Fraud was rampant in US housing bubble-economist
Fri Apr 18, 2008 1:43pm EDT

ANNANDALE-ON-HUDSON, N.Y., April 18 (Reuters) - Fraud was a basic feature of the run-up in U.S. housing prices that eventually led to the current crisis and record foreclosures, according to an economist who focuses on white-collar crimes.

In fact, a big portion of subprime loans in the United States were underpinned by a criminal overestimation of home values, said William Black, Associate Professor of Economics and Law at the University of Missouri, Kansas City.

"Seventy percent of stated-income loans exhibited fraudulently inflation appraisals," he told a conference sponsored by Bard College's Levy Institute of Economics.

He said the widespread practice suggests regulators such as the Securities and Exchange Commission and the Federal Reserve should have criminal specialists on their staff.

"Why doesn't the SEC have a chief criminologist? Why doesn't the Fed?" he asked.

Black added that U.S. executive compensation schemes created incentives for managers to not only look the other way to shady dealings, but also to embrace and facilitate them.

"The executive structures have become perverse and create incentives to conduct fraud," he said.

The professor argued that regulators' aversion to enforcing basic rules contributed to inflate the bubble and to eventually cause it to burst. (Reporting by Pedro Nicolaci da Costa; Editing by Tom Hals)

http://www.reuters.com/article/bondsNew ... 9220080418