Subprime Microeconomics

The Widget:

Court: First Circuit
Judge: Boudin
Subject: Subprime shenanigans
Tone: Clinical, disappointed
Importance: 4.2

The subprime loan/foreclosure/credit crisis is big news. Plenty of ink is spilled about Bear Stearns and Citi and all the trouble they’re having. You see decidedly less (but not nothing) about the communities where this is actually ruining folks’ actual lives. Places like Dorchester, Lawrence, Springfield.

A First Circuit decision today that is otherwise not terribly interesting gives you a notion of how it was done:

After purchasing a condemned or nearly uninhabitable property in Springfield, Massachusetts, usually at auction, the conspirators would arrange for a grossly inflated appraisal of the property; obtain a mortgage loan – based on fraudulent documentation and the fraudulent appraisal – for an unsophisticated buyer with low income, bad credit or both; then sell the property to the buyer and split the profits among the participants in the scheme (including the appraiser, the mortgage broker, the real estate lawyer, etc.).

Those who bought the homes were left with artificially inflated mortgages and usually defaulted; the banks were generally unable to recoup the full value of their loans because the homes were worth less than the false appraisals.

It should have been obvious that something strange was going on when the accident rehab offices on the Avenue started closing and turning into mortgage brokers.