This is the third column in my series about the Wall Street Journal report that “big money managers” want to bring back “liar’s loans.” Here are the article’s first two sentences.
Wall Street wants to bring back the “low-doc” loan.
These mortgages, which are given to borrowers that can’t fully document their income, helped fuel a tidal wave of defaults during the housing crisis and subsequently fell out of favor.
The second sentence begins the lies with an important lie. “Low-doc” is a euphemism for endemically fraudulent “liar’s” loans. The second sentence repeats a lie that the fraudulent lenders have told for decades – it is their carefully crafted creation myth of liar’s loans. If the WSJ had done its job and exposed the lie, the creation myth and the fraud scheme would have died decades ago. Instead, the WSJ endorses the lie. Liar’s loans were not designed for or “given to borrowers that can’t fully document their income.” The two keys lies by the fraudulent lenders about liar’s loans arise from their use of the word “can’t.” As I explained in my second column in this series, the IRS created, decades ago, Form 4506-T, which allows the borrower to give the lender access to transcripts of the borrower’s two most recent tax returns. This means that the self-employed can easily and cheaply permit the lender to verify their income – and home lenders routinely require borrowers to sign the 4506-T as a mandatory part of the loan application. The first lie is that there are borrowers that are incapable (“can’t”) document their (purportedly ample) income.
It is time to break out one of our two family rules again – it is impossible to compete with unintentional self-parody. How fraudulent is finance even now? The Wall Street Journal reports that “big money managers” want to bring back “liar’s loans.” I am trying to write much shorter columns, so there will be many columns in this series because the WSJ article so beautifully exemplifies the lies that the industry and the media told about liar’s loans before and after 2008.
Spoiler alert: liar’s loans, as the name admits, are pervasively fraudulent. Only fraudulent lenders make liar’s loans as a regular business practice. These home loans make the officers wealthy through the “sure thing” of the “fraud recipe” for “accounting control fraud.” The WSJ, of course, ignores these facts and presents instead falsehoods provided by fraudulent officers.
I will be writing a series of articles concerning the three mortgage fraud epidemics that hyper-inflated the bubble and drove the financial crisis prompted by four recent economic studies of mortgage fraud. My goal is to integrate the results of those studies with the work of criminologists, investigators, and data from other sources such as Clayton.
In economics and white-collar criminology, we teach our students the very useful concept of “revealed preferences.” We take what potential perpetrators say they would do and why they claim they took an action with cartons of salt. Their actions generally speak far louder and more candidly than do their words. I will show in this series how valuable revealed preferences are in analyzing the data and testing rival research hypotheses. (I will explain why I feel the recurrent failure to state these hypotheses expressly leads to serious error.)
In my first column in this two-part series I explained how the Department of Justice’s (DOJ) non-prosecutorial effort against the banksters’ frauds that caused the financial crisis had ended with a pathetic whimper uttered by Deputy Attorney General James Cole during his ritual exit interview with Bloomberg. Cole’s explanation for DOJ’s failure to prosecute a single senior banker for leading the three fraud epidemics that drove the financial crisis was that DOJ was “dealing with financial rocket science.” My first column made the point, which escaped DOJ and Bloomberg that if this were true it would presumably have been modestly important for DOJ to do something about the ability of “rocket scientists” to grow wealthy by leading the frauds that cost the U.S. $21 trillion in lost GDP and 10 million jobs. I also promised this column explaining why it was not true. In light of a reader’s comment I’ll add a third piece on “rocket science” in the financial context.
Here’s the central thesis of the far right about Fannie Mae and Freddie Mac. It is taken from the web site: The Neville Awards (as in Neville Chamberlain), which gives “awards” to Democrats for their cowardice and other mortal and venal sins. This particular article claims that the damnably clever Democrats, while the Republicans controlled the Presidency, House, Senate, Supreme Court, and all the regulatory agencies, pulled off a deliberate plan to destroy the economy in order to elect Obama. “Obama, Fannie Mae & Freddie Mac – How the Democrats Brought Down the Economy in Time to Elect Obama.”
Columbia Journalism Review (CJR) has a post giving kudos to William Black for his performance on CNBC’s Closing Bell. The episode’s topic was whether or not Goldman Sachs should or could be prosecuted on fraud charges for their part in the financial crisis.
William K. Black talks with EconTalk host Russ Roberts about financial fraud, starting with the Savings and Loan debacle up through the current financial crisis. Black explains how bank executives can use fraudulent loans to inflate the size of their bank in order to justify large compensation packages. He argues that “liar loans” were a major part of the crisis and that policy changes made it easy to generate such loans without criminal repercussions.
A reader has asked several important questions about liar’s loans that are critical to understanding the causes of the ongoing U.S. crisis. By 2006, half of all loans called “subprime” were also liar’s loans. Roughly one-third of all home loans made in 2006 were liar’s loans. The crisis was originally called a “subprime” crisis, but it was always a liar’s loan crisis. The reader is correct to inquire about causation and moral culpability.
“Dr. Black, are liar’s loans the same as stated income loans? In either case, how do we know whether buyers or loaners put the income for the loan? If most of these reported incomes were entered by borrowers, I would think most of the blame falls on them.”