My GMU colleague — and blogger extraordinaire — Tyler Cowen’s monthly New York Times column is never to be missed. This month’s column (published today and entitled "So We Thought. But Then Again…") is no exception. Here’s a teaser from Tyler’s column:
There has been plenty of talk about “predatory lending,” but
“predatory borrowing” may have been the bigger problem. As much as 70
percent of recent early payment defaults had fraudulent
misrepresentations on their original loan applications, according to
one recent study. The research was done by BasePoint Analytics, which
helps banks and lenders identify fraudulent transactions; the study
looked at more than three million loans from 1997 to 2006, with a
majority from 2005 to 2006. Applications with misrepresentations were
also five times as likely to go into default.
Many of the
frauds were simple rather than ingenious. In some cases, borrowers who
were asked to state their incomes just lied, sometimes reporting five
times actual income; other borrowers falsified income documents by
using computers. Too often, mortgage originators and middlemen looked
the other way rather than slowing down the process or insisting on
adequate documentation of income and assets. As long as housing prices
kept rising, it didn’t seem to matter.
In other words, many of
the people now losing their homes committed fraud. And when a mortgage
goes into default in its first year, the chance is high that there was
fraud in the initial application, especially because unemployment in
general has been low during the last two years.
