crime, securities fraud, Internet fraud, and environmental protection.[23]

A number of economists, lawyers and political analysts have commented on Spitzer’s active role in public policy debates. The New York Attorney General’s office has Wall Street (and thus many leading corporate and financial institutions) within its jurisdiction. Also, the New York Attorney General wields greater than usual powers of investigation and prosecution of corporations under New York State’s General Business Law. In particular, under the Martin Act of 1921, the New York Attorney General has the power to subpoena witnesses and company documents pertaining to investigations of fraud or illegal activity by a corporation. Spitzer used this statute to allow his office to prosecute cases which have been described as within federal jurisdiction.[24][25] In January 2005, the president of the U.S. Chamber of Commerce described Spitzer’s approach as “the most egregious and unacceptable form of intimidation we’ve seen in this country in modern times”.[26]

Spitzer used this authority in his civil actions against corporations and criminal prosecutions against their officers. It proved useful in the wake of several U.S. corporate scandals that began with the collapse of Enron in 2001. Several of these corporations, as well as the brokerage houses that sold their stock, were accused of having inflated stock values by unethical means throughout the 1990s. When inquiries into these allegations by the SEC and Congress failed, Spitzer’s office used its subpoena power to obtain corporate documents, building cases against the firms both in courtrooms and in public opinion.’

39 Andrew' January 30, 2013 at 8:47 am

“Anyone care to speculate why such clear cases of fraud have not been prosecuted, under two separate administrations?”

Have I told you about my “Just because Obama is the same Douche as GWB that does not make him a moderate Republican.”?

I hate moderates, but not THAT much.

40 Tom January 30, 2013 at 9:08 am

Sometimes I am so unsure what I am reading that I begin to believe you’re an incredibly sophisticated spam bot just waiting to include a link to cheap knock-off Nike shoes.

Either that or I’m far too stupid to be reading/commenting here. Take your pick.

41 prior_approval January 30, 2013 at 10:19 am

Well, I thought Spitzer’s fate would have been a cautionary tale – the only effective (or zealous) prosecutor of truly massive corporate fraud was effectively removed from public life.

So because it was so long ago (though around the same time frame as the discussion about ‘predatory’ banking activities), let’s reference that wikipedia article again –

‘On March 10, 2008, The New York Times reported that Spitzer had previously patronized a high-priced prostitution service called Emperors Club VIP[74] and met for over two hours with a $1,000-an-hour call girl going by the name Ashley Alexandra Dupré (legal name Ashley Rae Maika DiPietro, born Ashley Youmans).[75] This information originally came to the attention of authorities from a federal wiretap.[76][77][78][79] Spitzer had at least seven or eight liaisons with women from the agency over six months, and paid more than $15,000.[80][81] According to published reports, investigators believe Spitzer paid up to $80,000 for prostitutes over a period of several years while he was Attorney General, and later as Governor.[82][83][84] Spitzer first drew the attention of federal investigators when his bank reported suspicious money transfers, which initially led investigators to believe that Spitzer may have been hiding bribe proceeds. The investigation of the governor led to the discovery of the prostitution ring.’

Do note this part – ‘his bank reported suspicious money transfers’. And just like that, the only public figure in America actually capable of putting corporate executives behind bars basically disappeared from public life. Thanks to his bank being all so vigilant.

42 Dan Weber January 30, 2013 at 11:49 am

Spitzer was raising campaign money from firms on Wall Street while bringing charges against their neighbors. There is no way he’s the poster boy for “government ethically regulating Wall Street.”

43 Steve Sailer January 30, 2013 at 3:20 pm

Spitzer, Julian Assange, Dominique Strauss-Kahn … funny how everybody who takes on the D.C.-Wall Street axis turns out to be a raving sex maniac.

44 zbicyclist January 30, 2013 at 7:20 am

We might prefer this quote, from the first link:

“Unfortunately, these giant settlements are unlikely to make a difference. They are paid by shareholders and taxpayers (most of these settlements are tax-deductible), leaving the people who were ultimately responsible not only to walk away, but to walk away very rich.”

