And Some with a Fountain Pen: The Securitization of Mortgage Fraud
26 Pages Posted: 21 May 2010
Date Written: November 4, 2009
The paper examines a subprime loan used to fraudulently strip equity from an elderly African American couple in Chicago. Funded by lender MILA and securitized by Goldman Sachs, the Delany loan was among the 2006 vintage subprime loans that defaulted soon after closing and were characterized by fraud and misrepresentation. Following this loan from origination to securitization highlights responsibility for the wave of early payment default loans that contributed to the implosion of subprime lending in 2007 and the subsequent financial meltdown. Subprime loans support predatory lending that disproportionately targets the home equity of minority and low income borrowers. They also facilitate mortgage fraud that targets lenders. The Delaney loan was representative of the stated income, no down payment loans that defaulted in 2006 at the peak of the subprime bubble.
Subprime lender MILA was suffering financially from repurchase of similar loans and was insolvent as early as 2004. MILA relied on rapid automated underwriting to sustain growth in originations in a tightening market. MILA underwriters approved the Delaney loans despite obvious indications of fraud. The loan was sold to Goldman Sachs for inclusion in a $1.5 billion residential mortgage backed security. The Goldman Sachs Prospectus warned that subprime loans were high risk and that there was little historic data to predict delinquency and default rates on the new loan products originated by MILA and other subprime lenders. The Prospectus also promised due diligence with respect to lender guidelines, practices, history, and financial capacity to honor representations and warranties should the need for loan repurchase arise. Goldman Sachs was subpoenaed for evidence of due diligence on MILA but provided none despite its assurances to investors.
The drive to generate more subprime loans to securitize and to earn high fees and profits explains why Goldman Sachs didn’t investigate and didn’t uncover MILA’s inability to repurchase a growing portfolio of early payment default loans. Competition to buy subprime loans for securitization relieved lenders like MILA of pressure to verify that their loans were sustainable. The history of this single loan illustrates the contribution of securitized subprime lending to mortgage fraud and the contribution of mortgage fraud to the financial meltdown.
Keywords: Mortgage Fraud, Subprime Mortgage, Securitization, Early Payment Default
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