What's Happened to Mortgages Wasn't Just a Crisis, It Was a Crime

My wife and I have stood by for the past five years, ready to purchase a home, but refusing to participate in the Ponzi scheme that American home lending had become. When we decided to stay in Pasadena, back in 2003, we did the math and figured how much we could afford to pay for a house, using traditional mortgage affordability formulas. Heck, we even fudged it up a little bit, and priced a 30-year, fixed-rate loan that would take a third of our income, rather than the traditional 25 percent.

Forget about finding a home in the area at that price; we couldn't even find someone who would write us the loan. Every broker we spoke with tried to move us into an "80/20" double loan, with a variable-rate second loan that would cover the "down payment" that would qualify us for the first.

Real estate agents told us we were naive for taking such a conservative view of what we could afford. With prices rising so fast, one agent we know urged us to forget about affordability. Get a negative amortization loan, with a artificially low introductory payment, "just to get in." We could soon sell for a big profit, or at least refinance and take money out of the house, she said.

Having been in the Web publishing business since 1995, I'd seen this thinking before. That bubble burst, and I knew the real estate one would, too.

But the real estate bubble was different in at least one respect -- the massive number of consumers actively engaged in fraud. As home prices shot past $650 per square foot in Pasadena, my wife and I wondered who possibly could be qualifying for the loans necessary to buy at those prices. With a median household income just over $51,000 a year, only a tiny faction of Pasadenans ought to have been able to afford $800,000 homes, even using "teaser rates" and negative amortization loans.

The answer, we now know, is that massive numbers of Americans were lying about their incomes. And by lying, they helped inflate a bubble that drove prices to insane levels, forcing millions of other American families to make a choice - lie, as well, or forget about owning a home.

Those who chose to lie didn't just help inflate this bubble. They broke the law. As did the brokers and bankers who knowingly accepted their fraudulent applications, and, in many cases, suggested the bogus numbers that these borrowers submitted.

Seeing so few of these lawbreakers face criminal investigation has been driving me nuts. I can find plenty of people here in Southern California eager to deport hard-working illegal immigrants, even ones with underage children who are U.S. citizens, in the name of "upholding the law." But few have spoken out to urge jailing mortgage brokers and real estate agents whose mischief has done billions of dollars of damage to the economy.

Here's my fantasy: The FBI obtains warrants for the IRS records and mortgage applications of every U.S. household in foreclosure or pre-foreclosure. Feed 'em into a computer and run a cross-tab. Every record where the income stated on the mortgage app runs 50 percent, or more, above that household's gross income, as reported to the IRS, gets flagged.

Then let's run another query on the database, this time looking at brokers and agents. If more than 50 percent of a broker's clients are flagged, it's time for a perp walk. Interview a selection of flagged clients, and let's see how many of them are willing to testify that the broker told them to lie about their incomes.

Think we could get Vegas to establish an over/under on the number of indictments such an investigation could yield? If it ain't a five-figure number, I'm betting the over.

(Yes, I would rather play my money in Vegas than put it into the housing market, at this point.)

My wife and I want to buy a house, but one that is priced fairly, under a mortgage lending system where people are expected to pay back their loans, and not simply leverage them into some other shady deal. That's the system that built a solid American middle class.

I'm sick of Ponzi schemes. I'm sick of the bubble economy. The con artists who inflated this bubble did not deserve the riches they sucked from the system. They deserve felony convictions, fines, and, for some, jail. Here's hoping that is what is in many of their futures.

Robert Niles also can be found at http://www.themeparkinsider.com