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It Was All Liar’s Loans

My friend William Black has an excellent (if badly proofread and edited) analysis of our economic situation here at

(via

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). He explains how the liar's loans—those no-documentation, no-underwriting home mortgage "products" that took over the market in the mid-2000s—caused all the trouble. The main problem is that the industry never defined its products in such a way as to allow easy categorization now that everything's gone to hell. So the true number of liar's loans—the percentage of the total market—is still unknown. But what is known is that those products exploded in popularity during 2006-2007, and that most of the loans made in those programs were fraudulent on their face. Not some. Not many. Most.

It Was All Liar’s Loans

I'm going to quote Black's piece and add just a couple caveats and clarifications. William Black:

Right. This was a central point of Mike Hudson's excellent book,

The Monster,

reviewed

. A lot of subprime loans were liar's loans, but not all, and a lot of liar's loans were made to people who were not prototypical subprime customers. Liar's loans were made to folks in the mortgage industry so that they could get in on the frenzy. Black continues:

There is, of course, a third group: criminals. In Baltimore, as in other cities, drug dealers (who actually have money, but for reasons of personal philosophy often choose not to pay income taxes on it) and hustlers (who often have no money but

just know

they're gonna make it really big in, say, six months) saw great advantage in buying houses with borrowed funds. The first group wanted to

—remember, the profits from the sale of a home are often tax free—while the second wanted to profit from the flips until it went to hell and they could walk away with the banks' cash. Black:

This is an often-missed detail, but it is central. In many cases—not all; many—the person who took the loan was something of a patsy, a naïve tool of the loan officer or paid off with trinkets. Sometimes they

Black:

Again: Fraud was not the exception. Fraud was the rule. Fraud was the business model. That this is still news to anyone in America in 2011 says volumes about the failure of our journalistic institutions and our law enforcement system.

We saw a

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, eh?  Because tax-free profit (as well as tax breaks for ownership) come only from sale of a "principal residence." Black:

Oh wait, there's that "Operation Broken Trust" sweep the Justice Dept did a few weeks back. Oh, wait,

. So there it is, laid out: What happened to our economy was a huge crime wave, and basically nobody has yet been put in the dock for it. Which means the people who did the crimes are still at large, still in business.

(Forbes

) No one ought to think those folks are retiring.

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