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- [00:02]
A
Hi, it's Rachel here, director of Movement building at Strong Towns. I'm popping in to invite you to our upcoming Locomotive Training Sessions, a series of live virtual workshops focused on equipping advocates with the tools they need to make their places stronger. This fall we have eight sessions featuring a whole range of guest speakers who are deeply part of the Strong Towns movement. We're going to be hearing about everything from pre approved housing plans to to implementing the Strong Towns approach as an elected official to building a neighborhood where kids can be independent. Locomotive workshops take place every Thursday from 12 to 1pm Central, starting September 18 and ending November 6. Big news. This year we are making this whole series of workshops absolutely free for Strong Towns members. We're doing this because our members are those folks who have stepped up and said they are dedicated to this movement. And we want to give back to you the tools that you need to help make your town stronger where you live. So if you're a member, please join us absolutely free. You'll find a code to access your free ticket in your email inbox if you haven't seen it already. Or hit me up if you need access to that. For those that aren't ready to become a member, you can still just buy a ticket. $25 for a single session or $125 for all eight sessions. If you're interested in membership, head to strongtowns.orgmembership to become a member today. And if you want to get your locomot ticket, strongtowns.org locomotive thanks so much. Hope to see you there.
- [01:43]
B
This is Abby and you are listening to upzone. Hey everyone, thanks for listening to another episode of Upzone, a show where we take a big story from the news each week that touches the Strong Towns conversation. And we Upzone it. I'm Abby Newsham, your host and today I am joined by. Hey Marone, founder of Strong Towns. I never thought I'd speak to you again.
- [02:20]
C
I was going to say we, we have. We start this podcast and it's been 40 minutes before we actually turn on the recorder because we had so much to catch up on.
- [02:29]
B
I know.
- [02:30]
C
I feel like you and I could just sit and giggle like for the next half hour and, you know, have fun and not be serious. But we will try to, we'll try to pull it together for the audience. The listening audience.
- [02:42]
B
Yes, absolutely. We're not going to talk about the weather at all.
- [02:46]
C
No, we are. Our lives have been like two ships in the night. And seriously, like this has been, I would say, fair. 25, you 75% me in terms of, like, scheduling. We're just not available on the same day.
- [03:01]
B
Yes.
- [03:02]
C
And so. Yeah. And I even did one. I did one of these up zones, like, two weeks ago. Without me?
- [03:07]
B
Yeah, without me. I know. I need to go listen to it. Hopefully you didn't disparage my name.
- [03:17]
C
I'm like, let me make this look easy. And then. No.
- [03:21]
B
Oh, I'm sure you did a great job. I'm sure. Sure it went really well. Yeah. Our schedules have been really crazy, and thankfully, you have awesome staff. Sierra has been wrangling schedules and making sure that we can get things done consistently, which is super helpful because there's my calendar, and I hear that you have three or. Or four calendars, and so we. We're able to make some alignment now.
- [03:49]
C
Yes. Yes. My life. My. My life has gotten a little bit easier because we dropped the second kid off at college, and. And so now, you know, instead of balancing my calendar, two kids, calendars where I need to be my wife, all that, it's just me and the dog and the wife now, which is much simpler. Yeah.
- [04:09]
B
Exciting. How do you feel? Good.
- [04:14]
C
When I turned 50, everyone was like, hey, we're so happy for you. And I'm like, I am so depressed. I do not want to be 50. And this is one of these things where, like, you know, I'm so happy. Like, I'm happy for her. I'm happy for both my kids. They're both doing amazing. And as a parent, like, what do you want? You want your kids to be happy and be nice and, you know, be doing, like, good things? And they. They both are. They're both doing great. But I just miss them. Like, I just, you know, I miss them. I described it to someone, and this is gonna. I don't mean to sound coarse. If you have a pet that passes away, you know how, like, there's just this emptiness every day? Like, you get up and, like, the dog used to lay there, and now the dog's not there. And, like, I just. I noticed them gone because they've been there for so long, and it's just a part of you is missing. The kid is obviously not a dog. I mean, she's 100 times more important to me than any pet I've ever had. But, you know, her bedroom door is open, and there's no one in there. She does. I don't, you know, have. Sit down and have breakfast with her in the morning. Just, like, all these little things that are part of your day, let alone, like, her Just being with her, all these little things are gone now, and you're constantly reminded of, like, what you've missed. So it's just going to take some time for dad to get used to this. I've got a very nice, beautiful life, and I'm not complaining, but, you know, it is a change.
- [05:45]
B
Yeah.
- [05:46]
C
She's in Tucson studying astrophysics and astrobiology and living her best life and ready for a big football game to go to and marching bands and, you know, tryouts for this and club that. And she's having a great time.
- [06:01]
B
That's great. Well, you can live vicariously through her and eventually it'll feel more normal.
- [06:08]
C
Yeah. She gave me her login. She said her professor said it was okay. She gave me her login for her astrobiology video lectures.
- [06:16]
B
Yeah.
- [06:17]
C
And so I get to watch them like, this is so cool.
- [06:21]
B
That's awesome.
- [06:23]
C
I'll tell you. Because astrobiology, you know, Abby, is the search for life in the universe.
- [06:29]
B
Right?
