The Heritage Foundation - Leadership for America

The early narrative of the housing market collapse featured all the usual suspects: sleazy mortgage bankers, shadowy lenders and pushy Wall Street brokers – all of them preying on unsuspecting homebuyers.

But now we’re starting to get, as radio legend Paul Harvey puts it, “the rest of the story.”

Turns out that not all borrowers were naïve waifs lured into unaffordable mortgages by unscrupulous lenders. As Steven Malanga notes in an essay for RealClearMarkets.com, “many of these borrowers were irresponsible at best, and complicit at worse.”

Not only did the vast majority of today’s housing “victims” know what they were getting into, a large number deliberately engaged in fraudulent behavior to get there. “The deception was clearly widespread,” Malanga writes, “including false statements on mortgage applications about family income and … indebtedness, submission of phony documents, and lying about the intended uses of the property that was being purchased.”

Take the so-called “stated income” loans that require little or no documentation of a borrower’s earnings. Malanga reports that, when one lender compared 100 stated income loans with IRS data, it found that borrowers claimed income exceeded their actual earnings – by 50 percent or more – in 60 percent of the cases.

Often, it seems, the “victims” were in fact perps. But that didn’t stop the Senate from passing a bill Thursday that makes no distinction between ill-served homebuyers and those who tried to lie themselves into a speculative investment they knew they couldn’t afford.

For Heritage Foundation insights into the housing crisis and what Congress should and shouldn’t do about it, click here.