Criminal Probe in the Subprime Market

Last week while discussing the subprime mortgage meltdown and it's effects on the housing market on Bloomberg TV, I made a comment that host Rhonda Schaffler jumped on and caught me by surprise. I said something to the effect of this:

We're very early in the effects of this market meltdown's impact on the housing market. We're likely to see more bankruptcies and financial trouble for the lenders in the short-term. Then we'll see lending standards harden, regulation increase, criminal activity exposed... all these factors will conspire to make it significantly harder for first-time buyers for many years.

My intent was to emphasize the long-term nature of this problem for the housing market. Rhonda focused on the criminal activity comment. "When you say 'criminal activity' are you saying you know something beyond what we know already?" she asked.

Rhonda wanted to make sure I wasn't directly accusing anyone of criminal activity. Of course, I only meant to point out that in the frothy bubbly markets, these things have a way of rearing their ugly heads after the fact.

Exactly one week later, this news alert crossed my desk from the WSJ:

NEWS ALERT
from The Wall Street Journal

March 2, 2007

New Century Financial is the target of a federal criminal inquiry into its accounting and trading in its securities, and said its auditors could warn of "substantial doubt" over the home lender's ability to remain in business. Fremont General, another big lender, said it plans to stop making subprime residential loans and is in talks to sell that business.

The news came the same day federal bank regulators announced a crackdown on loose lending standards on subprime home mortgages.