- [06:30]
C
You and I are into that.
- [06:32]
B
I know, I know. That's perfect. So you've brainwashed her is what you're saying.
- [06:38]
C
Yeah, I'm going to try to not admit that, but, yeah, she's. She's fascinated with. With life out there as I am.
- [06:48]
B
So one of these days she'll be an expert in one of those documentaries about aliens and they'll bring on to interview.
- [06:58]
C
That's exactly right. We have a secret code that we've worked out, and I can't tell you what it is, but if she is working on a project where they actually definitively find, like, life in the universe, she has a. A phone call she's going to make and a statement she's going to utter so that I will know. You know, like, if you can't just obviously they. They won't be able to, like, disclose it until they go through all the, you know, facts and all that. But she's like, dad, I'll let you know. So we have a code worked out.
- [07:31]
B
Well, don't put that on the record now.
- [07:33]
C
The cic, we'll be looking, listening, monitoring for the code.
- [07:38]
B
Research organization will find this and the podcast archives.
- [07:44]
C
We're really. We've. We've worked this out so that it's not like a code, it's like a natural thing that you say in a conversation, but you say it in a certain way, and then I will know. Oh, okay. The world's about to change. Yeah. So.
- [08:00]
B
All right, well, interesting, that alien talk.
- [08:05]
C
We didn't talk about the weather.
- [08:06]
B
We didn't talk hey, it wasn't the weather. Wasn't the weather, guys. All right, done with the small talk we're going to cover now that we are reunited. This week a pretty light hearted article about mortgage fraud. And Chuck, for the record, asked to talk about this. So it's a little bit over my head and I'm looking forward to hearing about the connection between Strong Towns and mortgage fraud. So this week we are talking about a Wall Street Journal article that is titled Mortgage Fraud Accusations are Trump's New Political Weapon. So the piece looks at how the President and his allies are using allegations of mortgage fraud and the government's enforcement of those laws as a kind of political maneuver or talking point. And the argument that's being made is that by pursuing mortgage fraud cases, regulators and prosecutors are making it harder for Americans to get loans and that this crackdown is partly to blame for today's housing affordability crisis. So it's an interesting kind of political maneuver because it shifts the conversation kind of around structural issues driving housing costs. You know, instead frames it as an enforcement of fraud laws as really the villain. Chuck, I, I want you to maybe break down what the current situation is because again, this, this feels like a big political story that's a little bit over my head and I want to try to connect the dots here on what it all means.
- [09:50]
C
So maybe start with a disclaimer. We're going to talk about mortgage fraud, not politics. So if you are someone who is like, as a listener, super partisan, you have a form of Trump derangement syndrome. Either. Like, everything Trump does is horrible. Everything Trump does is great. This is probably not the podcast for you because we're. I don't care about, like, I find all those things boring. I find the mortgage fraud part fascinating. And let's focus on that. I shared one, two, three, four articles with you. Three or four and you. The mortgage. The first one that you, you alluded to was from the Wall Street Journal, but there's a New York Times article that I cut out and like put in my Save this article and come back to it sometime at the. In July. And that article is called Ken Paxton Claimed Three Houses as his Primary Residence Record show. And this was a in depth reporting analysis that the New York Times did like an investigative report on the Republican Attorney General of Texas. And the New York Times found that this guy, Ken Paxton was claiming three houses as his primary residence, which is mortgage fraud. Let me explain that mortgage fraud is essentially lying on your mortgage application. The federal government in the 1930s created essentially the national mortgage system that we know today. But before that, if you were going to get a mortgage, it was going to be at a local bank, it was going to be short term loan, it was going to have a big balloon payment at the end. Local banks operate like very differently, with very different, not only incentives, but like risk profiles than the national banks and backed by the federal government in order to make housing, you know, quote unquote, more affordable for people. It hasn't worked out this way, you know, spoiler alert. But in order to make it more affordable, the federal government went in to stabilize housing in the 1930s and said we'll create longer term loans, mortgage insurance, down payment assistance. Ultimately after World War II, the GI Bill, Fannie Freddie, longer term debt, things like 30 year mortgages and the like. The idea was we can get people into, we want to create an ownership society. We want to create a preference like a, basically like a preferred. Think of it as a subsidized track in our economy for people who want to get into housing. But we're only going to do this for people to get into housing. This is not going to be for rich people. It's not going to be for people's second homes, it's not going to be for people's third homes. You can't get a federally subsidized, you know, mortgage for your first house and then have a place in Lake Tahoe that we're also going to federally subsidize. There's, for the federal stuff, there's size limits on this. Basically we have said we want people to own homes. And so we're going to create, think of it as like a track for owning homes, a financial track for owning homes that we're going to give preferential treatment to along the way. And then we're going to have another tract for people who own investment properties and second homes and all that stuff. Right? So we've set up this preferred system for you and me and normal regular people to get into homes. All right? We should get into like the mechanisms that create the fraud. But let me just give you like the big picture. If you claim more than one house as your primary residence, you are committing mortgage fraud by basically accessing this preferred system for a house that is not your domicile, your like primary abode, your place. You're essentially cashing in on a federal subsidy or federal program or a series of, in a sense, preferential treatments that are only supposed to be available to individuals getting into a, their only home or their primary home. And so Basically, you can look and say Ken Paxton at some point claimed in his applications that each of these places was going to be his primary residence. Even though that's impossible. You can't have three primary residents. You have one primary resident. He claimed three different times that the place he was financing with a mortgage was going to be his primary residence. And that allowed him to get preferential financing and all that stuff for each of those places. Lisa Cook at the Federal Reserve, that's the, you know, that's the, the newest one that is in the news. The administration wants to reshape the Federal Reserve. I don't think I'm going out on a political limb here or saying anything partisan to say that President Trump would like or the administration would like Lisa Cook, who is a Fed governor, to be no longer a Fed governor. They, he actually fired her. There's some legal dispute there over whether he can and whether it's just cause and all that. But the reason that he fired her, that he claims, is because she committed mortgage fraud. She did the same thing. She has two homes, both listed as a primary residence. Do you remember Adam Schiff? He was one of the primary people involved in the impeachment of the president in his last term. They went after Adam Schiff for the same thing. He, I think we should say allegedly with all this, but I'm not trying to make the case that they've committed mortgage fraud. I'm saying it's been reported that they have multiple, you know, Adam Schiff, Ken Paxton, what's her. Lisa Cook all have multiple homes in, listed as their primary residence. And that is the definition of mortgage fraud. Does that, does that make sense as a, like an overall concept?
