A new study compiled by a financial researcher at the University of Texas at Austin has determined that mortgage fraud was much more prevalent than previously thought during the financial crisis of 2007-2009.

The study by John Griffin, professor of finance at UT Austin’s McCombs School of Business, will appear in the next edition of the Journal of Economic Literature. Griffin explained that the fraud that played a major role in the last financial crisis was cited by four stakeholder groups in the residential mortgage-backed securities industry:

• Mortgage originators who focused on profit-driven quantity rather than loan quality, resulting in misrepresentation of key financial information in 48% of loans securitized by non-government agencies;
• Appraisers who worked in conjunction with the originators, resulting in 45% of securitized loans for which the appraisal and loans matched exactly;
• Underwriters of investment banks who earned more by securitizing low-quality loans with high interest rates and falsely presenting them to investors as high-quality securities; and
• Credit rating agencies that have frequently inflated the ratings of mortgage-backed securities by adjusting their standard rating models.

Griffin’s study concluded that the fraud compounded the depth and breadth of the financial crisis, noting that house prices in California fell 45% in zip codes where more than 15% of home loans involved a fraud, but fell only 5% in fraud cases. in just 3% of home loans.

“The fraud has resulted in massive distortions in house prices,” Griffin said. “The bubble was very regionalized in areas where fraudulent loan arrangements were common.”

Griffin’s research was synthesized from more than 80 articles, as well as legal agreements made by 11 banks with the US Department of Justice. He noted that despite the massive scale of the fraud, only one investment banker went to jail in the wake of the mortgage collapse – in comparison, 1,700 bankers were convicted during the crisis. savings and loans from the late 1980s.

Today, Griffin warns that the biggest threat of fraud lies not in residential mortgages, but in other securitized assets such as commercial mortgages and secured loan bonds.

“The coronavirus is a different cause, but it can have the same effect, revealing the same forces that were at work in the run-up to the financial crisis,” Griffin said. “Market corrections have a way of exposing frauds and structural problems. “

And while the 2007-2009 crisis may seem like history today, Griffin warned that history may repeat itself.

“A lot of academics think conflict of interest and fraud are things the media like to talk about, but they are not of major economic importance,” he said. “This document and all the research it summarizes says otherwise. That they played a major role in the financial crisis. Checks and balances are supposed to be in place, but a lot of them don’t work.”