We need to extend the full-on opera clap to David Cho of The Washington Post for a very interesting look at the mortgage fraud phenomenon, which has only recently begun to get the attention it deserves. I believe that his opening example, a multimillion-dollar Atlanta case in which hundreds of people were in on the scam, represents just the tip of the iceberg.
Cho's piece covers the hard frauds, like the Atlanta scheme, but also details a practice that some of the rest of us have been screaming about for a while. When it's in everyone's best interest to approve loans as quickly as possible, jack up prices, and allegedly "transfer" the risk to others, you revert back to the rule of the jungle, and things get messy.
Easy money created huge demand for mortgage loans. Huge demand created a jump in prices. Those price jumps, coupled with euphoric media coverage and real estate industry propaganda about housing as an "investment," spurred greater demand and higher prices. The loans only got worse as the industry struggled to put people into properties those borrowers couldn't actually afford. No one should be surprised that some brazen scams resulted. But everyone should be shocked that the entire industry is beginning to look like a soft scam itself.
Cho's article does commit a seemingly small, but telling, sin of "objectivity," beginning with its presumption that home ownership in and of itself is a good thing. I consider this a telling trope in the whole sleazy American housing saga. The fetishization of homeownership in this country (to borrow a recent turn of phrase from the U.K.-based Economist) has been the prime ingredient in the entire home-industry Ponzi scheme that's now unraveling in front of our eyes.
The widespread assumption that homeownership is part of the "American Dream" has made it easier to fool people into believing they can get something for nothing. The National Association of Realtors and its cohorts at Beazer (NYSE: BZH ) , Pulte (NYSE: PHM ) , Ryland (NYSE: RYL ) , Toll Brothers (NYSE: TOL ) , Countrywide Financial (NYSE: CFC ) , Fannie Mae (NYSE: FNM ) , and others make their bread by peddling images of happy families, doggies, green lawns, and smiling neighbors. If they showed us ulcers, divorces, second and third mortgages, second and third jobs, five-digit credit card balances, and all-ramen diets, people might think twice about what they can afford.
Alas, the dream those companies were all selling is quickly turning into a nightmare. ARMs are resetting to payment levels beyond the means of the people who signed on the dotted line. Supply is huge. Foreclosures are making it huger. Demand is soft, and easy credit is drying up. Many naive but otherwise blameless buyers are going to suffer. Here's hoping the people responsible get what's coming to them.
Update: The International Monetary Fund (motto: "We'll loan to anyone, even Zimbabwe") says all is well. I guess that settles it.
Updated update: D.R. Horton (NYSE: DHI ) says spring isn't so sprightly. Maybe it can call the IMF.
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Fannie Mae is an Inside Value recommendation.