The sub-prime market is a simple agency problem–all it took to get a loan was a false appraisal and there were no real penalties for making a false appraisal. I work in the area every day the the number of “made as instructed” or MAI appraisals is staggering. Indiana has started a modest crack down and has already booted 350 appraisers, as a measure of the problem.

The felony was compounded by brokers who then packaged and resold the loans, knowing that they were not properly underwritten. “Where are the customers’ yachts?”

From the foregoing, it doesn’t follow that we need more regulation—we have enough laws on the books to sort out the problems and no one has tackled the real issue—making the appraiser stand, financially, behind his or her report.

What would help would be honesty in fact from “defenders” of free markets who could have taken care to explain that, for example, if you buy into a pool of mortgages which have no meaningful counterparty—you have no real resort against the appraiser and broker—you are buying a risky, pig in a poke.

For you see, the borrowers, as ignorant as they might be on their own, were fully advised and counseled by *licensed* real estate and financial agents for the most part. As you must be surely aware, licensing ensures only the best protections in the market for the consumer.

There’s no telling how badly these borrowers would have been taken if they hadn’t been dealing with people who were certified to have the consumer’s interests foremost in mind.

I saw a blog post (or ten) recently explaining how this works, but I can’t quite put my finger on which site they were on…

/keep up the good work

1′. … Although almost every player was honest and made good credit decisions, a very small percentage either made some mistakes or — a even smaller number — was outright fradulent. The press picked these anedoctes as data and congress is about to overreact.