The Study that Foreshadowed the Three Fraud Epidemics that Drove the Crisis

[Jefferson23]

By William K. Black. Bloomington, MN: February 15, 2015

I will be writing a series of articles concerning the three mortgage fraud epidemics that hyper-inflated the bubble and drove the financial crisis prompted by four recent economic studies of mortgage fraud. My goal is to integrate the results of those studies with the work of criminologists, investigators, and data from other sources such as Clayton.

In economics and white-collar criminology, we teach our students the very useful concept of “revealed preferences.” We take what potential perpetrators say they would do and why they claim they took an action with cartons of salt. Their actions generally speak far louder and more candidly than do their words. I will show in this series how valuable revealed preferences are in analyzing the data and testing rival research hypotheses. (I will explain why I feel the recurrent failure to state these hypotheses expressly leads to serious error.)

I have come to the view that a concept that I term “revealed biases” is a useful corollary to “revealed preferences.” The National Institute of Justice virtually never funds empirical studies of elite white-collar criminals (a classic “revealed bias”). OMB suggests research programs exclusively for blue collar crime – in the midst of the largest and most destructive epidemics of elite white-collar crime in history. I wrote my first column in this series about an example of revealed biases in discussions of econometric studies of mortgage fraud.

The Piskorski, Seru, and Witkin (PSW) Study

The four studies can be read without charge. (The most recent study was behind a pay wall when I wrote by first article in this series.) In this and my next column I discuss two excellent studies by multiple authors. I have written previously about a February 2013 study entitled: “Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market.” The co-authors are Tomasz Piskorski (Columbia GSB), Amit Seru (University of Chicago and NBER), and James Witkin (collectively, PSW). (RMBS is an acronym for Residential Mortgage-Backed Securities.) (I discussed the PSW study extensively in an academic talk I gave on February 26, 2013 at Columbia that Piskorksi was able to attend.) This column begins the process of showing how adding the research findings and theoretical developments of criminologists, (effective) regulators, and economists on “control fraud” (aka “looting”) to the excellent work by of these finance authors can be useful to understanding the ongoing crisis and limiting or even preventing future crises. This column focuses on the PSW study’s findings and a few key interpretations of those findings. The next column discusses the most recent study on liar’s loans by Amir Sufi and Atif Mian.

http://therealnews.com/t2/component/content/article/75-william-black/2287-the-study-that-foreshadowed-the-three-fraud-epidemics-that-drove-the-crisis

[newthinking]

1. Bill Black is a great patriot.

[Jefferson23]

2. I appreciate that he has the wherewithal to understand what happened and can explain it

to me..it is a mess.

[Duppers]

3. Clayton

Clayton was the dominant “due diligence” firm for secondary market mortgage purchasers. The due diligence reports from the less than handful of material competitors would also prove highly valuable. The FBI and the DOJ should be commissioning in depth analyses using the Clayton data – and documenting through the many Clayton whistleblowers the nature and extent of the efforts to ensure that the Clayton reports substantially underreported the incidence of false “reps and warranties.” Similarly, the instructions that Clayton received from the secondary market purchasers and the responses from those purchasers to the extraordinary levels of false reps and warranties found by Clayton would be highly incriminating and vital to researchers.

The continuing refusal of the federal banking regulatory agencies, the failure to appoint bankruptcy trustees and resultant failure to conduct bankruptcy examinations of notorious lenders like GreenPoint, and the FBI and DOJ’s failures to conduct major studies of mortgage fraud are indefensible. They should be putting together research teams of criminologists, effective (former) regulators, and economists with funding and access to the data to conduct these studies. The current crisis is so horrific in the damage it has inflicted that the failure of the federal government to conduct superb mortgage fraud studies is incomprehensible.

[Jefferson23]

4. I don't expect that to change, unfortunately. n/t