Tuesday, March 17, 2009

The issue of mortgage fraud vs. AIG bonuses

Back in the mid 1990s, I worked for a short time at SunAmerica, which was absorbed by AIG in 1999, and remember working for a rather detailed executive who is now an EVP at AIG. He had this rather peculiar habit of insisting that each piece of paper, whether it was a fax, snail mail, email, report or any other variety of correspondence be placed in a colored plastic folder. Should an errant piece of paper find its way into the wrong folder, there'd be hell to pay! So of course I've been wondering through this AIG meltdown, "Why didn't he or someone else apply this obsession with minutiae to, you know, the products they sold such as credit default swaps?"

And yet in the DC Examiner, the editorial page opines that mortgage fraud is such a growing cancer on the national stage that going after AIG bonuses is really nothing more than a political sideshow. From the editorial:

Many cancers become untreatable once they metastasize - spread throughout the human body. Something not unlike that appears to be happening in the mortgage industry even as President Barack Obama is off chasing AIG executive bonuses he deems as excessive.

To see what is wrong with this picture, one need look no further than the latest data from the Mortgage Bankers Association on mortgage delinquencies, covering the fourth quarter of 2008. Nationally, a little more than 92 percent of all mortgage loans were current, while 6.30 percent were seriously delinquent (i.e. more than 90 days past due). For sub-prime mortgages, which make up 11 percent of all mortgages, however, the overall delinquency percentage is 23.11 percent, and 33 percent for those with adjustable rates (ARMs). California’s ARM delinquency percentage is 39 percent and Florida’s a staggering 47 percent.

In other words, one of every four sub-primes is seriously delinquent nationwide, as is one of every three ARMs. It’s much worse in the two states thought to be havens for speculators. National delinquency rates like that simply cannot happen without extensive speculation and mortgage fraud, especially loan officers and applicants using false income, debt and other data.

Considering the pivotal role played by toxic bank assets made up in part by securitized packages of sub-prime mortgages in freezing up the financial sector, one might expect Obama to make a high national priority of identifying mortgage fraud perpetrators and prosecuting them to the fullest extent of the law.

Otherwise, it will be impossible to prevent such fraud from continuing and even expanding – metastasizing – throughout the mortgage finance industry. But when The Examiner asked the White House press office if the president plans a national anti-fraud program, we were referred to the Justice Department. There, a spokesman said he was unaware of such a program, though individual U.S. prosecutors might be launching their own efforts. The FBI has an anti-mortgage fraud effort, but the G-men clearly could use some help....

Click here to read the rest.

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