- [16:13]
B
Yes, it does make sense as an overall concept. I guess my question is how is this common that people are doing this? I mean, it seems like they're all now pointing at each other because all these people are, you know, allegedly committing mortgage fraud. Is this something that people commonly do? And why, why are there not stopgaps to that or ways of checking? I don't, I don't know. I'm, I'm curious about how that works and why all these people are allegedly committing fraud and I guess how it connects to the overall housing story.
- [16:55]
C
So we are, this is, you and I are recording this just before Labor Day weekend, and this will run after Labor Day. I don't know if you remember this or not, but last Labor Day weekend, which is my wife's birthday, is always around Labor Day, so we always celebrate it on Labor Day weekend. Last year, I spent much of Labor Day weekend in a, what is like, colossally stupid online Twitter war with some prominent YIMBYs. I had written an article a little over a year, like 13 months ago, basically saying like, the more the, the, the mortgage market is full of fraud and the higher interest rates go, the more problematic it becomes and the more likely that that fraud is going to be exposed. And I wasn't making that up. I was actually quoting a report by the Federal Reserve that said, and I can't remember what the percentage was, but it was not an insignificant percentage of mortgages contained fraud and that this was a big deal. The Federal Reserve had said that. And so the argument I got in was basically like, you know, why are you making such a big deal or mortgage fraud when the only real big problem here is zoning? Why are you doing this distraction? You're enabling people who you know are against housing. This is a year ago. Here's how it. Mortgage fraud impacts the housing market. And then let's talk about your question about how common is this? The Federal Reserve, by the way, has said it very common. If you are competing for a house and you can borrow at preferential rates, you can pay more for that house. If you don't get those preferential rates, you have to pay a more market rate for the house, which, you know, with the same amount of payment and everything would be a lower price that you could afford. So you're not going to be able to outbid people in a market that has scarcity, in a market that has scarcity. Giving people with lots of money the ability to get preferential financing and outbid people who have less money has basically like the opposite of the filtering effect, right? Yes, it has the effect of there's a lot of people who say, well, go build luxury housing because then that will. A person will move up into that house and then a person can move up into their house, and a person can move up into their house and voila, you have an affordable unit that is.
- [19:21]
B
But not if a football player claims it as this their primary residence and outbids everybody, but it's not their primary residence.
- [19:29]
C
Well, not if like a Federal Federal Reserve, you know, governor or the Attorney General of Texas or whatever wants to have a second home somewhere or buy an investment property or, you know, what have you, and uses the mortgage process to get preferential financing, then you're competing against them.
- [19:49]
B
Right?
- [19:50]
C
So, yeah, and that. And that extra unit's not going to open up.
- [19:54]
B
And pause really quick. Do you think that this, for Federal employees and elected officials. Do you think that this has to do with the fact that they may be from somewhere else and have to have a place in D.C. and so they have a second home in D.C. or do you think that this is vacation homes and other types of properties? Okay, yeah.
- [20:16]
C
This is having multiple properties. It's not about, like, I've got a house here where I work and a house here where I'm from. No, that. I mean, that's not the case with the Attorney General. It was not the case with Adam Schiff. I'm pretty sure it's not the case with Lisa Cook. But, I mean, you're talking millions of homes that are in this. Okay. We've set up this idea of there being two tracks, and you said, how common is this, and why isn't there, like, a way to regulate this? I'm going to make a confession here to you today. I think by the technical letter of the law, I have been guilty of mortgage fraud. Let me walk you through how this happened.
- [20:57]
B
It's nice knowing you, Chuck.
