Today, the SEC announced fraud charges against a third banker for selling worthless and non-existent mortgages to Colonial Bank, leading to its collapse. This is on the heels said executive confessing to conspiracy and being sentenced to 30 years in prison.

Most reporting on “mortgage fraud” centers on one of two themes: Joe Average knew perfectly well he couldn’t afford the house and lied to get the mortgage in the first place; or robosigning was a just an unfortunate oversight caused by the sheer volume of foreclosures and nobody could reasonably predicted a problem. Both infuriate me. The first was only a small fraction of the foreclosures we have, and the second is merely a cover-up for the real mortgage fraud.

Let’s start from the beginning.

1. The buyer is told by an unscrupulous mortgage broker that he indeed does qualify for a mortgage, even though the mortgage broker knows that within 3 to 5 years, this buyer will have to refinance or go into foreclosure.
2. Some buyers — mostly minorities — are pushed into sub-prime mortgages despite the fact that they qualify for a better deal. They are at higher risk of foreclosure from day one and the mortgage broker knows it.
3. In some cases, a bait-and-switch occurs at the closing table. Either the documents presented are not what was promised, or only the first few pages reflect what the buyer was promised. The rest of the huge stack of paper the buyer must sign is at a higher rate or with worse terms.
4. The mortgages are sold to trusts, banks, insurance companies, pension funds, investment firms, Fannie Mae and Freddie Mac. They have been fraudulently represented as “performing” — that is, paying every month and likely to continue. Sometimes, these loans change hands multiple times. This is particularly true in an environment where some financial institutions have failed.
5. The original bank is now just the servicer, and they have every incentive to add fees, post payments late, deny short sales, deny mortgage modifications, and push the homeowner into foreclosure.
6. Meanwhile, in violation of the laws of every state in the union, they have failed to report the new mortgage holder at the county recorder’s office. After all, that costs money. Instead, they put together a private company to keep track of who owns what: MERS stands for Mortgage Electronic Registration System. The banking industry insists that this is fine, the law is quaint, this is the way everybody does things now, so the courts need to just accept it. Courts in several states have disagreed. Just because everybody goes above the speed limit doesn’t mean you won’t get a ticket.
7. The homeowner knows he is in trouble. He calls to ask about a mortgage modification. He is fraudulently told that they won’t even consider it unless he stops paying for 3 months. When the 3 month mark comes, the homeowner is in default and the foreclosure process is begun; it’s a race to see whether the modification or the foreclosure finishes first.
8. Default is where the robosigners finally come in to play. They have stacks and stacks of documents, some of which need to be fabricated because originals were shredded to hide fraud.
9. I would be remiss if I did not point out that in some cases, banks are foreclosing illegally: they foreclose on the wrong home, they foreclose without legal standing to do so, they foreclose in violation of a bankruptcy order, they foreclose on a member of our military who is serving overseas.
10. In the fallout, some financial institutions fail.
11. The banks turn around and sell the properties at absurdly low prices, sinking property values. In any other industry, they would face charges of dumping.

And there you have it. Robosigners and “people who should have known better” are only a very small part of the mess we now face.

Cross-posted at ShortWoman.com