How Mortgage Fraud Makes the Housing Market More Expensive

Several high-profile members of the government have been accused of committing mortgage fraud recently, including Texas Attorney General Ken Paxton and Federal Reserve Governor Lisa Cook. Today, Chuck and Abby explore how mortgage fraud distorts the housing market, why it happens so frequently — and why no one in the financial system is interested in stopping it.

• Click here for the transcript. (Lightly edited for readability.)

  Abby Newsham 0:00

  Hey, this is Abby, and you are listening to Upzoned.

  Abby Newsham 0:18

  Hey, everyone, thanks for listening to another episode of Upzoned, 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 Chuck Marohn, founder of Strong Towns. I never thought I'd speak to you again.

  Chuck Marohn 0:42

  I was gonna say, 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. I feel like you and I could just sit and giggle for the next half hour. And, you know, have fun and not be serious. But we will try to pull it together for the listening audience.

  Abby Newsham 1:03

  Yes, absolutely. We're not going to talk about the weather at all.

  Chuck Marohn 1:08

  No. Our lives have been like two ships in the night. Seriously, this has been, I would say 25% you, 75% me in terms of like scheduling. We're just not available on the same day. And I even did one of these Upzones, like two weeks ago, without you!

  Abby Newsham 1:28

  Yeah, without me! I know, I need to go listen to it. Hopefully you didn't disparage my name.

  Chuck Marohn 1:36

  It was the worst episode ever. I'm like, "let me make this look easy," and then, no.

  Abby Newsham 1:42

  Oh, I'm sure you did a great job. I'm sure it went really well. Yeah, our schedules have been really crazy, and thankfully, you have awesome staff. Seairra 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 four calendars. And so we were able to make some alignment now.

  Chuck Marohn 2:10

  Yes. My life has gotten a little bit easier because we dropped the second kid off at college. So now, 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.

  Abby Newsham 2:30

  That's exciting. How do you feel? Good?

  Chuck Marohn 2:35

  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, 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, what do you want? You want your kids to be happy and be nice and be be doing good things. And they both are, they're both doing great. But I just miss them. Like, I just miss them. I don't mean to sound coarse, but I described it to someone like, if you have a pet that passes away, you know how there's just this emptiness every day? Like, you get up and the dog used to lay there, and now the dog's not there. And I just notice them gone because they've been there for so long. 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. I don't sit down and have breakfast with her in the morning. There's just all these little things that are part of your day, let alone her, just being with her. All these little things are gone now, and you're constantly reminded of what you've missed. So it's just gonna 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. 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.

  Abby Newsham 4:23

  That's great. Well, you can live vicariously through her, and eventually it'll feel more normal.

  Chuck Marohn 4:29

  Yeah, she gave me her login. She said her professor said it was okay. She gave me her login for her astrobiology video lectures, so I get to watch them. Like, this is so cool.

  Abby Newsham 4:42

  That's awesome.

  Chuck Marohn 4:46

  Astrobiology, you know, Abby, is the search for life in the universe, which you and I are into that.

  Abby Newsham 4:53

  I know, I know. That's perfect. So you've brainwashed her, is what you're saying.

  Chuck Marohn 4:59

  Yeah, I'm gonna try to not admit that. But yeah, she's fascinated with life out there, as I am.

  Abby Newsham 5:10

  So one of these days, she'll be an expert in one of those documentaries about aliens, and they'll bring her on to interview.

  Chuck Marohn 5:20

  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 life in the universe, she has a phone call she's going to make and a statement she's going to utter, so that I will know. You know, obviously they won't be able to disclose it until they go through all the facts and all that. But she's like, "Dad, I'll let you know." So we have a code worked out.

  Abby Newsham 5:52

  Well, don't put that on the record. Now, the CIA,

  Chuck Marohn 5:56

  Will be looking, listening, monitoring for the code.

  Abby Newsham 5:59

  Research Organization will find this in the podcast archives.

  Chuck Marohn 6:06

  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.

  Abby Newsham 6:21

  All right, well, interesting.

  Abby Newsham 6:25

  With that alien talk. We didn't talk about the weather.

  Abby Newsham 6:28

  Hey, it 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 around structural issues driving housing costs and instead frames it as enforcement of fraud laws really being the villain. Chuck, I want you to maybe break down what the current situation is because, again, 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.

