7 Myths of the Great Financial Crisis
1. Fraud is a distraction
Elite fraud and predation drove the Great Financial Crisis (GFC). By 2006, about 40% of all the mortgage loans made that year were “liar’s” loans – loans that did not verify the borrower’s income. The mortgage industry’s own anti-fraud experts (MARI) warned that the fraud incidence in these loans was 90%. In response, the industry rapidly increased its liar’s loans. In 2006, the industry made over one million fraudulent liar’s loans. Thomas Herndon’s 2017 study found those loans produced 70% of the mortgage losses. Liar’s loans hyper-inflated the bubble, increasing over 800% from 2003-2006. State attorneys generals’ investigations confirm that it was lender personnel and their loan broker agents that put the lies in liar’s loans.
2. No one saw it coming
There were three great warnings about the elite fraud and predation epidemics. We explained MARI’s warning in early 2006 to the entire industry about liar’s loans and the reaction – make vastly more fraudulent loans. The appraisers gave the earliest warnings in 2000 through a public petition explaining that lenders and their loan broker agents were extorting them to inflate appraisals or face being blacklisted and crippled economically. No honest lender would ever permit this, for an accurate appraisal is the key protection against loss. By 2006, 90% of appraisers reported being extorted that year. Chris Swecker, the top FBI official on mortgage fraud warned publicly in September 2006 that an “epidemic” of “mortgage fraud” would cause a financial “crisis” if not checked. The administration and anti-regulators’ response to the appraisers and the FBI’s warnings: crickets.
3. No bank would engage in appraisal fraud or liar’s loan fraud because it would harm the bank
Banks are not human. Bankers (on good days) are human. Bankers make all the decisions and they often make decisions to benefit themselves at “their” bank’s expense. Two Nobel Laureates in Economics, George Akerlof (2001) and Paul Romer (2018) wrote in 1993 to describe this fraud scheme. Their title tells it all – “Looting: The Economic Underworld of Bankruptcy for Profit.” They wrote to explain that the savings and loan regulators got it right – thrift CEOs were looting “their” thrifts by deliberately making terrible loans that produced fictional accounting profits. Looting by CEOs has been a leading cause of bank failures throughout history – and caused the failure of the first three United States banks. Thomas Herndon’s study of GFC losses agrees that looting was the overwhelming cause.
4. It’s too hard to convict elite bankers of crimes
It is difficult to convict elite CEOs of looting their firms. It takes exceptional work by three groups to make it happen. The bank regulators need to make thousands of well-crafted criminal referrals explaining the fraud schemes and provide expert testimony and assistance. The FBI must do extensive investigations. Department of Justice prosecutors (usually AUSAs) must craft “rifle shot” indictments carefully that will not confuse jurors and lead to epic trials and they then must prosecute skillfully against the world’s best criminal defense lawyers. All of this must be done through well-organized “task forces” that combine these talents. In the savings and loan debacle, the regulators made over 30,000 criminal referrals, the FBI assigned over 1,000 agents to investigate, and the prosecutor hyper-prioritized pursuing the most elite C-suite “perps.” The result was over 1,000 felony convictions of the most elite ‘perps’ – with nearly a 95% conviction result. We repeated this organization and success in prosecuting the Enron-era fraud epidemic with about 800 convictions.
5. DOJ did its best to prosecute, but concluded it could not succeed
The Con explains the astounding refusal to use these proven, vital steps against the GFC’s elite ‘perps.’ The result was virtually zero criminal referrals, scattered investigations of non-elite fraudsters by a tiny cadre of FBI agents, and no prosecutions of the elite bankers that actually led the fraud epidemics that caused the GFC. As Chris Swecker observes, the result has been the total destruction of deterrence against elite fraud. We knew how to succeed. Paul Pelletier, one of the Nation’s top prosecutors of elite fraudsters, explains in The Con: we were waiting for DOJ leaders’ “Go.” That authorization never came. We knew how to succeed despite all the difficulties of prosecuting corporate elites. The leaders forbade us to implement the essentials to success. The Con shows that GFC whistleblowers provided unique resources allowing successful prosecutions of CEOs on a platinum platter. DOJ’s leadership spurned every whistleblower.
