Guest Post: Double Dip In Housing Largely Caused By Failure to Prosecute Mortgage Fraud

Washington’s Blog

There’s a double-dip in housing prices (and see this).

As CNN points outs:

U.S. home prices fell 2% in the third quarter after having gained steadily since early 2009.
The S&P Case-Shiller Home Price Index has recorded gains in four of the previous five quarters, including a 4.7% jump between April and June 2010. That leaves national home prices down 1.5% year over year and off 2% compared to the second quarter, according to the Index, which was released Tuesday.


The inventory of homes is high with nearly 3.9 million on the market in October, according to the National Association of Realtors. That means it would take 10.5 months to sell through all of the current inventory. In a normal market, there is usually a six-month supply.
Plus, there’s a massive shadow inventory of homes waiting in the wings. These are homes that are deeply in the foreclosure process or even repossessed by banks but not yet put back on the market.

Much of the massive shadow inventory of homes is due to the fraud involved with mortgage documents.

CNN notes in a second article:

Big banks are having trouble restarting the foreclosure process after this fall’s “robo-signing” scandal, and the once booming market for foreclosed homes has been hit hard as a result.
According to ForeclosureRadar, the number of properties coming to auction in hard-hit western states — Arizona, California and Nevada — has dropped more than 30%.


Investors had been doing brisk business, buying distressed properties on the cheap, sprucing them up and flipping them. But now they are being far more cautious.
“Their concern is that homeowners will be more aggressive in fighting foreclosures even after the auction sale,” said Sean O’Toole, CEO of ForeclosureRadar.
For vulture investors, speed is essential — they do not want to tie up investments for months while attorneys argue.
They are also worried about being able to unload the property.


Pressure on the market for distressed properties could last if delinquent borrowers are less likely to give up on their homes, according to Duane LeGate, CEO of Georgia-based House Buyer Network.

LeGate says his business dropped more than 30% the week after news of the robo-signing scandal broke, and has stayed down since. His theory: homeowners think the bank will have a tough time kicking them out in this environment, and that they can live for free for a while. He says he’s got two friends who intend to do just that.

Reuters reports:

Shadow inventory is seen as one of the chief threats to the fragile housing market that is showing new signs of weakening.


Adding to the problems are errors in processing tens of thousands of foreclosure cases at Bank of America Corp, the largest U.S. mortgage servicer, and other financial institutions.

The massive failure to provide proper documentation in court has resulted in delays to an already lengthy processes of repossessing homes, leading to a backlog in paperwork and repossessions as the companies fix their procedures. The banks are also facing a nationwide probe by state attorneys general.


What’s more, buyers of distressed properties have become gun shy due to the foreclosure processing problems, according to a Campbell/Inside Mortgage Finance survey of real estate agents.

The poll found 14 percent of owner-occupant homebuyers and 6 percent of investors refused to view foreclosed properties in October.

And Zack’s Investment Research writes:

Foreclosures have slowed recently, but that is only because of the fraudclosure scandal, where the banks have proved to be exceptionally incompetent in handling the paperwork related to securitized mortgages. Basically, they can’t really prove that they hold the mortgage, and thus don’t have the right to foreclose.

It remains to be seen just how big a problem that will prove to be. It could just be a technical glitch that will gum up the works for a few months, or it could be a HUGE problem that once again undermines the solvency of the entire banking system.


What is clear is that what [Bank of America, Wells Fargo and other big banks] were doing was illegal and at least technically constituted fraud and misrepresentation to the courts.

There should be more than a handful of bankers who end up with long terms in prison as a result. Just because there should, however, does not mean that there will be. White-collar crime is simply not taken seriously in this country relative to blue collar or street crime, even though the amount stolen with a pen far exceeds the amount stolen with a gun.

For those who doubt that fraud is rampant in the mortgage paperwork mess, see this, this, this, this, this and this .

There are obviously other factors responsible for the softening housing market, such as the end of government stimulus programs regarding housing, and poor employment conditions. But as I’ve pointed out early and often, these problems are all interrelated.   See
Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won’t Recover.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. readerOfTeaLeaves

    Glad to see this whole, “It isn’t going to get better until things get cleaned up” meme getting stronger.