- [21:01]
C
I'm not currently committing mortgage fraud. So my wife and I built a house. After we graduated from college and got married, we built a house. And when we built that house, we financed it and we said, this is our primary residence. And when I signed my mortgage application, that was absolutely true. Like, that was my primary. That was our primary residence. That was where we lived. Then I went back to grad school five years later, and when I went back to grad school, we were going to sell our house. And then we didn't like the prices in the market, and we found someone who wanted to rent it. And what we ended up doing was taking some of our equity and buying another house down in the Twin Cities metro area, like two hours away. We bought a little condo unit that we lived in for the two and a half years I was in grad school, and we kept it for, like, another year. When we signed that mortgage again on that application, I said, this is our primary residence, because at that point, it was going to be our primary residence. Right?
- [22:07]
B
Yeah, we were actually buying it as a primary residence. But you didn't re. You're not refinancing the last mortgage.
- [22:13]
C
What we didn't do is we didn't go and refinance the last mortgage to essentially be market rate, not this, like, you know, preferred rate kind of system. And so I think in a very, like, technical sense, or in a very coarse sense, I, at one point, my wife and I, at one point had two mortgages. Both of which on the application we had claimed as our primary residence. I think it would be really hard from a criminal standpoint to prosecute us on that because, you know, at both points we were, we were answering the application process honestly. But you ended up in a situation where, you know, the 30 year mortgage market didn't reflect reality, it didn't reflect the risk that the, the lenders had. Because clearly once something moves from your primary residence to a rental property, which is what my other house did, it becomes a much riskier loan to make. So the, the, the risk of that new loan was not reflected in the old mortgage rate. This is all the distortions of a big 30 year, top down centralized mortgage market. Right? Like it didn't, if this were financed locally and it had to roll over every three to five years, this would have been, this would have been dealt with very, very quickly. The fact that it was wrapped up into this long term product means it could kind of evade that.
- [23:37]
B
But that's got to be really common. I mean I, super common. I don't know how, I mean, I'm not a mortgage lender. But when you're buying a second house as your new primary residence, are they asking you if you have another loan on a different. I mean, I'm sure they are, but are they asking you to refinance it? Does, does your bank get flagged or does that, you know, does the lender flag that. I'm just curious about process because I own a house and I've never been told that, hey, if you buy another house or I would think that they would tell you that, that you have to refinance the other house if you decide to move into a different house that you also buy.
- [24:26]
C
So, so let's look at this from two perspectives. I think the first perspective is the perspective of the bank who is originating your loan or the loan processing place that is originating your loan. This goes back to 2008. And who has what incentive in the system and who protects ultimately the investor. If you are the bank that is originating the loan, what you have to do is make sure that you can in good moral conscious check all the boxes. Now, some people would define morality different than others. But you know, if I sit across from you as the originator and I say, is this house that we're writing the loan on going to be your primary residence? And you say yes. And then I have you sign at the bottom of the thing, even if I know that you've got another residence and da da, da, da da, like I really have no incentive to push you on that. Right. I am going to process this loan. I'm going to get the loan done, I'm going to collect the origination fees and some of the other things that help us. I am going to then, you know, turn that over to a system that will sell that loan onto a secondary market. A bundler is going to buy that. I'm on the hook for 60 days. So if you default in the first 60 days, then it becomes a problem for me, but otherwise it becomes someone else's problem really quickly. You would have to, as a bank originator, and I'm not going to say anything despairing about those people, but they're salespeople largely. They have like an incentive structure to make sales. It would have to take someone extremely conscientious to say, hey, I've got some doubts about whether this is your primary residence or not and you know, therefore I'm going to hold up the loan. And my argument would be if you had such a person, they would not be in the mortgage loan origination business very long. Right. Like the, the incentive there is to like we're going to make your loan go through as quickly as possible, like with as few hang ups as possible.
- [26:28]
B
Well, does that make sense? It does. But also on the other side of that, let's say that somebody is buying the second house and they're moving into it and it will be their primary residence. The person who is originating that loan, unless they're required to, they don't necessarily have an interest in going to the other bank. That maybe the, the, maybe the last house has a mortgage with a totally different lender and they don't really have an incentive to say like hey, you need to refinance, you're at the loan you had before. I mean, no incentive and that, I mean, because no requirement problem. Maybe from their perspective it's like that's, that's not their institution's business.
- [27:17]
C
Okay, but here's the, here's the thing. I agree with all, all that is correct and very intuitive. But understand that it's not another bank's problem. And this is where I think the opacity of the mortgage market and just the complexity of the mortgage market makes this really weird. If I came to you, Abby, and I said I'm going to the bank of Abby and I want to borrow money for a house that I'm going to live in and care for and take care of and you know that I qualify for all the federal backing. In other words, as a Local bank. Like your downside risk is very low. You would say, all right, here's the loan I can package up for you. It has favorable terms, it has favorable conditions because of what you're doing. If I then leave and walk out and I come into the bank of Abby and I say, I have the exact same home right next door to this property. So essentially like the same property, I want to buy this house. I'm not going to buy it as a house to live in. I'm going to buy it as a house to rent. You would say, oh, whoa, hang on a sec. Very different risk profile. I'm going to require more money down. I'm going to require more equity. I'm going to require a higher interest rate. I'm probably going to roll that loan over more often because now this is just a much riskier situation.
- [28:41]
B
Yeah, it's a commercial investment. Yeah.
