OPERATIONS: The Subprime Crisis: Will the feds show up at your doorstep? By: Robert R. Calo


The subprime mortgage crisis is unique in America’s array of economic downturns. There have been banking crises on Wall Street (most recently, the Savings and Loan scandal) and real estate and mortgage crises on Main Street, but this crisis is on both. It spans the entire mortgage industry and reaches across the globe.

On Main Street, the downturn and possible fraud relates primarily to the lender/homeowner or lender/developer relationship. Here, the principal complaints are that lenders misled borrowers on the nature of the mortgages or financing packages, or that the money was loaned to borrowers on terms and in circumstances in which the borrowers were taking on debt far above their financial capacity. There is also concern that there has been collusion between lenders, mortgage brokers and appraisers (and sometimes borrowers) to commit fraud. The classic players for this scheme are: real estate scam artists who take advantage of lax oversights to dole out risky loans; mortgage brokers who select loan products with minimum underwriting standards; corrupt appraisers willing to overstate the value of properties; "straw” loan applicants who are willing to lend their name and credit histories for a fee; and/or closing agents who keep lenders in the dark about obvious fraudulent transactions.

The Wall Street subprime crisis is a bit more sophisticated, but it involves similar core principles of collusion and misrepresentations. Here, lenders package a series of individual loans into investment vehicles to be bought and sold. Unfortunately, as individual mortgages default, the value and creditworthiness of these packages also take a dive. The question is whether the investors on Wall Street were misled or defrauded on the risks of these investment vehicles.

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