    Assuming that economics is a social science (rather than say, physics, or a subfield of engineering and flow mechanics, a la ‘derivative matrices’), then the ability to generate, support, and enhance trust is fundamental to economic prosperity.

    All the economic modeling, all the political speeches, and all the interventions by the Fed are not going to recreate the trust that is essential, IMVHO, to commercial exchange.

    The only way to rebuild trust is to investigate, prosecute, and enforce social consequences (ranging from jail to community service activities) for what was diabolically anti-social conduct in the housing market, from the bottom levels of realtors, appraisers, and mortgage brokers all the way up to the ‘highest levels’ of both bankers, but also of a few former electeds and political appointees who enabled this corruption to get completely out of hand.

    I realize that no one believes — not even me, really — that ‘the highest levels’ of society will ever be investigated and prosecuted. But the consequences are so huge, that’s what would be required to rebuild the kind of trust that appears to be necessary for a functioning economy.

    But that, obviously, rebuilding a health economy would also require new economic paradigms that view economic behavior as a social activity, rather than the ‘rational man’ nonsense that puts far, far too much faith in mathematical constructs and overly simplistic models.

    1. Jessica

      “the ability to generate, support, and enhance trust is fundamental to economic prosperity.”

      Yes, yes, yes. The scope and intensity of coordination is the “fitness” that drives the evolution of societies over time. Trust is what allows that coordination to be cooperation. Without trust, society must used coercion, which is too crude to run complex contemporary societies.

      1. readerOfTeaLeaves

        Wow, I have never seen anyone put the dynamics, and the end goal, so succinctly. Thank you.

  2. Fred Stoned

    The FBI has spent time ‘successfully thwarting it’s own terrorist plots’ as Glen Greenwald said.

  3. kravitz

    It really is more than a feeling I have about this. There is something specifically stinky about Freddie, Fannie and the FHFA which are actively behind the acceleration in foreclosures. And none of the agencies wants to openly admit they gave the green light. There won’t be prosecution because fault would aim directly back at the GSEs, and there’s no possibility the government would blame itself for allowing fraud.

    I listened to Bisenius and DeMarco this week. And needed lots of degreaser afterward. But for the most part, they want the banks to aggressively peruse homeowners – some of whom they helped put in the homes they’re foreclosing on. Then, they gave banks permission to toss the homeowner, looked the other way, and even want the banks to foreclose on someone looking for a modification. Even saying that’s what has to happen.

    Which even the OCC took time out from getting a manicure to oppose!

    As the story reaches fever pitch, I sense a bit of guilt in some potential homebuyers about whether foreclosures are being treated fairly. (A karma thing – you don’t wanna profit off someone else’s failure that badly.) But at least we’re finally seeing judges who have had enough crap clog up their toilets that they can’t flush it out and have to do something about it.

    1. Roger Expat

      Yes, we’re seeing SOME judges who are beginning to pay attention to homeowner claims and beginning to look at the paperwork, but there are still lots of judges out there who are accepting the banks’ paperwork without question, or, if the forgeries are too egregious, dismissing WITHOUT PREJUDICE to give the banks another chance to try to make their forgeries a little better and come back in a month or two to try it again. The Florida “rocket docket” is more the norm than the exception, I think. I would love to see a headline, “Foreclosures Stall As Judges Read Documents.” I don’t think I will.

  4. Rick Halsen

    Let’s put it this way. Unless you have tons of money to burn, much less don’t give a damn after you lend it out, who here would right now plunk down $400K on property wherein title history is murky much less without an absolute insurance-backed guarantee?

    Rockefeller types? Middle-east oil barons? Drug lords?

    Any show of hands that’ll do this right now?


  5. Ron

    The RE market is a mess. The last 30 years it has been driven by move up buyers using equity to make large down payments on larger upscale properties or borrow and buy rental and vacation homes. In Calif this is old news and what remains is vast number of homeowners either upside down on there mortgage or hoping for that one buyer who has the cash and desire to buy their property. The foreclosure market is riddled with extremely unattractive homes usually in the worst locations on busy streets, corner lots most needing extensive work now or in the future to make them livable.
    Most buyers have little or no experience looking at or bidding on REO or auction homes and those that have first hand knowledge will tell you very few properties can be termed a deal,and while some have been flipped for profit that needs to be balanced against the many that are still in investor hands waiting to be unloaded if only the market would suddenly return to bubble conditions.

