Indictments give glimpse of mortgage horror show

The indictments announced last week by U.S. Attorney Jeff Sullivan focus on alleged criminals who cheated banks. What made them such a talked-about story was the horror show the indictments imply about banking.

There is a house in Newcastle. What it is really worth we do not know. It was bought in August 2007 for $670,000. A month later, it was sold for $1 million; two months later it was sold for $1.4 million. The house apparently doubled in value in 120 days.

One might think the banker asked to finance the third purchase would question the jump in value: The property is his security for the loan. Apparently, this banker did not.

Maybe he was focusing on income. The buyer claimed an income of $385,000 in the previous year: the equivalent of $185 an hour at a full-time job. A few months earlier, the buyer had told the Internal Revenue Service he earned just $16,600, the equivalent of $8 an hour. Was it $185 or was it $8? A good banker would want to know. (And so would a good tax auditor.)

In those days, some bankers did not want to know. In its final annual report before it imploded, Washington Mutual Inc. told its bewildered shareholders its bank had billions in "limited documentation" loans. These were don't-want-to-know loans.

It was not only WaMu, which was bailed out by the FDIC and sold. The lender in this case, ING Bank, is part of a company that has had to be bailed out by the government of the Netherlands.

Speaking of recessions, investor Warren Buffett famously said, "It's only when the tide goes out that you learn who's been swimming naked."

It is ebb tide now, and the indecencies are remarkable. Contemplating them, U.S. Attorney Sullivan, whose legal guns might have been trained on kidnappers, drug smugglers or terrorists, must have wondered how such huge apparent swindles could have come about in the simple business of lending money to buy houses.

"Some of this," Sullivan said, "could have been prevented by the banks with a little due diligence."