Miami mortgage fraud and the housing crash by gimleteye

Yesterday’s Miami Herald had a story worth scrutiny, excavated from the back page of the Sunday business section: rising mortgage fraud in Miami Dade County.

Herald reporter Monica Hatcher quotes Sergeant Richard Davis of the Miami Dade police: “I’ve never seen us this overwhelmed on any one type of crime before.”

That’s quite a claim from the city that gave TV audiences; Miami Vice, CSI Miami, and Dexter.

We bet that there is an analogy to drug use in the behavior of mortgage fraud: the more people that use drugs, the more thieves will emerge to rob drug dealers.

The more who signed up exotic loans with minimal credit supervision, the more to defraud banks willing to make risky loans.

The mortgage fraud escalation in Miami Dade county is an indicator seeking more data, just like the crisis in the subprime mortgage sector.

So far the mainstream media has reported the implosion as though it is a limited phenomenon: the result of keeping the carousel turning on the housing boom in 2006 when this segment of mortgages accounted for $600 billion or about 20 percent of all mortgages, up from $120 billion and 5 percent in 2001.

The selective data that is emerging is relatively easy for investigative reporters to reach. It includes the vast wealth generated by Wall Street investment bankers and shareholders of mortgage companies from bringing financial products to the market.

At the time, they were viewed as reasonable investments. Now, the market is judging them to be high risk in the best case and in the worst case, practically worthless.

But we’d ask another question of the data, that is more predictive of human behavior at the gullible part of the economic spectrum.

How many homeowners in the past six years reached beyond the basic yardstick of 25 percent allocation of disposable income for mortgages on the assumption that in a financial pinch they could refinance at a lower interest rate or resell because housing ‘always goes up’?

In the answer to this question is the difference between a 2007 recession and a financial shock driven by unmeasurable risk.

In the price escalation for housing from 2000 to 2006, many, many families were caught because they felt they had no choice but jump into the housing market because "there is never a better time than now, to buy a house".

Think of rising delinquencies and defaults on homeowner mortgages and rising mortgage fraud as the skin of the housing bubble: the volume of homeowners trapped inside the bubble is much, much bigger.

In a sharp down market, homeowners who transgressed purchased a home based on its speculative value and not reasonable family budgets are going to have a very hard time. These Americans, not incidentally, have propelled the world consumer economy on the lowest savings rate of any industrialized nation.

Yesterday the New York Times characterized the situation as a slow-moving train wreck, but a train wreck nonetheless.

Our interest—for those who have read this blog—is not strictly the financial and fiscal aspects of the crisis. We are interested in is the crushing effect of the housing boom in Florida on the political landscape. As we noted in previous posts, its repercussions travel far beyond the state line.

At the local level, Miami's mortgage fraud was mirrored by actions of local county and municipal governments against the best interests of citizens in piling on costs—traffic, overcrowded schools, and a declining quality of life and environment—in order to accommodate the rise of a separate power elite dedicated to the greatest land grab and construction boom in Florida history.

In Miami Dade county, the infrastructure deficit has a number: it is conservatively estimated by county departments to total on the order of $7 billion. The failure to pay for costs of growth as they are incurred has left deep scars on the landscape and the politics of Florida.

Of course the political leaders of Florida don't see it that way. In Florida, the real estate deal is practically the first paragraph of the state constitution.

We understand the "free market", how prices for new homes will have to fall a long way to stimulate demand, at the same time that commodity price are squeezing homebuiler margins tight as a drum.

The latest, greatest housing boom in Florida history has imposed enormous costs on the environment, the quality of life, and the interests of social justice. Those are very loud stories the mainstream media has scarcely touched.

We also understand how no one in the middle of a party ever says to turn the music down.