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11 Journal FRAUD AND THE HOUSING BUBBLE CRASH A new study compiled by a financial researcher at e University of Texas at Austin has determined that mortgage fraud was far more prevalent than previously known during the 2007-2009 financial crisis. e study by John Griffin, a finance professor in the McCombs School of Business at UT Austin, will appear in the next edition of the Journal of Economic Literature. Griffin explained that the fraud which played a major role in the last financial crisis was predicated by four stakeholder groups in the residential mortgage-backed securities sector: Mortgage originators that emphasized profit-fueled quantity over loan quality, which resulted in the misreporting of key financial information in 48% of loans securitized by nongovernment agencies Appraisers who worked in conjunction with originators, resulting 45% of securitized loans where the appraisal and loans exactly matched Investment bank underwriters who earned more by securitizing low-quality loans with high interest rates and falsely presenting them to investors as high-quality securities Credit rating agencies that frequently inflated ratings of mortgage-backed securities by adjusting their standard rating models. Griffin's study concluded that fraud deepened the depth and scope of the financial crisis, noting that home prices in California plummeted by 45% in the ZIP codes where more than 15% of home loans involved fraud, but only fell by 5% where fraud was involved in just 3% of home loans. "Fraud led to massive distortions in the prices of houses," Griffin said. "e bubble was very regionalized to those areas where fraudulent loan originations were common." Griffin's research was synthesized from more than 80 papers, along with legal settle- ments by 11 banks with the U.S. Department of Justice. He noted that despite the massive scale of fraud, only a single investment banker went to prison as a result of the mortgage meltdown—in comparison, 1,700 bankers were convicted in the savings and loan crisis of the late 1980s. Griffin warns that the greatest threat for fraud today is not in residential mortgages, but in other securitized assets such as commercial mortgages and collateralized loan obligations. "e coronavirus is a different cause, but it may have the same effect, revealing the same forces that were at work in the pre-fi- nancial-crisis period," Griffin said. "Market corrections have a way of revealing fraud and structural problems." While the 2007-2009 crisis may seem like history today, Griffin warned that history can repeat itself. "A lot of academics think that conflicts of interest and fraud are things the media like to talk about, but they're not of major economic importance," he said. "is paper and all the research that it summarizes says the opposite. at they did play a major role in the financial crisis. Checks and balances are supposed to be in place, but a lot of them don't work."