As the financial fallout from the subprime mortgage problem continues to get worse, many are trying to piece together the clues to figure out what caused us to reach this point. And one of the big questions is whether or not fraud has played a role in the crisis.
The simple answer: To some extent.
The worldwide economy is being rocked by defaults on subprime mortgages, and I don’t think we still know the full extent of the problem. I suspect that there is more bad news coming as lenders continue to assess the loans on their books.
The core problem is pretty simple. Borrowers are defaulting on mortgages. In the subprime mortgage industry, loans are made to individuals and businesses with credit problems. They have poor credit histories or current financial problems, so they are inherently risky borrowers. The subprime lenders fill a need by offering mortgages to those less desirable customers, and the borrowers typically pay higher interest rates because of the increased risk.
Borrowers are defaulting for a number of reasons. Some are unable to meet their mortgage obligations because of legitimate financial difficulties that have arisen. Others are defaulting because fraud was committed in the process of getting the mortgage. Applicants commit fraud by lying about their income, failing to disclose some debts, and otherwise manipulating data to make themselves or their businesses appear more qualified for financing than they really are.
Lenders aren’t necessarily blameless, however. It’s no secret that mortgage lenders have a vested interest in consumers closing on loans. Yes, some lenders encourage applicants to lie about their financial status and some manipulate the underwriting process.
Many problems have finally converged to create this financial crisis. Borrowers are defaulting, leaving lenders with unpaid mortgages and foreclosed properties to sell. The cooler housing market is making it more difficult to sell those properties, and some properties aren’t sold for enough to cover the outstanding mortgages.
The subprime mortgage problem is serious because it reaches far beyond the housing marketing. This credit crisis is affecting many industries worldwide, is negatively impacting investments, and is affecting the availability of credit in the world markets.