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My Changing View on Mortgage Fraud

Since the start of the mortgage crisis, I’ve maintained my position that everyone who participated in the market was in some way guilty of bringing it down.  Originators made fraudulent loans; investors bought pools they knew were too risky; diligence firms didn’t disclose what they knew; rating agencies didn’t understand the collateral; issuers were willing to securitize anything; and borrowers lied and cheated to get a loan for houses they couldn’t afford.

I’m not known for sugar-coating.

One argument I have consistently resisted is that borrowers were duped into taking out loans they couldn’t afford.  I’ve seen too many examples of people willingly overextending themselves to believe that they took out loans because someone made them do it. 

But this week, I heard a rumor that we’d found fraud in a few loan files, so I decided to take a look.

Let me clarify: I’m not a loan person, I have a bond background.  One reason I got into due diligence is because I felt someone without a background in that business could bring a fresh perspective to the market that would benefit investors.  So, I haven’t seen a lot of actual mortgage loan files.

I took a look, and here is what I saw.  One set of signatures, all in the borrower’s name, for the note documents, and another set, also in the borrower’s name but clearly in someone else’s writing, on the disclosure documents like the Truth in Lending form.

This showed me one thing: it might be true that borrowers were willing (and still are) to take on loans they can’t afford, but it is also true that, at least some of the time, they didn’t have the benefit of the disclosure documents that were put there to protect them.  They signed up for high-cost loans without knowing they were illegal.  They agreed to terms that might have made sense when explained by a broker but that they would have rejected if they’d been spelled out in the simplistic terms we in the industry designed to make loan terms perfectly clear to borrowers.

I still contend there were a lot of contributors to the mortgage meltdown.  But I am at least a little bit more sympathetic to the borrower’s case now, than I was before.