How Mortgage Fraud Plagued Chicago’s Poorest Neighborhoods

(somber music) Amir Sufi: All of it started in 2007 when defaults started creeping up into lower-credit-score, poorer neighborhoods. We’re talking default rates, for example, of 25 percent, in contrast to say 5 or 6 percent in some of the higher-credit-score neighborhoods. And we just wanted to do research to try to figure out what exactly happened in these neighborhoods that was leading to higher mortgage default rates. And so then we started looking at income patterns and seeing some strange things. 

(lively piano music) So, for example, if you look at income being reported to the IRS [US Internal Revenue Service] in Englewood and Garfield Park, it’s growing every year by about 1.9 percent in nominal terms. Given that inflation is about 2–2.5 percent, that implies an actual decline in real income in these neighborhoods. 

However, if you look at the income being reported on mortgage applications, it’s on the order of 8 percent per year, which is obviously very high—much higher than inflation, and also much higher than any other neighborhood in the City of Chicago. And so, right away, those two things don’t kind of match. 

One thing that was very tricky to tease out is that house prices were starting to rise in these areas. You’ve got one of these perverse relationships where house prices were just being driven by the credit itself, and there’s no doubt in my mind that fraud on mortgage applications was an important part of driving that boom in mortgage credit. 

One of the depressing things is that these neighborhoods were devastated by the Great Recession, by the foreclosure crisis. This mortgage credit boom artificially may have boosted some economic activity in these neighborhoods, but ultimately left the people who live in these neighborhoods worse off. 

Lovey Griffin: My name is Lovey Griffin, and I’ve lived in Garfield Park since, yeah, 1988. Well, on this block I can say, maybe that I know, like about seven, eight people who have lost their home. During the Great Recession, lot of people lost their homes because they lost their job. And after losing a job, they could not afford the home. 

(bouncy piano music) Amir Sufi: One of the big questions I think remaining is, “Who exactly was falsifying the income information?” There’s certainly a lot of anecdotal evidence that the brokers were doing it on their own volition, without even the borrowers actually knowing that they were falsifying the income information. But there has so far been very little, if any, criminal investigations into fraud, and you know, I’m highly doubtful that we’ll ever see that. 

The US economy seems like it’s struggling. The only way we seem to be able to generate enough spending, enough home buying is by extending credit, usually on owners’ terms to people that, at the end of the day, may not be able to afford houses or the cars that they’re buying. 

At the end of the day, the money’s gonna come due, and when it comes due, and people can’t pay, what is the effect gonna be on the financial system? What is gonna be the effect on the people themselves? That’s a pretty worrisome sign going forward.