Mental Exercise: Data, Mortgages, Derivatives, and Foreclosure

I’m heartened to see that 40 of the Attorneys General of the states here in the US are going to examine mortgage foreclosure fraud.

I’m certain more than a few of them will take the easy way out and blame the victims  (afterall, this is an election year, and the Teabaggers will demand scalps), but there can be little doubt that fraud was occurring on a massive scale and likely was the cause of the collapse of the US housing market.  A 2005 FBI report estimated that 80% of fraud losses came collusion and collaboration from industry insiders (via this MeFi thread).  All of the major lenders are at the very least scrutinizing their processes and at most ordering foreclosure moratoriums.

How could data mining and visualization aid in surfacing potential fraud?

As a mental exercise, consider the multitude of data that certainly exists and the challenge of combing the haystack and creation of a comprehensible narrative.

These flowcharts posted by Barry Ritholtz (sourced from  Foreclosure Fraud for Dummies Part 1,  Part TwoPart Three, and Part Four) show the process as it should occur.  The news has been full of stories about foreclosure mills rushing foreclosures through and in some cases ‘recreating’ original documents, pushing through foreclosures.

Government agencies – both local, state, and Federal – have access to terabytes of data from the VA, HUD, Freddie Mae and Freddie Mac, with more to be discovered via subpoena, from proprietary lender systems to MLS and MERS to credit bureau data, as well as email and other correspondence between borrower, lender, and broker, as well as the other invested parties.   From Patriot Act disclosures to county deed filings and lien notices to the eviction notice sent to the sheriff, each of those transactions lives as a datapoint, somewhere…

Then there’s the question of “should we go down this road”? While I personally think the answer is “Hell Yes, Round up the Banksters!”, I’m certain that ‘following the money’ will open the door to more investigations.  Fraud may end in the foreclosure process, but it certainly didn’t start there.    The trail will certainly lead us past questionable practices regarding the mortgage backed securities, collateralized derivatives, credit default swaps, mortgage servicers, mortgage originators, home appraisers, builders, realtors, mortgage brokers, and yes, homeowners (there’s a variety of infographics here).

The fallout will likely include homeowners, stock markets, the entire domestic financial system, and the entire global economy.  Will renewed scrutiny and the likely fallout lengthen the Great Recession, or worse yet precipitate a Great Depression 2.0?

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