45 jc January 30, 2013 at 9:18 am

My experience working with subprime borrowers showed me that they do lie…a lot…often blatantly, and far more often than most seem to think (at least out loud). Others I know report the same thing. Don’t know what happened here, and that sure as heck doesn’t mean lenders and intermediaries don’t lie too. Predatory lending, of course, is a much juicier story than predatory borrowing. And whether this is a good example of the latter, I don’t know. I just know there was a hell of a lot of lying going on (with seemingly varying degrees of determination when it came to catching lies vs. looking the other way).

46 Curious January 30, 2013 at 9:19 am

I see that Tyler has modified his post to include more from Kling (maybe Kling modified his post too?). Nevertheless, until a copy of the working paper is found, the only direct evidence we have for its contents is Zingales’ article, and he says quite clearly that what is being measured is the discrepancy between what the banks’ internal systems said, and what they presented to mortgage investors. Maybe the borrowers lied, and maybe they didn’t, but the working paper Zingales discusses does not seem to talk about it at all, and does not seem to examine any data that can establish this one way or the other. Why then do Tyler (and Kling) persist in calling this “predatory borrowing”?

47 prior_approval January 30, 2013 at 11:49 am

‘Why then do Tyler (and Kling) persist in calling this “predatory borrowing”?’

Well, if it was false, they would have to delete this entire post and its comments – as has been done here in the past.

Because really, the faculty director of the Mercatus Center apparently has no desire to ever publish incorrect information. And is more than willing to delete any post that someone could consider to be inaccurate, thus causing all the information and comments that remain public to be above reproach concerning their accuracy.

Or something like that, if I understand the various presented deletion justifications over the past half year.

48 Becky Hargrove January 30, 2013 at 9:24 am

I must confess I don’t get this whole game. Does it matter who conned who? Does anyone really need to be punished for the fiction everyone was trying to maintain? What’s wrong with hi-tech inexpensive, mass produced building structures which even people with low incomes can afford, and competitive loan offerings that actually give the option of reasonable borrowing standards?

49 Dan Weber January 30, 2013 at 12:00 pm

> Does it matter who conned who?

If we are talking about prosecution, then it definitely matters.

And the game most people want to play about the housing bubble is “it was the fault of the people I always blame for every other crisis, definitely not me.”

50 Urstoff January 30, 2013 at 12:47 pm

The blame game is much more important to politicians and the public than is actually fixing the situation or preventing similar occurrences in the future.

51 Glenn Schafer January 30, 2013 at 9:40 am

Lots of experience here. Mortgage brokers and the borrowers were both complicit in the game. The borrowers knew exactly what they were doing and the independent mortgage brokers helped them lie. . They should be prosecuted but never will be because it is not politically correct. It is always easier to blame the big bad banks.

52 anon January 30, 2013 at 9:50 am

no it’s easier to bail them out.

53 JWatts January 30, 2013 at 10:48 am

Close, but not quite.

It’s easiest to publicly shame them, throw some red meat to the base and then bail the out and then throw some more red meat to the base. And then claim that you saved the economy from utter collapse by bailing them out and the issue is old why are we still talking about it?

54 ChacoKevy January 30, 2013 at 10:50 am

Who is the “They” that should be prosecuted? The independent broker? I’m having trouble imagining a way to go after a borrower, even if we can prove they misrepresented themselves.

55 ohwilleke January 30, 2013 at 9:50 am

Loan officers routinely twist the facts when preparing mortgage applications, and while the borrower’s must sign off on the doctored paper, it takes immense confidence and familiarity with loan documentation to stand up against that against your own interests when the person you are going to in order to request a loan ratifies the act by making up the lies themselves when they know otherwise, and then presenting them to the borrower to be signed. I’ve taken out mortgage loans or done refinance applications about six times in the last decade and a half and seen that happen at least four of those times. I routinely see it when working with clients.

The loan officers do it, because their immediate supervisors create strong incentives for them to do so and make clear that this kind of conduct is acceptable. The executives don’t care, so long as the loans are being sold to a third party and no one tells them about it so they can’t be tagged for fraud personally.

The notion that this is some improbable conspiracy is hogwash.

Undisclosed second liens are pure and simple the fault of lousy title insurance work.

56 prior_approval January 30, 2013 at 11:37 am

But did you know anyone in this entire process who was prosecuted for fraud?

Ever wonder why not, considering that the paper trail is supposed to be more than adequate to allow prosecution?

57 gg January 30, 2013 at 10:52 am

Predatory Brokers?