    Market prices are declining because prices are too high and need to decline in order to attract qualified buyers!

    1. eagerly beaverly

      I agree. However, there aren’t enough cheap homes to satisfy the market. Hence, paralysis. Im of the opinion that 75% of all properties bought and bought between 2001 and 2008 will default in the deacde of next. Good luck to all.

      1. kravitz

        Y’know, if there aren’t enough inexpensive homes, it’s kinda because too many big oversize behemoths got built relative to actual demand or need. I don’t see it as the ones already around just plain had their values inflated.

        Like GM made way too many Hummers far too long before it ever realized their future Cruze customers weren’t even thinking GM.

        1. rd

          A few years ago, Jonathan Clement wrote a column in the WSJ that pointed out that house sizes had been steadily increasing over the years and therefore the amount of money a family was spending on housing went up. This in turn forced families to have two incomes. They would probably not have needed two incomes if they lived in the size of a house that they grew up in.

          I think that there will be a lot of drivers over the next couple of decades that are going to make McMansions undesireable simply because of their size and cost to operate.

          I am perfectly content with my 2,300 sf house that we have been raising 4 kids in. I live in a low cost housing region, so our house is worth about 4x the median household income in our area. That should allow us to sell it easily if we want to move or downsize. A house this size has allowed us to build up significant savings in retirement accounts instead of simply betting on the house.

          1. abelenkpe

            I grew up in a home around 2,500 sq feet. It cost 73,000. In my current neighborhood people want between 800,000 – 1.5 million for a 3 bedroom 1 bathroom home (1400 sq ft average) built in 1930.
            Those same homes were going for 250,000 in 1999.
            We make great money, far more than my parents did. But we work longer hours, have less benefits and cannot afford to buy a home in our neighborhood for ourselves and two little kids. You are so fortunate to have the place you do. Enjoy! :)

      2. Anonymous Jones

        I agree as well. I see places that are 40% or less of their 2007 sales prices, and even then, the current prices aren’t really compelling. In the short term, the fraud may be causing a “double dip,” but the long term story is that housing is unaffordable on a price-to-income basis. Housing is likely in for a rough few years in the extreme bubble areas.

  6. Get Out

    Right. Joe Six Pack’s eyes are red with rage: “Why the hell would they want housing to soar again? Goddamn this shit, housing sucks so much of my pay as it is. Can’t the Wall Street Assholes make money some other way instead of permanently poisoning housing? ”
    He has a point, realtors, banksters, brokers, fraudsters have jobs that need to be saved, apparently.

  7. abelenkpe

    It would be nice to see mortgage fraud properly investigated and the system cleaned up. However, unless wages go up, the job market improves and people actually have job security the housing market will continue to tank.

  8. Adam's Myth

    Foreclosure delays restrict housing supply. This puts upward pressure on prices, not downward. So I don’t think this article makes sense per se.

    The best argument for prosecutions is the general one: long run, markets work best when you have transparency and rule of law. That can’t happen until you get the bad guys.

    1. Rick Halsen

      I don’t see the bad guys ever leaving voluntarily.

      If the authorities don’t remove this obstacle I can foresee a private removal service getting hired one way or the other. lol


      1. Baliff Evictions

        Well, we all know who the bad guys are. Eventually the clean out crews will be heading to their houses too.
        Send lawyers, guns and money – the shit has hit the fan.

      2. Clean Out Crew

        Homeowners who are in danger of eviction, but have no where else to go, should wait for officers of the court to escort them off the property. Anyone else, and it’s an act of self defense.

    2. Paul Repstock

      Adam; You missed the point. Realestate has always been ‘buyer driven’ as are most markets. What the author was saying was that buyers were unwilling or afraid to attend sales.

  9. losing my home n florida

    when is someone going to take responsibilty for appraisal fraud and void any foreclosure that is involved with these jacked up false prices.

Comments are closed.