A Down Payment is the Best Protection

I am a little behind on this, but Megan McArdle had this from Joe Wiesentahl, on the importance of loan down payments to prevent fraud and foreclosure:

The author, Michael Richardson, owned a Colorado mortgage company that was busted by HUD for processing too much fraudulent paperwork.  This caused him to discover that unbeknownst to him his employees were (on their own) engaging in mortgage fraud, prompting him to write this book and try to warn the industry.

This alone is interesting -- that even on the small-time level, there was an information problem (bosses not knowing what the underlings were doing) -- and the book is rich with details about the nuts and bolts of mortgage fraud.

But beyond that, one point he makes clear -- and remember, this is before 2005, so before the crash and before conservatives blamed government intervention in the housing market for the crash -- is that the FHA's subsidization of $0-down loans made it all possible.

If you make someone pay 10% or 20% of a house's cost upfront, then there's no way you can alter the paperwork enough to make an ineligible buyer buy a house for an inflated price. But once you drop that requirement, everything goes. You can sell any house to any buyer for any price as long as you put in the effort to falsify documents and go through the cumbersome legwork.

  • Dr. T

    "This alone is interesting — that even on the small-time level, there was an information problem (bosses not knowing what the underlings were doing)..."

    I cannot imagine being the boss of a mortgage company and not having daily reports of mortgages written, amounts loaned, interest rates charged, points and fees collected, and percent equities of the borrowers. The boss must have been asleep at the helm.

    When I directed laboratories, I had daily and weekly electronic reports on a variety of parameters. These reports were run automatically M-F mornings. Some results were graphed and posted. All reports were shared with the CEO and CFO. All quality- and clinically-related reports were shared with supervisors. We're in the computer age: it's not hard to do this.