While the federal government continues its after-the-fact criminal investigation
of the fraudulent practices used by the securities industry to help perpetuate
the stock market bubble, it continues to ignore similar practices in the mortgage
industry which are creating an even bigger bubble, this one in the real estate
market.

To many observers, the fraud on Wall Street was obvious as early as 1997 and
1998. However, as the stock market bubble helped create the illusion of prosperity,
not to mention revenue for the federal government, the justice department did
nothing to prevent it. It is only after-the-fact that vote-seeking politicians
pretend to care about their angry constituents, who would have lost far less
had the government acted preemptively, when such action would have been politically
unpopular.

Some of the characters have changed, but sadly, the drama will likely play
out the same. Instead of stock analysts there are real estate appraisers. Instead
of investment bankers allocating hot IPO’s, real estate developers allocate
hot parcels in new phased developments, with subsequent phases being offered
at progressively higher prices, creating the illusion of rising value. Similar
to the way investment banks prohibited retail investor from flipping their
IPO allocations, new property buyers are often barred from flipping their parcels.
In many cases the developers originate the financing themselves or make donations
to “charities” who intern re-donate the down payment money back to
the buyer to enable the loan to comply with diminishing FHA standards.

Despite the painful lessons from our recent past, the government looks the
other way as fraud, moral hazard, and conflicts of interest permeate every
aspect of the mortgage banking industry. Lax credit standards, aggressive lending
to marginal bowers, low and no down payment loans, interest only and adjustable
rate mortgages, phony appraisals, fabricated stated income loans, falsified
W-2’s, illegal kick-backs, and deceptive sales and marketing techniques, have
become routine in today’s hyped-up real estate market. However, as American
homeowners tap into the temporarily inflated values of their homes and go deeper
into debt to indulge all manner of consumption and speculation, the economy
is artificially stimulated. As a result, politicians do not want to do anything
to upset this poisoned apple cart.

As the stock market bubble was fueled by the belief that stock valuations
could perpetually remain high, the real estate bubble is driven by the belief
that mortgage rates will remain perpetually low. However, when a weakening
in the U.S. dollar ultimately triggers a sharp rise in interest rates, mortgage
credit will basically become unavailable. Real estate prices will collapse,
and politicians, eager to appear sympathetic to the plight of irate voters
who will have lost their jobs, their life savings, and all the equity in their
homes, will once again look for scapegoats with meaningless after-the-fact
criminal investigations and selective prosecutions.