6. The government caused the GFC by forcing banks to make bad loans to people of color
“The Con” calls bullshit on this vile lie. Fraudulent, elite bankers decided to make endemically fraudulent liar’s loans and extort appraisers to inflate appraisers. They decided to make these loans overwhelmingly through loan brokers – who have been notorious for at least 50 years for providing crappy loans, committing fraud, and predating on minorities. Every administration’s regulators warned against these practices. In every case, organizations representing minorities and the poor asked the government to ban or dramatically limit these practices. In every case, the mortgage industry opposed all regulatory efforts to restrict liar’s loans, appraisal fraud, and the use of loan brokers. From the beginning, in 1990 in Orange County, California, the bankers making liar’s loans combined that practice with predation targeting Blacks, Latinx, and particularly elderly African-American widows. Liar’s loans typically inflated the borrower’s income by over 50%, and The Con show routine inflating of appraised values in poor neighborhoods by hundreds of percent. That makes no sense if the theory is that the lender (or Fannie and Freddie) were trying to demonstrate that they were lending to poor people.
7. The reality is that the GFC’s epidemic of predation was the leading cause of a catastrophic loss of Black and Latinx wealth
During the GFC (through 2013), “median wealth declined by about 72 percent among Hispanic college-grad families…. Among blacks, the declines were 60 percent….” The comparable figure for Whites was 16 percent. FRB St. Louis study (August 2015). Demonizing black and brown people who are the primary victims as the supposed perpetrators has a long, disgraceful pedigree in America. The Con blows up this smear.
Watch THE CON series, episodes 1-5.
Concerned Real Estate Appraisers from across America
Submit the attached petition (Which was posted on appraisersforum.com):
To: Mr. Ben Henson – Executive Director
Appraisal Subcommittee (ASC)
Federal Financial Institutions Examination Council
cc: Other state or federal agencies with authority in the following matter
“The ASC’s mission is to ensure that real estate appraisers, who perform appraisals in real estate transactions that could expose the United States government to financial loss, are sufficiently trained and tested to assure competency and independent judgment according to uniform high professional standards and ethics.” From the ASC website.
The concern of this petition has to do with our “independent judgment” in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.
This pressure comes in many forms and includes the following:
– the withholding of business if we refuse to inflate values,
– the withholding of business if we refuse to guarantee a predetermined value,
– the withholding of business if we refuse to ignore deficiencies in the property,
– refusing to pay for an appraisal that does not give them what they want,
– black listing honest appraisers in order to use “rubber stamp” appraisers, etc.
We request that action be taken to hold the lenders responsible for this type of violation and provide for a penalty on any person or business who engages in the practice of pressuring appraisers to do dishonest appraisals that do not provide for independent judgment. We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists. We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.
We thank you for your cooperation and assistance.
This petition is now closed for further signing. 11,000 signatures should be evidence enough that a problem exists and needs to be addressed.
There’s also a lot more to #6, #7 that isn’t really being unpacked.
Circumvention of laws, regulations, sound-generally accepted appraisal practices, USPAP, FIRREA; & price fixing below reasonable & customary fees for work complexity remain major problems today.
Instead of addressing these issues, many if not most states are instead going after appraisals to impose more fines. They do this NOT to improve or maintain appraisal quality. They do it to backfill declining department revenues resulting from decreasing numbers of license fees.
More and more states are using “Factual Investigation” chimeras in order to circumvent an expectation that they will review & report USPAP compliance in accordance with SR 3 and SR 4.
State Appraisal “review” has become a process of legal “gotchas!” rather than professional appraisal reviewing in accordance with standards that we all know and understand (USPAP SR 3 & 4).
Appraisal has long been a profession that encompasses both art and science. Whether its the artful application of science or the scientific application of art,; or simply a variable mixed blend of both is up for discussion. What is NOT up for discussion (or shouldn’t be) is the current regulatory presumption that appraisal review can be replaced by purely academic ‘fact-finding’ with a prosecutorial bent.
No appraiser anywhere should ever be subject to disciplinary action on any appraisal that has not in fact been the result of a properly completed SR3 & 4 compliant appraisal review.
Until this specific issue is adequately addressed not much else matters.
A great and educational article to read on the Appraisers Blogs. Thank you, hopefully more to come. If nothing else, disclosure after the fact may still guide the invisible hand of consumer decision making. It’s out there, lurking, predatory lending interests. Because the government will never be able to successfully police the entire financial sector, long term solutions lie in better financial education. One can see how easy it is to make those programs work, simply tempt the consumer. Serving justice through the legal system is a reactionary effort at best, it never actually solves the root cause of poorly informed consumers. The long term solution is better financial education and a renewed skepticism about monied institutions. A return to the constitutional principals this nation was founded upon. As we slip further down the line and spend decades unpacking the previous deceptions. Audit the FED.