By Arnold Kling
Moody’s plotted the rate at which recent mortgages are going into default within the first 9 months of issuance, and it is quite high. Look at the graph at Calculated Risk, reproduced by James Hamilton.
When I was at Freddie Mac, we presumed that any loan that defaulted within 12 months was fraud. Typical cases included inflated appraisals, loans that were sold to us as owner-occupied when they were actually investor loans, loans on vacant lots, totally fictitious loans…These were not just minor misrepresentations. They were pure mini-conspiracies to enrich mortgage brokers. In some cases, the broker did more than just take fees for originating junk loans. If you traced the recipient of the loan, you might find a close relative of the broker–a relative who never had any intention of repaying the loan.
We had several full-time investigators employed in a fraud unit. We also had a number of other layers of controls that were used to limit our exposure to fly-by-night brokers.
Hamilton notes that in recent years the share of mortgages going to nontraditional investors (meaning not Freddie Mac or Fannie Mae) went up. Put this together with the high rate of early-payment defaults, and my guess would be that a lot of fraud has taken place. The new players on Wall Street thought they were buying genuine mortgage loans. I would not be surprised to find that they were just helping a lot of small-time operators steal a quick few million dollars each.