- [28:44]
C
Yes, exactly. Okay, look at my loan from my original house. It got sold off to bundlers. The bundlers took it and bundled it with a bunch of other mortgages. Then they chopped it up into securities and sold those securities off. And those securities were bought by banks and pension funds and, you know, all kinds of things that are like, hey, I've got a mortgage backed security. Now it's a thousand different loans, including 1/100th of Chuck Marone's mortgage in Brainerd, Minnesota. This is great. Okay, five years later, six years later, I move out of that house and turn it into a rental property. What happened is that that mortgage backed security just became riskier with nobody who owns it or is in the chain actually recognizing how much riskier it became. This is not a big deal if it's one out of 10,000 mortgages, right? Like, it gets, it gets lost, it gets washed away in the volume of it. But when it's 8%, 10%, 12% of the mortgage market, which the Federal Reserve has intimated that it may be, well, all of a sudden now there's an underlying risk profile in the entire, like foundational product, mortgage backed security in our market with a much higher risk profile than anybody imagines or understands.
- [30:03]
B
So then let's talk about why this is so common and why, why this apparently is happening across our government. I would imagine it, it happens beyond just government officials. If it's, if it's popping up this.
- [30:19]
C
Much happens all the time. I mean, it happens all the time. So I think it's, it's so common because the 30 year mortgage is an unnatural product. When we set this up, we do it with the assumption that people will live in their house indefinitely and when they move, they will sell it and they will get a new 30 year mortgage mortgage. And while that's the life that most people live, I mean most of us, I don't have a second home. I don't know if you have a second home, Abby. I suspect, you know, most of us don't like operate in that world. So that's not an issue for us. So the mortgage market is in a sense set up for people who would operate like you and me. I have one mortgage at a time, I move to the next place, I sell that one, I get a mortgage. Ultimately that's what I did. Even though there was a little bit of overlap between what I bought and sold. You have this product that works in theory for a family in a financial situation that is in a normal distribution in the middle. The problem is you have enough edge cases now and this product is ubiquitous enough in the marketplace where, where the edge cases are starting to become bigger players in the system. They're starting to become more consequential and more meaningful. You not only have lots of affluent people, lots of baby boomers who have, you know, saved up and what have you and have bought two houses and you know, all that, you have a lot more affluent people who are owning multiple homes. That's just a part of like the experience. You have people who are buying homes as investment properties. And I know the Yimby Group doesn't like when you talk about that because that gets into some of these supply side issues. But you know, the reality is, is that our market actually provides a benefit for that. There's also this other side of the equation and I think I would be remiss if I didn't talk about this. I remember sitting in a course I think is what you would call or a seminar maybe 10 years ago for incremental developers. And there was someone who was a very successful incremental developer, someone that we all know and admire. I will not Monty Anderson just because I don't want to throw. I love Monty so much and don't want to throw him under the bus. And I know people might assume I'm talking about him because he is like the incremental developer that we, we talk about probably most often not Monty Anderson, but this person was going through and teaching people how to get financing for the houses they wanted to build. And part of the, you know, part of the class was like, well, take your primary residence and put it in your wife's name. And then go out and buy a house with yours and claim that's your primary res. And, and I'm listening to this and I'm like, wait a sec, this person is teaching us how to commit mortgage fraud.
- [33:16]
B
Yeah, that's terrible.
- [33:19]
C
It's, it's terrible. But yet, okay, look at it from a standpoint of what's the greater good, right? Are you worried about the integrity of the banking system and the financing system? If you are, then this kind of mortgage fraud is really bad because you are passing along a product with a much higher risk profile than what it appears to be. But if your concern is we got to get a lot of housing built very quickly and we need more housing and we need more people building it, well, then committing mortgage fraud is like not a bad thing because it actually gets housing units built. I'm, I'm, I'm not trying to cast like moral judgment on all this beyond just saying when you have a system where the federal government is such a big player in how things are financed, one of the things that happens is that you get all these weird distortions that people who are just like, I'm focused on zoning or I'm focused on single staircases, or I'm focused on like, don't grasp all of the weird freaking distortions of this. And when you add bailouts of banks and bailouts of mortgage backed security funds and bailouts of AIG and you know, mortgage insurers, and you basically create this utility around the housing finance system, you are going to get very weird outcomes. One of them, which is housing's not going to reflect supply and demand and it's going to become broadly unaffordable.
- [34:54]
B
So what do you think the intent here is, you know, making this a, I guess it's a political maneuver, but bringing this to light. I mean, is, is the intent to actually curb mortgage fraud in a meaningful way? Not that you can speak for what they're doing, but I mean, it's like, well, you know, what's the, what's the, what's the plan here?
- [35:20]
C
So let me, at the risk of brushing up against politics for a second, let me make an observation. What to me, we have seen over a number of decades now, but particularly starting in 2016, up till today, is what, you know, what I think would be called lawfare, right? The weaponizing of the legal system to go after your opponents. And this is the kind of thing that happens in despotic countries, places that, you know, we warn people against visiting, but we see it now increasingly happening in our country. And, you know, if, if you are a Republican, you can point to many, many cases where this has been done against Republicans. And if you are a Democrat, you can count to many, many places. And like, you know, now an increasing number of places where this has been done against Democrats. And it's unsavory. I don't think any of them care, quite frankly, about mortgage fraud. Like, I don't think the.
- [36:24]
B
Right.
