ROBERT SIEGEL, host:
To make a subprime mortgage crisis, you've got to make a lot of risky loans to a lot of homebuyers who are less than credit worthy. And it turns out that the system for vetting mortgage applicants was practically designed to permit just that.
The Financial Times reported last week on how pervasive fraud was and how few people in the industry did due diligence.
Saskia Scholtes was one of the reporters who wrote that article, and she joins us now to give us an understanding of how many people were complicit in those bad loans. Welcome to the program, Saskia Scholtes.
Ms. SASKIA SCHOLTES (Correspondent, The Financial Times): Thank you. Hi.
SIEGEL: And first, let's begin with the loan applicants. A surprising number whom, it turns out, were dishonest in their loan applications, no?
Ms. SCHOLTES: That's absolutely right. Actually, in fact, most borrowers that took out so-called stated income loans overstated their income by at least five percent. But the much more extraordinary figure is that more than half of borrowers that took out these loans overstated their incomes by more than 60 percent. So that's quite extraordinary. I mean, you had people working in very low-income jobs, claiming that they earned more than $200,000 a year.
SIEGEL: You're saying that for a mortgage broker, the answer to the question should this person get a loan, the correct answer was always yes.
Ms. SCHOLTES: Always and every time, the correct answer was yes because the loan would be sold very easily to a Wall Street bank that would then package the loans up into securities that were very easily sold to investors around the globe. So no one really had any incentive to say, hang on a minute. Let's look under the hood of how these loans actually work, and look at the individual borrower, and look at the home and see whether the home is worth what they claim it's worth. The whole thing was ridden with fraud, actually.
SIEGEL: Now, in addition to the applicants for loans who were falsifying in such large numbers their incomes, and those who are not doing due diligence to find out if they were, there were also other players in this business. One of them, you - in the article - gave us the Web sites so we went to it, which is verifyemployment.net. And this is a Web site, which will say, you know, in order to get a loan, you have to have a job. So if you don't have a job…
Ms. SCHOLTES: Yes.
SIEGEL: …we'll provide you with paycheck stubs, which show that you are a consultant to us. You have to pay money to do that, $55…
Ms. SCHOLTES: Yes.
SIEGEL: …but it was a service operating on the Internet.
Ms. SCHOLTES: Yes. It's quite an incredible thing. For that $55 fee, they'll employ you as what they call an independent contractor. They'll provide you with pay slips as proof of income. And if you do in fact have a lender that wants to check that you earn what you say you earn, you can give them an extra $25 and verifyemployment.net will man the phone lines and give you a glowing reference, saying, oh, yes. Saskia's worked with us for 20 years and she's an excellent employee. And yes, she does earn $200,000 a year. And I'm sure that verifyemployment.net was not the only one.
There's actually another Web site called fakenamegenerator.com that we didn't include in the article that will generate not only a name and address, but a fake telephone number, a fake Social Security number, a fake credit card number, everything you would need to take out a mortgage application. And most of these places, I can safely say, are shut-ups for business now.
SIEGEL: Yeah. Beyond being shut up for business, this sounds like rank fraud. It must be a violation of at least a dozen laws.
Ms. SCHOLTES: Yes. That's exactly right. But the very sad thing is that all of this is going to be extremely hard to prove because most of the fraud that occurred in this market was individual borrowers overstating their income just so that they could afford to get a home. And that introduces a problem because the borrower would have overstated their income to stretch for a loan that they could just about afford to make the monthly payments on until something goes wrong. And the problem is that that creates a time lag between when the mortgage is initially taken out and when they eventually default.
And that makes it extremely difficult to attain a conviction. And not only that, it's extremely difficult to recover any money from borrowers in these sorts of circumstances because they simply don't have very deep pockets.
SIEGEL: We've been talking with Saskia Scholtes. She and Brooke Masters of the Financial Times wrote the article last week, "As Subprime Bites, U.S. Investigators Look for Culprits." Saskia, thank you very much for talking with us.
Ms. SCHOLTES: Thank you. A pleasure.