Home Loan Scamming Is Still Going Strong -- and Now You're Paying for It

Everything the real estate industry tells you is a hustle. No industry is more geared toward pumping up the positive and burying anything remotely negative, leaving you -- and truth -- out in the cold.

The crash has not made real estate agents any more honest, but at least the gap between the industry's crazed optimism and stark reality has grown so obvious that even the real estate industry can't hide it anymore.

Nowhere is this more obvious than in Victorville, Calif., an exurb of Los Angeles situated in the high desert where housing bubbled up higher than just about anywhere at the peak of the subprime-lending craze and is still in free fall today.

These days, there are a lot of lies and broken dreams buried in the gravelly sand on which Victorville was built. During the last real estate boom, this barren wasteland was the mecca of low-income homeownership, proof that the American Dream was within reach of all.

Tract-home developers stripped away the rocks and tumbleweeds and Joshua trees, replacing them with mazes of curvy streets and cul de sacs with soothing names like Cottontail Drive, Steeplechase Road and Ladybird Lane, lining them with the cheapest McMansions in California. Things exploded out of control this past decade, with the population doubling to 100,000 in just eight years.

But that whole way of life is over now. Unemployment in Victorville is way above the national average, and violent crime has shot up. Homes prices have plunged to 1989 levels and many stand empty. Banks don't even bother to putting them on the market.

Yet, last week, the press started hyping up the supposed real estate sales-driven economic turnaround that was about to sweep the country. "Honk if You Think It's Over," read a June 7 New York Times headline. "The panic in the Manhattan real estate market of the winter of 2009 lifted in the last few weeks, brokers say, as more and more buyers and sellers have found the courage and the comfort level to sign on the dotted line."

The Washington Post went even further: "Economists, senior government officials and ordinary consumers are all showing greater confidence in the outlook for the economy. ... There are unquestionable signs of economic progress." ABC News went with a rhetorical structure: "Has the Recession Finally Ended? Strong Home Sales Are Just One Indicator That the Economy May Be on the Mend."

From where I sit, this reads like pure fiction. It runs contrary to virtually every economic piece of data available: rising unemployment, growing credit card debt, a massive shadow inventory of foreclosed homes and a wave of defaulting ARM and commercial loans that's just around the corner.

But there is something else, too. And it is as deadly to our vampiric debtor economy as a stake through the heart: the FHA loan. By guaranteeing certain mortgages, the Federal Housing Administration has been helping middle- and low-income Americans purchase their first homes ever since the 1930s.

But this modest leg-up program has been been hijacked and transformed into the new subprime-loan market operated by lenders who are as corrupt, predatory and shortsighted as the original, and maybe even more so. Because this time taxpayers have been put on the hook for the risk well in advance. Real-estate insiders have been sounding the alarm about this new shadow subprime mortgage market -- which is now almost $600 billion strong -- for months now. But instead of listening, Congress has been trying to expand the FHA loan program.

Not surprisingly, it seems that risk-free loans are the only way they banks can be persuaded to start lending again. But I wanted to find out firsthand how much of an impact these loans were having on the housing market. So last weekend, I shaved, put on a clean shirt and headed out for a day of shopping in Victorville.