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Sub-prime suspects

13 December 2012

Mortgage fraud is being uncovered on an increasing scale as the full fall-out from the financial crisis becomes apparent. Here, Aziz Rahman of Rahman Ravelli, considers why the buck is now being passed around faster than bad loans ever were.

Blame has never been a precious commodity. People have always been keen to pass their share on to others, regardless of whether it is appropriate. It seems to be passed quicker than the most deadly virus and although the consequences are not quite as fatal they can be seriously damaging in many ways. And never more so when we look at those who all claim to have “caught a cold’’ in the financial crisis and the mortgage merry-go-round that both preceded it and caused it.

Mortgage fraud has become increasingly apparent as the full financial crisis has been played out in front of us. House repossessions, prosecutions for mortgage fraud and much talk of toxic assets (meaning sub-prime mortgages given to people who had no hope of repaying them) have all stoked debate about who was to blame. And, once again, no one wants to take a fair share of the blame.  There is, after all, plenty to go around when the irrational borrowing and lending is considered, not to mention the complacency that spread like wildfire through the financial markets as bankers, brokers and anyone else after a cut of the action created a climate where a 110% mortgage never seemed as ridiculous as it actually is.

There are people out there who will argue that each house repossession is the fault of the homeowner – or rather the ex-homeowner. After all, they should not have taken out a mortgage they could not afford to repay. The blame, therefore, lies with them. The blame game is played with an even fiercer intensity when it comes to those people who have been or are about to be prosecuted for mortgage fraud. They are even worse than the person who fails to pay their mortgage because they always intended to use the loan as a means of swindling large amounts of money out of the banks and other lending institutions. They have to be prosecuted because they did wrong and, in turn, caused financial hardship.

The arguments for blaming the mortgage non-payer and the person accused of mortgage fraud are strong and relatively clear cut. The people who make the arguments can cite examples to back up their stance. In either case, the lender lost out because of a borrower’s inability or lack of desire to ever pay back the loan. This left the banks out of pocket through no fault of their own.

But are the banks simply the innocent victims of people unable or unwilling to repay what they owe?

Is it right that banks should be apportioned a share of the blame mountain that is being passed around? Probably. And that is because of one little phrase: short-term greed.

Any mortgage that was issued during the times of easy money involved at least one bank lending to someone who was unable or unwilling to ever pay it back. If proper checks had been made on borrowers, these mortgages would never have become a reality. But all too often, banks were happy to lend money without doing their homework. In their rush to lend money and make profits, they not only loaned billions of pounds that were never likely to be recouped, they showed a staggering complacency and irresponsibility when it came to assessing the risks. That lack of risk assessment was typical in an era and a business sector that was addicted to short-term gain and long-term short-sightedness. The inevitable end result was a financial collapse due to bad debt and a property market effectively crippled by the wide boy lending practices – also known as predatory lending – that the main financial institutions employed to chase short-term gain. Without such a practice, none of the catastrophe would have been able to unfold so damagingly; with all associated individuals and institutions  - banks, mortgage brokers, solicitors, property developers -refusing to acknowledge the true situation so they could keep gaining their slice of the loan cash that was sloshing around. The complacency and greed that sparked the insanity also ensured its downfall. While the lenders and their associates let their activities be dictated by greed they were also causing the collapse of the whole system.  Yes, the odd homebuyer was talked into borrowing what they couldn’t repay. But it wasn’t them that created the crazy financial climate that caused the crisis.

Without wanting to sound like an old codger, mortgages used to be hard things to obtain. Lenders would make applicants produce clear proof they would be able to repay a loan – and only then would the loan be approved. Such a system of underwriting seems to have been ditched during the years of crazy lending. And while we can obviously point the finger at those who gained mortgages which they could or would not pay back, it has to be remembered that the banks were not forced to make these loans. They made the loans after making insufficient checks – or even turning a blind eye – regarding the risks of a borrower failing to repay. In many cases, they even passed the risks on to other investors by bundling up mortgage packages and selling them on. The evidence now seems to be emerging to show that not only did banks make disastrously risky loans – they took steps to hide this information from other interested parties. In the United States, for example, the big three ratings agencies, Moody’s, Standard and Poor and Fitch all gave AAA ratings to mortgage-backed securities that were nowhere near as safe a bet as such a rating indicates. Quite why such supposedly impartial ratings agencies gave such inaccurate glowing ratings to the securities being hawked around by the big banks can only be speculated upon. What is not in doubt, however, is the hugely detrimental effect such activity eventually wreaked on the world economy as the “see no evil’’ US approach to lending made its way to the UK and other countries. People were persuaded to take on mortgages they couldn’t afford which were then parcelled up and sold to investors after being given a dodgy rating. Such a disaster would and could have been avoided if the banks had properly assessed the risks when handing out mortgages. In theory, many troublesome mortgages could have been modified to assist those who realised belatedly they were struggling to meet their repayments. But in the rush to lend it has become apparent that so many banks gained inaccurate or incomplete information about a borrower when approving a mortgage that they have very little data to work out a realistic new formula for repayments. Added to this, the fact that thousands of such mortgages have been packaged up and sold on makes any realistic dialogue between the current owner of the debt and the hard-up borrower nigh on impossible.

The result, as we have seen, is financial meltdown and property markets struggling to survive in any realistic way. People have lost the homes they could never really afford in the first place. Others are being prosecuted as the largest instances of mortgage fraud come to light. Many professionals involved in the property market – mortgage brokers, surveyors, solicitors, estate agents and developers – are coming under scrutiny. Yet vast amounts of taxpayers’ money have been used to bail out the banks and help them bounce back from the calamity they played such a large part in creating.

Bearing in mind the way the banks made such a disaster possible, it seems strange to help them and punish everyone else. The whole situation was a fragile house of cards built on complacency and greed that had to collapse at some point – a house of cards caused by greedy banks believing they held all the aces.


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