The Bonnie and Clyde of Mortgage Fraud
November 7, 2006 (Marcia Vickers - Fortune)

A master con artist and his partner went on a six-state crime spree, ripping off homeowners, stealing identities and defrauding lenders.

They desperately wanted to sell the property, which had been on the market for six months. Dr. Brown was starting a new job in Augusta, Ga., in weeks. Just days before, they had amended their listing to offer $201,000 in owner financing, "hoping to broaden the pool of candidates," says Bridget. They did.

Four months later the Browns returned from a trip to Disney World to find a chilling message on the answering machine in their new home in Augusta. It was from a U.S. Secret Service agent named Andrea Peacock. Peacock informed the Browns that their old house had been bought by a con man - an exceptionally sinister one who had committed dozens, possibly hundreds, of mortgage frauds and identity thefts, netting millions of dollars.

The man who had seemed a bit of an earnest loser at the closing was in fact on the Secret Service's Most Wanted list. His real name was Matthew Bevan Cox, he was 34, and he used more than ten aliases. Peacock ended the voicemail with an unsettling directive: By no means should they approach Cox, since he was considered "armed and dangerous."

Now that the market is slowing, fraud is only rising. As business dries up, there's increasing pressure on lenders, brokers, title companies and appraisers to be profitable. That means loan and title documents aren't scrutinized as carefully as they might be, and courts - many of them so low-tech they resemble Mayberry - can't keep up with the volume of paper.

Then there's the mad rush to sell, particularly by people who paid high prices for homes and suddenly can't afford the mortgages.

It's like a tasting menu for con artists and grifters, so tempting that in some cities drug dealers have turned to mortgage fraud, plaguing lower-income neighborhoods with crooked mortgages rather than crystal meth.

AntiSpin: Fraud, as we pointed out in 1999, is a standard feature of asset bubbles, and yet another reason why the Fed cannot continue take a laissez fair approach to them, in addition to the main reason at last admitted by a Fed official yesterday, "Today... the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed's] task of achieving... sustainable noninflationary growth."

Greenspan's position was that the Greenspan tried to actively control an asset bubble–once, in 1994–and failed, as discussed in "The Fed: Dishonest or Incompetent?" One failed attempt does not prove that containing asset bubbles is a bad idea, only that the approach the Fed took at that time to address that asset bubble didn't work. Raising margin requirements may have helped contain the tech stock bubble, and the tech industry might have been spared several years of recession. The housing bubble might have been contained by tightening lending standards, saving millions of households the pain they are going to start to suffer next year, as the decline in housing that started in mid 2005 continues on schedule, with respect to predicted timing and geographical process dynamics.

According to
Martin Mayer, in our yet to be published interview, "The Fed lacks the political will to intervene in asset bubbles." Maybe the crisis that I expect next year will give the Fed a justification to intervene next time.