Mar 03 2015

Cracking Down on Mortgage Fraud

The New York Times is reporting that in several cities officials can’t keep up on mortgage fraud investigation cases.

The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said.

“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,” said Chuck Cross, vice president of mortgage regulatory policy for the conference of state bank supervisors, an organization of regulators and bankers. “There’s too many cases, not enough agents.”

Mortgage fraud covers crimes like false statements on mortgage applications and elaborate “flipping” schemes that involve multiple properties and corrupt appraisers, title companies and straw buyers.

In one common flipping plot, someone buys a house, has it appraised for more than its true value and sells it to a straw buyer for the inflated price, pocketing the difference. The straw buyer lets the house fall into foreclosure, leaving the bank with the loss.

Why wouldn’t banks go after any money from the straw buyer? If the laws are written so you can simply walk away from a house without having to pay anything back, then we’re likely to see more and more fraud schemes revealed.

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Mar 03 2015

Do Commercial Banks Get It?

Financial Times has a nice op-ed that discusses how despite liquidity injections from the central banks, commercial banks still can’t manage to straighten their mess out. (the full article was available earlier, but now requires free registration to be read in its entirety)

The combined central bank injection of liquidity last week was impressive. Still, more than five months after the interbank market froze, banks’ thirst for cash seems unquenchable. The central banks have done everything they can to keep financial markets orderly. They took the risk of feeding the moral hazard beast and what did they achieve? So far they have avoided the much-feared “Big Crunch”, but the end of the tunnel is not yet in sight. The time has come to ask the harder question: do commercial banks get it?

What are they drinking? We have an idea.

Obviously, shareholders do not like the dilution of their stakes, but this is what shareholding is all about. If a company has suffered, or is about to suffer, heavy losses, its shareholders will have to bear part of the trouble. Delaying tactics prolong the misery without solving the problem, which will not go away.

Shareholders have no problem enjoying immense profits during good times. It’s nice to see someone point out how delay tactics have no real effect in solving the problems. We’ve heard many delay tactics proposed for the mortgage markets such as bailouts and temporary rate freezes, but ultimately they have no effect on solving the problem.

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