Turns out, fraud was a big part of the financial crisis:
In a way, this isn't surprising:
Quote:In this post I will focus primarily on how fraud in the origination and distribution portions of the privately securitized mortgage supply chain contributed to the financial crisis, because it provides a salient example of how widespread and deeply rooted in markets the economics of deception has become, as well as how difficult it is to protect ourselves from it...Mortgage Fraud Fueled the Financial Crisis—and Could Again
The basic issue underlying misrepresentation of MBS quality in the distribution portion of the supply chain was succinctly summarized in a recent ruling by District Judge Denise Cote, “This case is complex from almost any angle, but at its core there is a single, simple question. Did the defendants accurately describe the home mortgages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The offering documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.”[1] [emphasis added]. What sellers of MBS concealed from investors was a wholesale breakdown in underwriting standards at origination, which included outright falsification of borrower financial information. However, the sale of loans that were originated with fraudulent practices, or simply negligent underwriting, typically violated market regulations and contractual obligations.
In a way, this isn't surprising:
- Securitization of mortgages allowed financial institutions to get them off their balance sheet and turn the mortgage business into a volume business.
- That is, they wouldn't have a stake in the game should these mortgages turn sour, so they didn't have much incentive to accurately describe the risk.
- To increase the volume, misrepresenting mortgages to investors became quite common.
- Regulatory capture also played a significant role (see article linked above).