Abstract
In Fraud and the Subprime Mortgage Crisis, Tomson H. Nguyen argues that mortgage fraud is inextricably linked to the structural determinants that contributed to the rapid growth of the subprime lending market. The primary goals of this research are to (1) demonstrate how factors contributing to the growth of the subprime lending market created criminogenic opportunities, (2) identify the specific impact of subprime lending fraud and alternative loan products have on minority communities, and (3) highlight the ways in which industry actors (lenders, brokers, appraisers, borrowers, etc.) contribute and respond to the growth mortgage fraud. To accomplish these goals, the author examines data collected from semistructured interviews, government and media reports, and industry studies.
Nguyen identifies five determinants that contributed to the growth of the subprime lending market. These include the deregulation of the financial industry, legislative efforts to achieve financial parity in minority communities, the proliferation of alternative loan products, subprime loan securitization, and the lack of oversight and accountability in the mortgage origination system. The author asserts that the passage of the Community and Reinvestment Act (CRA) 1977, designed to alleviate discriminatory lending practices, and the deregulation of financial markets in the 1980s loosened lending restrictions and, at the same time removed oversight. Subsequent revisions of the CRA and the passage of the Alternative Mortgage Transactions Parity Act in the 1990s allowed lenders to create alternative loan products and, again, lowered qualification criteria required to obtain a mortgage. In the mid-1990s, Wall Street began trading mortgage-backed securities. This allowed lenders to pass mortgages, in bundles, to investors freeing lenders to write additional mortgages. Working in concert, these factors led to the housing boom, yet, as the author contends, these factors resulted in an industry in which fraud is systemic. Although, additional research is required to draw more definitive conclusions, the author’s assertions are compelling.
The author conducted 23 semistructured interviews with individuals working in or having experience with subprime lending. Having previous working experience in subprime lending, the author “mined” existing business relationships to recruit participants. The researcher’s experience in the industry was one of the strengths of this research. As indicated in the study, participants spoke freely about their experiences because they trusted the researcher. All participants lived and worked in the Southern California area. Although the author reviews government and media reports and industry studies, a description of the data collection methods for this data is not provided. It does not appear that the author conducted this review in any systematic way that would extend its utility beyond the brief analysis found in the literature review.
Although the limited sample size prevents generalization, the study does contribute significantly to our knowledge of loan origination fraud. The study reveals that current definitions of mortgage fraud, as for property or for profit, are inadequate. Overwhelmingly, participants, identified as mortgage brokers, identified fraud as a “normal” business practice. Brokers indicated that they often falsified supporting documentation (tax forms, pay stubs, letters from employers) to ensure that the borrower qualified for the mortgage. Borrowers frequently knew and were “in on” the fraud. The author notes that many participants indicated that lenders were complicit in the fraud in two ways. Lenders either had direct knowledge that documents were falsified or poor underwriting standards and practices failed to reveal the fraud. Participants did not view their acts as criminal. In fact, some participants indicated that the ability to doctor documents was seen as a highly valued skill. Some participants indicated that African American and Hispanic borrowers were pushed into loan products with high interest rates and substantial fees, regardless if they qualified for traditional mortgages. Nguyen finds that employee compensation packages contributed significantly to their decisions to engage in the deceptive practices.
The book is very informative and readable. Readers do not need any prior knowledge of the subprime lending industry to fully understand the materials presented. In the first chapter, Nguyen provides conceptual definitions for frequently used terms and continues to define confusing concepts throughout the subsequent chapters. Although the author offers very informative data and definitions, the chapters lack comprehensive analysis. For example, using historical financial crises as a reference, the author reviews the literature on organized crime and organizational crime but does not fully demonstrate the connection between these previous studies and the current study. The reader must draw his or her own conclusions on how the literature contributes to our overall understanding of mortgage fraud. Similarly, the author reviews various criminological theories but fails to identify how each theory informs the study of mortgage fraud. Unfortunately, the book suffers from poor editing. Too often words were misused and/or misplaced. This is particularly noticeable in Chapter 5.
Although this book’s true scope is much narrower than identified in the first chapter, I would recommend it to industry insiders, white-collar crime scholars, and criminal justice graduate students. The book will surely initiate discussion within all of these circles.