- [36:24]
C
I don't think, yeah, the New York Times doing an investigative series on Ken Paxton and the Attorney General really cares that he committed mortgage fraud. I think that they probably don't like Ken Paxton very much. And, you know, this is an issue they could write about. I, you know, if you read, I posted two articles in here for you from the New York Times. One was on Ken Paxton and one was on Lisa Cook. The New York Times tends to be a left of center publication. And if you read those two, in the one on Ken Paxton, they're saying, hey, this is a real big issue. And on the later one with Lisa Cook, they're going, wow, the big issue here is the, the lawfare against a Federal Reserve. So they have different sensitivities too. Right. I think that mortgage fraud is endemic to our system. And by endemic, it's one of those things that if everybody's doing it, you can't really make it against the law. Let me give you the equivalent of like things that we would otherwise talk about. If you say the speed limit on this road is 55, I was just thinking, and everybody's driving. Yeah, everybody's driving 65. Everybody's breaking the law. But the person who will get pulled over is the person who's driving 70. Like, they won't pull everyone who's driving 65 over because everyone's doing it. So the person who committed mortgage fraud by having six residences that they claimed as their principal residence and are flipping them and doing all that, like, that person becomes an easier target because they don't have the same argument that, say, my wife and I would have that. Like, I did sign this saying that it was my primary residence because it was for five years. And then I did sign this one saying it was my primary residence because it was for three and a half years. I'm really not committing mortgage fraud now. Technically, I probably was, but I would have a much better defense than like the person driving 75 and the 55 who owns eight houses that they're flipping all using this system.
- [38:31]
B
Right.
- [38:31]
C
You get what I'm saying? Like, there's.
- [38:34]
B
Yes, I Do get what you're saying. And it makes me wonder about, I mean, this seems like a system where if this was a problem that people really wanted to solve, that there would be a way to solve it. I mean, it seems like there's a way to break down these incentives and to, and to keep mortgage fraud from happening. But it just seems like it's, it's a system that doesn't have those stop gaps. Like the banks are not required to call the lender of your other house and say, hey, they're getting another mortgage. You need to talk about refinancing with this person. I mean, it just seems like there are ways of, of solving this if they wanted to solve it.
- [39:24]
C
When you were saying that, my first thought was, no, there's not. And then as you talked, I'm like, yeah, okay, I think you could.
- [39:31]
B
But I mean, when you fill out a mortgage application, you provide all this information. If I go buy another house, they're going to ask me if I have another mortgage credit score.
- [39:40]
C
And you're. Yeah, absolutely.
- [39:41]
B
They're going to pull all that. So it's like, right. I mean, it seems like there could be a system by which they say, hey, we can't give you this loan until you refinance your other loan. Otherwise you have two low interest loans. I just don't understand why this isn't solvable.
- [39:59]
C
I think that that would be the easiest thing would be to say you only qualify for one 30 year mortgage. Here's the problem with that, Abby. From like a practical standpoint, we want more 30 year mortgages. Part of what happened in the run up to 2007, 2008, in the Great financial crisis. And this is this, this is like, watch the big short. You know, this will give you like an entertaining view of this. But if you watch this, we actually got to the point where there were so many bets and side bets and hustles going on in the mortgage backed securities market that we could not create enough mortgages to fill the demand for paper to bet against. And so what they came up with was this thing called, it's a synthetic cdo. A synthetic CDO is a fake piece of paper that mimics a real piece of paper. So if you take a security that is from a bunch of bundled mortgages that originate from original mortgages, you take that and you say, okay, we've got this CDO that's created from all these mortgages. Then you say, all right, I'm going to create a separate basically security instrument that doesn't exist. Like it doesn't. There's not backed by any mortgages, it's not backed by anything. But what it does is it mimics the behavior of the one that is real. It's a synthetic one. And then we can create out of that all kinds of derivative products. We did this, and I say we like the financial market did this because there was such huge demand for these mortgage based products, these derivative mortgage products, that we couldn't originate enough mortgages to fulfill all the demand. Even when we were giving people with no credit scores, no job history, the big huge loans and all that, we couldn't create enough mortgages to actually satisfy the financial market. And so if you said, well chuck, everyone gets one 30 year mortgage, you can't have more than that because you know that that's like screwing up the whole system. I would say that's a very logical answer. The problem is that nobody involved in the system wants that outcome to happen. They would be happier.
- [42:24]
B
Yeah, exactly. That's the, that's kind of the question I'm asking is like it seems solvable and it, it's not being solved.
- [42:34]
C
This is, this is the essence of, you know, escaping the housing trap. The book that Daniel and I wrote is that at the end of the day, the thing that drives all of this is that everyone involved in the financial side of the system benefits from housing prices going up and staying up. And what you just described would actually put downward pressure on housing prices, which is, you know, if you're about housing affordability, like that's what you want. You don't want mortgage fraud, you don't want people owning multiple homes. You don't want a system that subsidizes, you know, the speculator or the investor or the, all that to gamble, you know, on housing and pay more. You don't, you don't want that system. But if you're the bank or you're the investor who owns that slice of the mortgage backed security and your pension fund, that all of a sudden has become riskier because, you know, way upstream the profile of the properties have changed. You don't want to encumber that risk. Like you don't want that to happen. You don't want prices to go down. And this is the tension, right? This is the unresolvable tension because we are going to allow and accept mortgage fraud and we're going to accept the risks that come along with that because not accepting it would mean housing prices would have to come down. And that's the thing. We can't Bear.