I guess mortgage makers have no responsibility to do any kind of due diligence anymore if it so easy for borrowers to lie.

58 Enrique January 30, 2013 at 11:47 am

Excellent entry on “predatory borrowing” — as Coase would put it, the banking “crisis” is a reciprocal problem, with some lenders trying to “exploit” stupid borrowers, and with some borrowers trying to game stupid lenders

59 lxm January 30, 2013 at 2:00 pm

I’ve got a real problem with anyone who makes statements like this: “I always presume that it is the borrower instigating the fraud.” In fact it was when I first read a statement like this from Mr. Kling that I decided he was not worth reading. As I recall he was also making other statements that pretty much said that the real estate bubble and crash was the fault of bad borrowers and nothing else.

For some reason which I can not fathom, it is important to Mr. Kling and others to believe that it was the banks that were defrauded rather than the banks doing the defrauding.

Here is a story of what happens in that world where the banks do no harm: It’s a story about a man who got a liar’s mortgage and went to jail because of it. His brokers knew he was lying and helped him get the loan. The brokers, of course, have not been charged because banks never defraud anyone.

It’s a great story and the movie is good, too.

Bottom line for me: If you don’t think there’s been massive fraud committed by our banking and financial institutions, then you just haven’t been paying attention. I agree with Zingales:

“Why have Mozilo and others been allowed to pay a relative pittance and avoid criminal proceedings? A few prominent criminal convictions have sent a powerful signal in the fight against insider trading. If the target is an industry-wide culture of deception, shouldn’t the criminal justice system be mobilized against banks’ mortgage fraud as well?”

60 ChacoKevy January 30, 2013 at 3:48 pm

I’m largely in agreement with you.

But Arnold Kling is ABSOLUTELY worth reading. It’s as if the first Stevie Wonder song you heard was “I just called to say I love you”…

61 lxm January 30, 2013 at 2:12 pm

I have a real problem with anyone who makes a statement like this: ” I always presume that it is the borrower instigating the fraud.” In fact when I first heard Mr. Kling making statements like that I decided that he was not worth reading. He also made similar comments that argued that the real estate crash was the result of borrower fraud and nothing else.

For some reason I cannot fathom, it is important to Mr. Kling and others to believe that banks are defrauded rather than banks defraud.

Here is a story about how the world works when you start from Mr. Kling’s assumptions:

It’s the story of a guy who gets a liars loan with the willing help of his brokers. He goes to jail. The brokers do not. It’s a great story. Well worth following the link. And the movie is good, too.

Bottom line: I agree with what Zingales says:

“Why have Mozilo and others been allowed to pay a relative pittance and avoid criminal proceedings? A few prominent criminal convictions have sent a powerful signal in the fight against insider trading. If the target is an industry-wide culture of deception, shouldn’t the criminal justice system be mobilized against banks’ mortgage fraud as well?”

The bankers and other financial guys will suck the life blood out of the world if we let them. No matter what Mr. Kling thinks otherwise.

62 Robert January 30, 2013 at 2:13 pm


There’s SO MUCH FRAUD among the “victims” of the housing crash. I think 6% is a very low number, considering that 50% of the “first time home buyers” tax credit were found to be FRAUDULENT. (See Of course, NPR claims these people were simply “confused.)

I think the Government should investigate EVERY mortgage application where the borrower is behind and compare the STATED INCOME to the W2 / 1099 income. If the STATED INCOME is GREATER, give the borrower a choice:




We’d get a TRILLION DOLLARS this way!

63 a January 30, 2013 at 2:40 pm

So mortgage issuers would just allow you to declare anything as your income without asking for tax statements?

If so, that does seem to mean that the mortgage issuers are the ones who defrauded investors.

64 maguro January 30, 2013 at 7:21 pm

Honestly, I don’t think anyone was defrauded, other than the taxpayers.

Everyone in the industry – the real estate agents, the banks issuing the mortgages, the investors buying and selling mortgage-backed securities, the politicians who cheered it on – knew that mortgages were being issued to damn near anyone who walked in the door. But no one cared, because this time it’s different, home values are gonna go up forever, man!

