That’s one way of doing it, anyway; there’s a rich number of variations. One of the more straightforward ones is to set up a foreclosure prevention company, refinance a bunch of at-risk homes, and then just not give the homeowners the money, eg. But generally speaking it’s just asking lenders for money under false pretenses and then not paying it back.
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Why’s this a big thing now? House prices skyrocketed over the past decade, and a lot of very smart professionals, much less regular folk, had no idea when they would stop going up (or at least fooled themselves into thinking they would steadily increase for a long time), and this meant a couple things: (1) Inflated appraisals seemed much more plausible. (2) Lenders were making so much money on solid business that they sometimes didn’t even report getting screwed, because no one wants to play the fool, especially in front of shareholders.
What is Big Shitpile? Paul Krugman explains in an absolutely invaluable column (emphasis mine):
“Here is a crude gauge of the credit bubble. Not long ago, the sum of all financial assets–stocks, bonds, loans, mortgages, and the like, which are claims on real things–were about equal to global GDP. Now they are approaching four times global GDP. Financial derivatives, a form of claim upon financial assets, now have notional values of more than ten times global GDP.”
What do the Bear Stearns guys have to do with it? That part of the initial news articles confused me. They don’t have anything to do with mortgage fraud. They were the guys convincing people to invest in the funds that included the Big Shitpile investment pools that were surely based on some fraudulent mortgages, but also on legal, stupid mortgages and heaven knows what else. The government alleges that they strung along investors well after they knew Big Shitpile would swamp the funds. That’s a totally different kind of fraud.
