The Causes of the Subprime Crunch

The New York Times suggests that some of the current waves in the subprime credit market might not be caused by nasty companies in need of more federal regulation, but by something a little more obvious, and more clearly malicious: mortgage fraud.  And it turns out that fending off this sort of fraud isn’t a big concern for law enforcement agencies:

Fraud is especially common with subprime mortgages, the high-price loans for borrowers with poor credit. Lenders and investigators trace part of the foreclosure crisis to mortgage fraud.

For local law enforcement agencies, fraud is increasing as regulatory budgets are tight and other crimes seem more pressing, said Tom Levanti, a fraud investigator in New York.

“You only have a certain amount of resources,” Mr. Levanti said, “and in New York, you need to spend them on counterterrorism, protecting citizens, reducing violent crime. Mortgage fraud cases are long and time consuming, and the victims are usually financial institutions that can write off the loss. So as a police department, return on investment has to be thought about.”

Management and prioritization of law enforcement budgets is a tricky issue, but this seems far more plausible as a legitimate problem in need of some sort of government action. Perhaps Congress should focus less on Frank-Dodd style legislation aimed at stifling and controlling innovative business models and more on actual criminals whose actions are having spillover effects on the system.