Mortgage Crisis Branches Trimmed, Root Untouched

And so it begins. The arrests for the criminal activity that helped create our current mortgage crisis have begun. Two hedge fund managers from Bear Stearns have been indicted for fraud (against their own investors) and forced to do the perp walk, and more than 400 other low level mortgage industry players have also been indicted in dealings related to fraud.

We can be certain that when all is said and done, the amounts of fraud committed by the "average joe" will surpass anything found on Wall Street or by politicians, though the commentary will not generally reflect that. In the newspapers, and when addressing home buyers, most of the mortgage debacle writing takes the form of wounded soul reporting, where we the innocent get tips on how to avoid foreclosure from banks, or how to balance the higher gas prices with our home payments. ("Try carpooling and coupons", says anonymous newspaper).

The sweep of the 400 (tagged "Operation Malicious Mortgage", cute) was a grab bag of street level mortgage industry types:

Real-estate developers, brokers, agents and appraisers were among those charged, along with lenders, lawyers and so-called straw buyers, said Sharon Ormsby, a section chief for financial crimes in the FBI's criminal investigation division.

(Dow Jones via CNN)

As the government grinds into action, they are clearly NOT starting with the individual buyer. Using such a tactic leaves people in rather ignorant bliss, and certainly going forward the major mortgage industry participants will apply the type of tough loan and credit conditions that will eventually puncture that bliss.

According to Forbes, other targets may include "investment banks, hedge funds, credit rating agencies, brokerage houses and due diligence firms - which evaluate loans packaged into investments."

However, this still leaves major questions unexplored. We cannot assume fraud on the part of sellers accounts for all the mortgage difficulties that we face, nor can Wall Street be blamed as the cause of the valuation problems.

Wall Street's chief sins can be rolled into probably three areas: supplying too much liquidity (which is almost like suggesting too much oxygen is a bad thing), the use of leverage, and the inability (honestly or otherwise, often otherwise) to provide accurate valuations for securities.

The mortgage industy's primary sins can be narrowed down to economically vapid products (no doc loans), fraudulent application of standards, and lack of vetting.

But the third leg of the current crisis still remains the individual buyer and those involved with fraud rings.

While we will see the professional fraudsters punished, we still cannot help but note that the bulk of the crisis is centered around homeowners unable or unwilling to pay for the homes they purchased, so the indictments we are seeing now are are not entirely central to addressing root causes and culprits.