Considering that as a society we allowed ourselves unsustainable indulgences that really did not make any sense. How could one buy a house, do nothing and a few months later sell it again for a huge profit? People were making their living doing this. Something that had never been done before and historically should not have been possible. Parts of it were stupidity, part was greed, and part was criminal. In an article from the Seattle Post Intelligencer titled FBI saw mortgage fraud early one wonders how much of this disaster was preventable. Lets take a look -
The FBI was aware for years of "pervasive and growing" fraud in the mortgage industry that eventually contributed to America's financial meltdown, but did not take definitive action to stop it.
"It is clear that we had good intelligence on the mortgage-fraud schemes, the corrupt attorneys, the corrupt appraisers, the insider schemes," said a recently retired, high FBI official. Another retired top FBI official confirmed that such intelligence went back to 2002.
[John Falvey Jr., a former federal prosecutor who currently does white-collar criminal defense work in Boston] said that financial executives who deliberately chose not to learn the facts about dicey mortgage-lending practices in their companies -- who chose to be "willfully blind" to such practices and the subsequent securitization of those mortgages -- could be vulnerable to prosecution for securities fraud.
Both retired FBI officials asserted that the Bush administration was thoroughly briefed on the mortgage fraud crisis and its potential to cascade out of control with devastating financial consequences, but made the decision not to give back to the FBI the agents it needed to address the problem. After the terrorist attacks of 2001, about 2,400 agents were reassigned to counterterrorism duties.
Further complicating efforts to detect and prosecute mortgage fraud, banks and other mortgage lenders were making so much money from the constant churn of transactions and the continually escalating price of homes that the fraud that did arise simply didn't cost the industry enough money to raise their concerns.
When FBI Director Robert Mueller was briefed on mortgage fraud, "his eyes would glaze over," the first retired FBI official said. "It was not something that he would consider a high priority. It was not on his radar screen."
"The potential impact of mortgage fraud on financial institutions in the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market."
[Chris Swecker, then assistant director of the criminal investigation division, said in October 2004 before the House subcommittee on housing and community opportunity] went on to describe the scenario that ultimately wrecked financial havoc around the world: "Often mortgage loans sold in secondary markets are used by financial institutions as collateral for other investments. ... When loans sold in the secondary market default and have fraudulent or material misrepresentation ... these loans become a nonperforming asset, and in extreme fraud cases, the mortgage-backed security is worthless. Mortgage fraud losses adversely affect loan-loss reserves, profits, liquidity levels and capitalization ratios, ultimately affecting the soundness of the financial institution itself."
While the article is long, it is chock full of important information about what was known when and what was done or not done about mortgage fraud during the bubble.
The warning of the ripple affect onto the rest of the economy was forewarned within the government in 2004 - and still nothing. Another preventable disaster that was not prevented. People knew what was going on, what the affects could easily be, yet still nothing was done. Maybe worse than nothing - eyes glazed over. Mortgage fraud was too dull or complex to deal with! Shocking, sad and scary.