There has been a lot of talk lately about subprime mortgages and fraud associated with stated income loans. Here in the San Francisco Bay area a legal saga has been unfolding for several years regarding alleged loan fraud. This is a strange story of what DoJ alleges to be pure fraud coupled with a willingness of folks to believe myths about fundamental social, legal and economic principles. Two gentlemen - Dale Scott Heineman and Kurt F. Johnson were indicted on September 22, 2005 for activities related to a business called the Dorean Group. These gentlemen continue to insist on representing themselves in court and give all appearances of holding to a zealous defense of their beliefs. They have not presented a typical legal defense of their actions but instead contend that much of the legal code is inherently illegal and that their case revolves around the rights of contract. This appears to be one of those cases where the Federal judge has tried to accommodate the defendants' requests while still protecting their rights and the concerns about potential appeals. The original DoJ indictment may be found here. It appears from the indictment that the Feds, in essence, allege that these guys did the following: They had brokers who marketed their program. The brokers convinced individuals who owned property with mortgages that, in essence, the mortgages were not true legal obligations and could be discarded. The property owners entered into agreements with Dorean to act on their behalf regarding the old mortgages, title and new loans. Dorean would sent letters to mortgage holders (banks) stating that they were duly appointed representatives of the borrower and demanded "the lender prove the validity of its loan "to the unilateral satisfaction of the Dorean Group." " Most lenders probably had little idea how to interpret this and did nothing. After 10 days went by Dorean would (this depends on jurisdiction the example following is for California) prepare a substitution of trustee and deed or reconveyance and actually have the County Recorder's Office record this. To all appearances the mortgage was paid off. But they did not stop there. They had in hand (so the indictment alleges) agreements with the property owners to refinance their now unencumbered property. They would do cash-out loans and split the money between the owners of the property, Dorean and the broker. The former owners were not co-owners of their homes. Dorean was on title as well. What ensued was something resembling utter chaos. With the title to each of these properties now clouded the lenders who had their deeds of trust "reconveyed" needed to go to court to reestablish their lien. See: the remedy The court was attempting to do two things: 1) reestablish the owners right in the property which they now owned jointly with Dorean so as to remove Dorean from having any ownership interest in the property 2) reestablish the standing of the original mortgages 3) establish the cash out loans as seconds. The real issue is that while this might lead to a sort of chaos regarding the properties and that some lenders were not going to get paid the legal process has to be run through to clear the titles to these properties so that they were not permanently "cursed" by unresolved legal issues. It might appear that some of the people who owned the properties were as guilty as the defendants in this case. They were hoping that the words of the two men now in prison would be true and allow them to walk away from their mortgages. One of the indicted gentlemen has a blog. One might read that and conclude the he sees himself and the powers of God on one side and the Federal government and a substantial part of the "financial establishment" on the other side. He is, if his words are to be believed, a true believer crusading for the forces of good. The fact that the scheme served to enrich him to the detriment of the property owners is just a sort of inconvenience contrived by evil forces which probably includes mortgage brokers and lenders. One might find it strange that given the divine charter to rid folks of their evil mortgages the first thing these folks did was take out new mortgages. For me there are lessons here. There is virtually no limit to human stupidity. I am not talking about the guys in jail but their clients. Make no mistake. The guys in jail had savvy enough to use county recorders offices to help them put some money in the bank. The same stupidity here is why folks can convince otherwise sane and functioning people that Federal Income Tax is voluntary.
-- Dick Lepre
Hi Dick,
You wrote, in part --
"...For me there are lessons here. There is virtually no limit to human stupidity. I am not talking about the guys in jail but their clients. Make no mistake. The guys in jail had savvy enough to use county recorders offices to help them put some money in the bank. The same stupidity here is why folks can convince otherwise sane and functioning people that Federal Income Tax is voluntary."
Dick, I fear it has something to do with something other than just sheer stupidity in the sense of raw lack of neural function.
I have met some folks who seem to be at least moderately intelligent (say can master moderately complex computer functions, read and use maps to navigate, and who I am sure would score at least 120 on an IQ test if not higher) who can believe the "income tax is voluntary" to say nothing of believing that the US government blew up the world trade centers (I'm appalled at the policies and idiocies of this administration but believing that nonsense requires some incredible mental gymnastics and ability to look incredibly selectively at reality.)
I know nominally intelligent and well educated people who can sign onto the various versions of Ponzi schemes that keep reappearing -- sometimes mixed in with multilevel marketing, "new age spiritualism", etc.. In contrast, my wife, while intelligent and not overly cynical, has only a high school education -- yet she spots these same schemes instantly -- understands that if there's more money supposed to be coming out than true productive activity going on, or if you don't understand how a company makes its money don't mess with it, and that there's no such thing as a free lunch.
I don't have a name for what it is, OTHER than your suggestion of just lack of neural capacity or education (what I guess you mean by stupidity), it takes to fall for those kind of cons, but it's in the realm of ability to believe what one would like to believe and to compartmentalize one's concepts and thus simultantiously keep contradictory beliefs isolated from each other so as to not see that at least one of them must be flawed.
{This message constructed with not less than 99% recycled electrons}
Posted by: Alex Censor | May 04, 2007 at 07:31 PM