If you've been hiding under a rock the past few weeks, you may not have heard that worldwide stock markets have been having a bit of a problem lately, and that the root cause is apparently an implosion in the US mortgage market, due to the collapse of lenders specializing in "sub-prime" loans, with said collapses having taken down some funds that were holding a lot of their paper. So now that you're out from under your rock, you know what I'm talking about.

But even if you were under a rock, if you've been following the spam problem these past few years you shouldn't be surprised.

For the past few years, mortgages have been a very popular subject of spam. Spammers are criminals. Mortgage brokers who paid spammers to get customers were dealing with criminals. They were paying criminals to get them in touch with customers who were (a) stupid enough to respond to spam, and (b) desperate enough for a loan that they would believe pitches in unsolicited email. And unless the brokers themselves were overwhelmingly stupid (which admittedly can't be completely ruled out), the amount of mortagage spam that was sent out implies that the brokers were making more money than they were paying to the criminals. They were making money off of stupid or desperate people, arranging loans for them in amounts greater than their financial means should have allowed, and taking their fat fees up front.

Now, how did these brokers get underwriters to accept these mortgages? Perhaps the underwriters were in on it all along. This is possible, and I'd bet in some cases it was true, even though the payoff for the underwriter doesn't come up front, and the risk does. But whether the underwriters were or weren't in on it per se, they were certainly aware of what was going on in their industry, or they should have been. And, gee... what do you think the likelihood is that the people who paid money to criminals in order to find stupid and desperate customers were totally averse to committing a little fraud here and there when filling in the financial data for the underwriters?

The traditional mortage industry, the underwriters, and regulators -- who for the most part are not overwhelmingly stupid -- knew this. But what did they do about it?

Anyone who treated the mortgage industry as being any more legitimate than the herbal viagra, penis extension, and breast enlargement industries these past few years just wasn't paying attention.

1. Devin Olson09/08/2007 10:12:10 PM
Homepage: http://www.devinolson.net

As usual Richard, you have nailed the root of the problem perfectly.

-Devin.