Predatory lending, or mortgage fraud?

Much of our recent foreclosure problems are being blamed on "predatory lenders, but Steven Malanga explains how borrower fraud deserves a lot more of the blame than it's getting.

By one estimate, total losses from fraudulent mortgage applications were estimated to be about $3 billion annually—and growing. The deception was clearly widespread, including false statements on mortgage applications about family income and current levels of indebtedness, submission of phony documents, and lying about the intended uses of the property that was being purchased.

Sen. Clinton’s speech and the mortgage industry report, coming within days of each other, illustrate the two separate and often mutually exclusive tracks that the discussion of the subprime crisis is taking these days. On the one hand, remedies proposed separately by Senators Clinton and Obama, as well as the bailout package agreed to by both Republicans and Democrats in Congress last week, essentially treat many subprime borrowers as victims of seedy mortgage brokers, opportunistic lenders and aggressive Wall Street houses. Under this narrative many borrowers were ‘lured” (in a term used by both Sen. Obama and the New York Times) into mortgages they couldn’t afford, and the Bush administration’s rescue plan--which involves urging borrowers and lenders to work out new loan terms individually--amounts to too little help at too laborious a pace to make a difference.

And yet the more time that passes the clearer we begin to see the extent to which many borrowers themselves may have participated in creating the mess from which we are preparing to rescue them. As more mortgages go bad and enter foreclosure, their details are coming under scrutiny, and the facts are not always pretty. They suggest that while lenders became too careless and some brokers were clearly swindlers, many borrowers were more than simply naïve or overly optimistic; a good many were probably cheating. Any federal legislation package that provides the financing to rework millions of thousands of subprime mortgages quickly is likely to reward quite a few of these chiselers.