U.S. government ignored massive mortgage industry fraud

We’ve all now heard about the scoundrels who took out “liar loans” for homes far more expensive than they could afford and the greedy mortgage originators who winked at such buyers.

But have you heard that many of those greedy mortgage originators also engaged in other dirty tricks to drive up their fees at home buyers' expense?

What disturbs me is not that companies systematically ripped off consumers but that the federal government did nothing about it. In fact, the federal government basically doesn’t regulate the mortgage industry:

[Ameriquest] and its affiliates had grown to become the nation’s largest subprime mortgage lender when, in January 2006, Ameriquest coughed up $325 million to settle charges that it misled borrowers and falsified loan documents. Representatives of 49 states, the District of Columbia and even Northern California’s Alameda County signed off on the deal.

But as Ameriquest and its parent company cut the deal, Uncle Sam was noticeably absent. Ameriquest… wasn’t a deposit-taking bank or savings and loan, so it wasn’t subject to scrutiny by federal bank regulators…

[Wall Street] bought the loans and bundled them into what are now vilified as “toxic assets” — the poison at the “too big to fail” banks that have received the most federal bailout funds.

Even worse, the U.S. government failed to regulate all kinds of mortgage-related insurance policies and derivative contracts, which became the roulette wheel of the U.S. banking system, whose gambling losses we taxpayers are now paying off:

State-regulated insurer American International Group Inc., the largest bailout recipient, guaranteed billions of dollars of these mortgage-based bonds…

The U.S. Securities and Exchange Commission, for example, provided little oversight of mortgage-backed securities or the credit ratings firms that blessed them, said Chapman University law Professor Kurt Eggert, an expert in this “securitization” process.

“Whole chunks of the mortgage business, including securitization, were almost completely unregulated,” said Eggert, a former member of a consumer advisory panel for the Federal Reserve.

Creators and buyers of these bonds sometimes bought guarantees for the securities… using complex financial contracts called credit default swaps, which were supposed to reimburse investors if the bonds went bad. …The credit default swaps were largely unregulated.

Posted by James on Tuesday, April 21, 2009