If a rash of armed bank robberies swept across America next year, and if in these robberies criminals absconded with $30 billion dollars, one may be certain that a public panic would ensue. The banking system would likely be changed forever. If thousands of armed thugs went rampaging across the nation forcing people out of their homes, into the streets, and then destroying the properties, leaving the occupants homeless -- well then one might be certain that fear would force our society to adapt its proceedings and its policies to fight this thuggish threat. Yet in many ways this is precisely the situation currently occurring with recent rise in mortgage fraud and abuse. Certainly, the criminals are armed with paperwork instead of shotguns, but the impact they are having is no less real. "Authorities have stated that fraud is involved in $60 billion in loans annually, resulting in $30 billion in losses."
Mortgage fraud is quickly leading to houses repeatedly "flipped" between conspiring buyers to reach artificially high prices and then fraudulently sold to the innocent for much more than it is worth -- leading both to repossessions and to artificially created comparables that may skew future appraisals. Such flipping serves to defraud banks and individual buyers.
However, not only is the mortgage industry being defrauded, but elements of the mortgage industry are also --often illegally-- defrauding thousands of disadvantaged lenders out of (combined) millions of dollars and destroying thousands of lives in the process. The effects of these frauds are particularly felt in the inner cities, where predatory lending practices are shattering many areas and leading to homes being repossessed from long-term owners and either left vacant or sold to slumlords. Many independent studies have shown that the majority of consumers targeted by predatory lenders are minorities or in a lower income bracket -- fraud seems to target those who can least afford to survive it. It appears that a startling number of the loans made to lower-income or credit disadvantaged borrowers (subprime lending) is not only unfair in terms of higher interest rates, but is also actively deceptive and intended to unethically leach away as much income and equity as possible from borrowers. The mortgage industry is not only having fraud practiced upon it, it is also itself riddled with abusive and fraudulent practices.
It is perhaps because fraud is so pandemic in the industry today that less is being done to combat fraud than one might expect. Mortgage companies frequently fail to report fraud, and when they do it is frequently put on hold by law enforcement. Individual consumers, meanwhile, may not realize that they have legal protection, or may think that there is no point in fighting the system and risking losing even more. Abuse committed by mortgage companies is even harder to prosecute than fraud committed upon them, as the former often walks the thin line between legal (if unethical) and illegal practices. Many grass-roots groups are trying to combat lending abuse, while many corporate organizations work to develop ways for mortgage companies to better protect themselves against fraudulent applications. In addition to these non-governmental solutions, federal, state, and local governments have all tried passing regulations to help prevent mortgage fraud and abuse. Despite these efforts, and in some cases ironically because of them, fraud and abuse continues to grow by the year, daily reaching new extremes, developing new tactics, and becoming increasingly destructive in the economic and social realms.
The Dead Pledge Heritage: Are Mortgages Inherently Susceptible to Dishonesty?
The degree of dishonesty and fraudulence associated with the modern mortgage industry indicates an important question that should be raised: is there some level at which the very nature the mortgage industry is fraudulent or invites fraud? Looking over the history of mortgages, one can see some indication that there is some historical link between exploitation and mortgages. This is somewhat indicated in the formation of the word itself. Mort- signifies death, and -gage is from the same root as "pledge."
Mortgages are, literally, death pledges. This phraseology is descended from the idea that "property rights were said to be 'dead' to the borrower until the due date. Worse yet, if he failed to settle up on the due date, he lost everything, or as English jurist Sir Edward Coke put in 1628, if a mortgagor failed to pay, 'then the Land which is put in pledge... is taken from him for ever, and so dead to him.' "
As this short little linguistic lesson suggests, mortgages in the old world were not unrelated to the exploitative systems of feudalism. In fact, many ancient worlds had agreements akin to mortgages. For example, in ancient Egypt most private landowners had mortgaged their land to the ruling class, and though they owned it officially, still paid for the right to remain there.
This stable Egyptian system gave rise to the longest-lasting civilization known to man, and created an enduring and powerful ruling class which, nonetheless, might be considered to have been somewhat exploitative of the peasantry.
The ability to borrow against one's property (the pledge it to death if one failed to pay) was important to the economic development and history of Egypt as it would later be in Europe and America. It was this mortgaging aspect of Egyptian culture which the Mosaic Laws were reacting against when the Jewish scriptures forbade lending money at interest to fellow Jews, and moreover ordered that all property be returned to its hereditary owners every seven years. The ancient Hebrew sense that God did not approve of the death-pledge of mortgaging carried over to Catholic theory and later Puritan thought as well, both of which considered usury a sin.
Mortgaging of property existed despite the Christian rejection of usury, and has been credited with helping to fuel the westward expansion of the American frontier, as struggling farmers had one property after another foreclosed on by predatory banks.
One hopes that by now the relevance of this history to modern mortgage fraud is slowly becoming apparent. Mortgages have historically been linked to the chaining individuals to the soil, to the transfer of power from peasants to ruling classes, and to other exploitative practices. This has a certain relevance to today's predatory lending practices, and also may contain some insight on the solutions to mortgage fraud if fully explored. It may also serve to explain certain dynamics of the consumer-side of mortgage fraud. However, to really understand the way in which modern mortgage fraud functions, it is important to know the history and functionality of the common modern mortgage.
The New Big Deal: Modern Mortgages and the Road to Fraud
It wasn't until the New Deal fought to pull America out of depression that mortgages as they currently exist, with all their strengths and weaknesses, really came into being. This was when the Federal Housing Administration was established to guarantee 93% of new home owner mortgages, and the Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Deposit Insurance Corporation (FDIC) were created to insure savings and deposits. "With the federal government guaranteeing all, there was almost no risk [for lenders]." This created in environment in which, for the first time, loans were both federally regulated and encouraged. A predictable surge in homeownership followed.
Not incidentally, though, this Government move was at least partly in response to a significant issue in America with predatory lending. Prior to the founding of the FHA, the American mortgage industry had already gotten its start. "And, it wasn't banks...it was insurance companies. These daring insurance companies did it, not in the interest of making money through fees and interest charges, but in the hopes of gaining ownership of properties if the borrower failed to make the payments on it.... The repayment schedule was spread over three to five years and ended with a balloon payment. " It was the FHA that started the amortization of loans so that indebtedness could decrease over time. They also instituted practices of lending based on ability to repay the loan, judging the quality of the property involved before making the loan, and expanded loan terms so that they could be feasibly repaid (instituting seven, fifteen, and thirty year loans). The government pushed extensively in this years to create fair, non-predatory lending situations. "It was as if what well-known patriotic poster were pointing to say, like a gimlet-eyed realtor: 'Uncle Sam Wants You to Buy A Split-Level in the Suburbs.'" For the first time in Christian history, having significant debt (a mortgage) was equated not with sin but with the proper way of family living. Homeowners went from being a minority to a majority of households.
Yet despite this overwhelming push to improve the financial situation of borrowers, the end result of this massive shift into home ownership was now an unmitigated good. In the housing rush, "houses had often been bought at inflated prices, at astronomical rates of interest. For many people, homeownership was, to put it…