Ex-strippers, mortgage fraud and the North Side
- Blog Post by: Steve Brandt
- January 9, 2012 - 9:28 AM
Those with long memories may recall the north Minneapolis real estate debacle from 1995 to 1998, when property flippers relied on fraudulent documents to pump mortgages through lenders and left the North Side with hundreds of homeowners owing more than their homes were worth.
The main lender at the center of the flood of bad mortgages was WMC Mortgage, which appeared to self-inflict its mortgage losses by reckless inattention to the shaky loans brought to it by brokers, as the Star Tribune reported in 1999.
The spate of bad loans wound up becoming a dress rehearsal for the explosion of subprime lending that took such risks that the collapse of the housing market has left the American economy in a slump that's entering its fifth year.
So what happened to WMC?
According to a new investigative piece by the Center for Public Integrity, blue-chip firm General Electric bought WMC for $500 million in 2004, let the wild lending continue, and eventually took a $1 billion bath before shutting the lender down in 2007. WMC hired ex-strippers to peddle mortgages and marginalized whistleblowers, CPI reports, while continuing its loose lending.
Of course, a stronger response to lenders like WMC back then might have cured some of the excesses of the subprime lenders that allowed so many borrowers to get into trouble. U.S. Attorney Todd Jones and his attorneys took out some of the top-tier mortgage brokers who relied on inflated income verifications and overblown appraisals, but the Hennepin County attorney's office was missing in action against second-tier fraudsters, something not cured until Mike Freeman was elected to head the office. The Legislature passed up a chance to rein in abusive features of some subprime lending, waiting until 2007, when much of the damage was done. Federal regulators who had the most influence over the lending system also fell down on the job.
Political leaders teamed with lenders to respond to flipping-related fraud with an education program warning consumers against risky mortgages. But the second wave of North Side foreclosures that accompanied the national housing crash suggests that strategy didn't work so well.
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