- [43:57]
B
Well, I'm really glad that you broke all this down in the way that you did, because I, before today, I had not considered how mortgage fraud is constraining supply on the system and causing prices to inflate. That's. I feel like that's just a whole new piece of this puzzle on housing that is like, again, it sounds solvable, but I don't think many people have. Sounds like a lot of people don't have an interest in solving.
- [44:27]
C
I'm saying a year later, I don't think many of the Yimbys that our was, you know, tweet fighting with last Labor Day know it either. So don't, don't feel bad.
- [44:38]
B
It's not at all.
- [44:40]
C
Okay, let me put it this way. I feel like I know a first, second or third grade level of the housing finance system. The people who know like a college level or a PhD level are so deep in the finance stuff of it that they have no understanding at all of the zoning side, the regulatory side, the way that things get built. But they're doing financial alchemy that is at a level that I think we would be blown away at. And all you have to do is go back to 2006, 2007, when you've got the Federal Reserve saying, subprime is contained. There's nothing going on here. This is not a big deal. And then all of a sudden, they woke up one day with banks failing and said, what do we not understand? And the thing that they did not understand was the entire mortgage market. I mean, like, literally the big picture, they did not understand. Not just the big picture. They didn't understand the mechanics of how the market actually even worked. And these are the highest level regulators in the country who are, you know, by the way, not dumb people. The people putting these packages together and running this stuff in the financial world are doing things that are. Are so advanced that, like, I'm not even going to pretend that I can even smell an understanding of what it is. So mortgage fraud is like the, the easy stuff?
- [46:10]
B
Well, yeah, maybe we'll leave it there. I hope, if, if there's any lenders out there or people in finance who understand this stuff and can help fill in some gaps, I'd love to hear it because. Yeah, I want to explore this a little bit more. It's. It's fascinating and, and again, a little bit over my head, but I think I understand it more than I did when we started this conversation.
- [46:36]
C
Awesome.
- [46:36]
B
All right, let's do the down zone. Chuck, what do you have for me.
- [46:40]
C
This week, I could not decide. I have three. So we just took a vacation and I went through three books on vacation and they were all awesome. One was on James Cook, the explorer. It actually came out last year. Is such a good book called the Wide Wide Sea. This is about Captain Cook's travels on his third voyage, the one where he, spoiler alert, doesn't make it back. And, you know, you get a sense of how just insane exploration was for these Europeans going out into lands that Europeans hadn't been in, crossing these massive seas in these boats that today I think we'd be afraid to ride on. And they were, you know, putting them together with, like, the. The duct tape and baling twine of the time. You know, they're going along and like, their mast breaks and they have to find a way to replace it. And just like the crazy stuff that they did to make this ship work. This is a. This is going to be one of my best books of the year. I also read a book called Apple in china by Patrick McGee. And I got to tell you, I've thought for a long time that, like, Apple's relationship with China was problematic from a business standpoint, that it was. It made them one of America's most fragile companies. This book. This book, like, took that. That intuition I had and amped it up to 100. I mean, really. Oh, gosh, yes. You get the. The way that Apple got sucked into being essentially a Chinese company is so fascinating. I would recommend this book to anybody. I mean, this. This. This is. Is really, really eye opening on how, you know, it's one of those slippery slope kind of things. Like we start here and then we move here, and then we got here, and then pretty soon we're fully embedded in China. And if we even try to leave, they put the clamps down on us and make it impossible. Apple is a Chinese company today. I mean, it just is. Yeah. And, you know, you look at things like tariffs. I don't know if you noticed, but Tim Cook went and got his own, like, Apple carve out and all the tariffs and has really been doing everything he can to butter up to the administration because even a modest tariff would just destroy their business model. I mean, it just not. They are. They are wholly dependent on China in a way that is really bizarre. So Apple in China. And then the third book, Abby blew my Mind. It is called Dr. Calhoun's Mousery.
- [49:22]
B
Okay.
- [49:22]
C
The strange tale of a celebrated scientist, a rodent dystopia, and the future of humanity. The book is by Leigh Allen Dugatkin. I can't. I'm sorry. For not saying his last name Right. This one is about this. This scientist who would run these mouse and rat utopias to study overpopulation. And, you know, he would allow, like, the universe to grow and then watch the collapse. And it was. The experiments were fascinating, but what was even more fascinating was how he took the insights and extrapolated them to human society and kind of the effects of that on the dialogue of overpopulation and what have you. I think a dialogue that is still with us today despite, you know, I think some of the evidence not correlating with reality is, for anyone who is interested in the intersection of, I think, science and culture, this was a fascinating insight into how scientists often don't make the best cultural interpreters of their work. So, yeah, really? I mean, this was super fascinating book.
- [50:38]
B
I thought the third one was going to be a children's book. Not gonna lie.
- [50:43]
C
No, it was all about. Yeah, well, so the guy worked for the National Institute of Mental Health, which is abbreviated to nim. And the actual book, the Rats of nimh, was inspired by his work.
