There were several news reports this evening of investigations into possible fraud commited by Beazer Homes, a major builder. Naturally, all right thinking people will be "shocked, shocked" to find out that there might have been fraud taking place. When you get a speculative mania, like the current housing bubble, fraud is a virtual certainty. There will always be people out there willing to take advantage of irrational exuberance. The same was of course true with the stock bubble. Those economists who pay attention to multi-trillion dollar distortions (admittedly a tiny minority within the profession) knew that there would be a rash of accounting scandals following the bursting of the bubble, even if we didn't know that companies would be Enron, WorldCom, and Quest. The obvious place for fraud in the housing market is in the issuance of mortgages. Since these quickly get dumped into the secondary market, the seller, the buyer, and issuer all share an interest in having the mortgage go through even if the true value of the home doesn't justify the size of the mortgage. I have even heard accounts of sellers kicking back part of the contracted price to buyers. If you can get the bank to issue the mortgage, why not? The main check on this sort of fraud is supposed to be independent appraisers. But, the problem is that the appraisers (just like the corporate auditers in the tech bubble) are not really independent. They get hired by banks that want to issue mortgages. Appraisers that come back with low numbers don't get hired again by the banks. Being smart people, appraisers quickly learn that the way to get steady business is to always give the bank a high number. That way, everyone is happy -- until the bubble bursts. I look forward to the investigative pieces.
--Dean Baker