65 maguro January 30, 2013 at 7:27 pm

Additionally, it’s rather amusing to recall that the New York Times was running articles attacking the racist banks for not issuing enough mortgages to poor minorities (redlining) pretty much right up to the day they started running articles attacking the racist banks for issuing too many mortgages to poor minorities (predatory lending).

66 Steve Sailer January 30, 2013 at 8:41 pm

The Obama Administration is _still_ suing banks for disparate impact discrimination for _not_ issuing enough subprime loans to minorities!

67 jonf January 30, 2013 at 8:57 pm

Yes, that’s the way it worked. It was called a “stated” or “no doc” loan (more colloquially, a “liar’s loan”). Everyone knew that such borrowers were liable to be lying through their teeth (often coached by the mortgage broker). The Wall Street banks knew it, Fannie and Freddie knew it, and the private investors to whom the MBS were sold knew it. I’m not sure we can cal it “fraud” when everyone was in on it– because everyone expected housing prices to keep going up, so no one cared.
IMO, the tolerance for “stated” loans was the single greatest factor in the housing bubble and bust. Had borrowers been forced to justify their claims (with traditional underwriting standards regarding debt-to-income) none of the mess could have happened. And no, that had nothing to do with the CRA: minorities and working class people could still have afforded mortgages, just not such munificent ones. And in reality it was the middle class house flippers, seeking a get-rich-quick scheme, who really abused the “stated loan” option, speculators buying up multiple properties by claiming grossly inflated incomes, and often claiming to be the owner occupant in all of them.

68 Steve Sailer January 30, 2013 at 3:32 pm

There’s a lot of blame to go around, so why shouldn’t the very top guy get some of it? George W. Bush signaled to the financial industry and his federal regulators that they shouldn’t worry so much about fraud at his 2002 White House Conference on Increasing Minority Homeownership. Old fashioned documentation and downpayment requirements were roadblocks to racial equality in homeownership, Bush proclaimed.

Angelo Mozilo immediately picked up on Bush’s fight-racism-through-weakened-standards theme in demanding less regulation so he could loan more to minorities.

69 Glenn January 30, 2013 at 4:18 pm

Come on guys. Who are you kidding. The borrower makes a representation that his application is true and correct. To blame it on some one else is hogwash. The bank may or may not know if the borrower told the truth but the borrower sure as heck knows if he told the truth. Ignorance of the law does not work in any criminal situation. The brokers should be penalized and so should the borrowers. It is indeed against the law for a broker ( who are for the most part not bank employees but independent contractors) to solicit or make false representations on loan documents. Whatever happened to individual responsibilty. If you have to lie to get a loan a then you are responsible. To say it is alright to lie and commit a crime because someone didn’t catch you (like not disclosing a second lien or creating a false tax return or a phony W-2) and then blame it on someone else says a lot about our society.

70 Robert January 30, 2013 at 5:20 pm

I read the first link, and he certainly is talking about error rates in the banks proprietary databases. As far as fraudulent information on the mortgage applications, I believe it depends on the bank. Countrywide was encouraging people to lie on the application for $470 million profit for the owner. Bank of America bought Countrywide without doing due dilligence to gain market share of the mortgage market, and it was a stupid purchase. The article definitely had an agenda since it jumped from Countrywide, which was a ponzi scheme, to the rest of the banking industry, i.e. Paul Krugman says stupid things so all economist are stupid. I believe that the reasons that there haven’t been more prosecutions is because Countrywide, as well as others, had and have strong ties to the Democratic party, which would be embarassing. Chris Dodd did take a lower than market loan, and he has his name on the banking regulation. What ever happened to the former governor of New Jersey?

71 Steve Sailer January 30, 2013 at 5:33 pm

Angelo Mozilo of Countrywide really was more the central figure than anybody else in the Housing Bubble. He represents nicely one of the main trends of our era, one so all-encompassing that almost nobody notices it: how the high in our society (e.g., CEOs) claim to be in alliance with the low (minorities, the poor, the oppressed, the victims of racism, etc.) in order to stick it to the middle.

72 The Original D January 31, 2013 at 11:59 am

My sisters has spent the lat 25 years working on the IT side of the mortgage industry, including with a bank that blew up in the crisis. She tole me she was appalled at some of the “efficiency improvements” she was forced to implement whose primary purpose was to get shaky mortgages off their books as quickly as possible that did not technically have to be disclosed to buyers.

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