- [51:01]
B
Really?
- [51:01]
C
So, yeah. So if you have ever read the Rats of nimh, which is a children's book, you've read work that was written by someone who worked collaboratively with this doctor and then was inspired to write this tale and others. Fascinating as a result.
- [51:21]
B
Fascinating. Well, I. I don't have any books for you this week. I. I'm in the middle of doing some home renovations, so that's why I'm. I don't know if you've noticed, but I'm recording from. Not my home right now.
- [51:36]
C
This is. This didn't. I was like, mine's a little different.
- [51:39]
B
No.
- [51:39]
C
Okay.
- [51:40]
B
This is a different home. I. Yeah, there's loud noises going on in my house right now, so. Yep, that's. That's happening. Kind of chaotic otherwise. I. I may have mentioned this in a different week. I don't remember, but I wanted to share this with you specifically because I feel like you would like this show. It's not a new show, but I discovered it recently. Apparently, it was really popular at one point, but I've been watching a lot of House. Have you ever watched House.
- [52:15]
C
Abby? I have watched the entire seasons of House.
- [52:19]
B
I knew it.
- [52:21]
C
I think three times.
- [52:22]
B
I knew it. Okay. Because I. I started watching it, and at first I was like, man, I don't know. And then I got into the rhythm because it's like. It's like Sherlock Holmes structure of story, but medical mysteries and it's. It's like this mad genius kind of guy solving rare disease cases and that kind of thing. I mean, for anyone who hasn't watched Houzz, which I guess was just me until about a month ago, but. Yeah.
- [52:51]
C
So what season are you in?
- [52:52]
B
I'm in season two, season two, I think, like, episode 20, something like. It's.
- [52:59]
C
I have to say, season four was my favorite, really, just because. But I feel like when they got to season four, they had to up the, like, lunacy level and didn't lose its. Its good writing and its interest until you get to, like, season seven. I. I think in season four, it still is really good, but it got crazy in a way that I found hilarious. So I'm. Tell me when you get to season four, because I want to talk to you.
- [53:29]
B
I. I thought that was a fun season. I'm looking at the episode guide right now. I'm on season two. Let's see. Episode got through. Euphoria got through. Oh, you know what? So the last. The last episode of season two, he has that crazy, like, dream after he gets shot. So I'm in season three now. I think I'm on episode two, two of season three.
- [54:04]
C
Well, I can't tell you what happens in season four, except I will preview it and say they have, like, a Survivor kind of thing to. To pick some residents to work with. House.
- [54:18]
B
Oh, my God.
- [54:20]
C
It is hilarious. It is. It is one part, like, genius and one part hilarious, and it brings out kind of the craziness of the show in a really, really cool way.
- [54:31]
B
So I'm about to bring this full circle because. So the episode that I'm on and I'm about to. That I'll probably watch tonight, the description for it is House and his team treat a young boy who believes he's been subject to alien experimentation.
- [54:50]
C
There we go.
- [54:51]
B
So. So that's. That's my next episode. Great timing.
- [54:57]
C
I like how so much that when I'm on YouTube, the, you know, they recommend, like, shorts to you all the time.
- [55:04]
B
Yeah.
- [55:04]
C
YouTube has got me figured out that it can sucker me in with House shorts. So, yeah, that's. That's where I'm at.
- [55:10]
B
That's. That's awesome. I'm glad that. I'm glad to hear. I'm glad to hear that. I'm glad to hear that you do watch that show because we haven't talked in a while, and since then, I've been watching a lot of House. I didn't realize I'd been watching two seasons of House, so maybe more House than I thought. But yeah, I've been binging this show and I'm like, hooked. And I have been wondering if you are a fan of the show and I. If you weren't, I was going to recommend it to you, but apparently everyone in the world has watched this show because I've recommended it to people and they're like, how have you never heard of this?
- [55:48]
C
Can I give you one detail that I did not know until I had watched the entire thing?
- [55:53]
B
Yeah.
- [55:54]
C
Hugh Laurie House is British. Is British. And he does not like the entire show. He talks with an. As an American and you. Like, I had no inclination that that was not his net. Like, he was actually having an American accent.
- [56:14]
B
It's a great accent.
- [56:15]
C
Wild. Great. I mean, it's so. He does it so well. It's crazy.
- [56:21]
B
Yeah. I saw a clip online of him being interviewed and he jumps back and forth between accents and. Yeah, it was amazing. He's definitely British.
- [56:33]
C
Yes, definitely. I was like, first time I heard him talk, I'm like, why is he talking in a British accent? Like, what? What is this? And then it's like, oh, no, that's okay. That's great acting.
- [56:43]
B
Yeah. Big fan. Big fan. Well, all right, cool. Well, nice to see you, Chuck, and hope to see you next time. Thanks for joining today.
- [56:52]
C
Thank you. Thanks for having me. Thanks for keeping everything going.
- [56:56]
B
Of course. Well, thanks to your team for helping with the schedule. We'll keep it going. And thanks everyone for listening to Epzoned. Bye, Chuck.
- [57:04]
C
Take care. This episode was produced by Strongtell, a non profit movement for building financially resilient communities. If what you heard today matters to you, deepen your connection by becoming a Strong towns member@strongtowns.org membership.