  Chuck Marohn 8:12

  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 everything Trump does is horrible or everything Trump does is great, this is probably not the podcast for you. I find all those things boring. I find the mortgage fraud part fascinating, and let's focus on that. I shared three or four articles with you, and the first one that you alluded to was from the Wall Street Journal. But there's a New York Times article that I cut out and put in my "save this article and come back to it sometime" 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. 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. Before that, if you were going to get a mortgage, it was going to be at a local bank, it was going to be a short term loan, it was going to have a big balloon payment at the end. Local banks operate very differently, with very different incentives and risk profiles than the national banks and backed by the federal government. In order to make housing quote, unquote, more affordable for people. It hasn't worked out this way, spoiler alert. In order to make it more affordable, the federal government went in to stabilize housing in the 1930s and created longer term loans, mortgage insurance, down payment assistance. Ultimately, after World War Two, the GI Bill, Fannie, Freddie, longer term debt, things like 30 year mortgages and the like. The idea was, we want to create an ownership society. 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 mortgage for your first house, and then have a place in Lake Tahoe that we're also going to federally subsidize. For the Federal stuff, there's size limits on this. Basically, we have said, "We want people to own homes, so we're going to create a financial track for owning homes, that we're going to give preferential treatment to along the way. Then we're going to have another track for people who own investment properties and second homes and all that stuff." 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 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 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 their only home, or their primary home. And so basically, 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 residence. You have one primary residence. 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. 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 or the administration would like, Lisa Cook, who is a Fed governor, to be no longer a Fed governor. 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. I think we should say allegedly with all this. I'm not trying to make the case that they've committed mortgage fraud. I'm saying it's been reported that Adam Schiff, Ken Paxton, and Lisa Cook all have multiple homes listed as their primary residence, and that is the definition of mortgage fraud. Does that make sense as an overall concept?

  Abby Newsham 14:34

  Yes, it does make sense as an overall concept. I guess my question is, 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 allegedly committing mortgage fraud. Is this something that people commonly do? And why are there not stop gaps to that or ways of checking? I don't know. 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.

  Chuck Marohn 15:16

  So you and I are recording this just before Labor Day weekend, and this will run after Labor Day. 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 colossally stupid online Twitter war with some prominent YIMBYs. I had written an article like 13 months ago, basically saying the mortgage market is full of fraud, and the higher interest rates go, the more problematic it becomes and the more likely that fraud is going to be exposed. And I wasn't making that up. I was actually quoting a report by the Federal Reserve. I can't remember what the percentage was, but it was not an insignificant percentage of mortgages that contained fraud, and this was a big deal. The Federal Reserve had said that. And so the argument I got in was basically like, "Why are you making such a big deal of 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 mortgage fraud impacts the housing market. And then let's talk about your question about how common this is. The Federal Reserve, by the way, has said it is 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, 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, giving people with lots of money the ability to get preferential financing and outbid people who have less money has basically the opposite of the filtering effect. There's a lot of people who say, "Well, go build luxury housing, because then 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."

  Chuck Marohn 17:42

  Yeah, but not if a football player claims it as their primary residence and outbids everybody, but it's not their primary residence.

  Chuck Marohn 17:50

  Yeah! Not if a federal, Federal Reserve governor or the Attorney General of Texas or whatever, wants to have a second home somewhere, or buy an investment property, or what have you, and uses the mortgage process to get preferential financing. Then you're competing against them, and that extra unit's not going to open up.

  Abby Newsham 18:16

  Pause really quick. 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 DC, and so they have a second home in DC? Or do you think that this is vacation homes and other types of properties?

  Chuck Marohn 18:37

  Yeah, 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. 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. 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 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. So let me walk you through how this happens.

  Abby Newsham 19:19

  It was nice knowing you, Chuck.

  Chuck Marohn 19:22

  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 said, "This is our primary residence." And when I signed my mortgage application, that was absolutely true. Like, 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? We were actually moving in.

  Abby Newsham 20:29

  Yeah, you were buying it as a primary residence, but you're not refinancing the last mortgage.

  Chuck Marohn 20:35

  We didn't go and refinance the last mortgage to essentially be market rate, not this preferred rate kind of system. And so I think in a very technical sense, or in a very coarse sense, 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 at both points, we were answering the application process honestly. But you ended up in a situation where the 30 year mortgage market didn't reflect reality. It didn't reflect the risk that 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 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? If this were financed locally, and it had to roll over every three to five years, 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.

  Abby Newsham 21:58

  But that's got to be really common.

  Chuck Marohn 22:02

  Super common, yes.

  Abby Newsham 22:03

  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 property? I'm sure they are, but are they asking you to refinance it? Does your bank get flagged? Does the lender flag that? I'm just curious about process, because I own a house, and I've never been told that. 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.

  Chuck Marohn 22:47

  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 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, I really have no incentive to push you on that. 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 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. I'm not going to say anything despairing about bank originators, but they're sales people largely. They have 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 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. Like, the incentive there is to make your loan go through as quickly as possible with as few hang ups as possible. Does that make sense?

  Abby Newsham 24:51

  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. Maybe their last house has a mortgage with a totally different lender, and the person who is originating that loan, unless they're required to, doesn't really have an incentive to say, "Hey, you need to refinance the loan you had before."

  Chuck Marohn 25:21

  No incentive and no requirement to.

  Abby Newsham 25:24

  Maybe, from their perspective, it's like, that's not their institution's business.

  Chuck Marohn 25:38

  Okay. But here's the here's the thing. I agree, 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 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." If you know that I qualify for all the federal backing, as a local bank, 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. 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."

  Abby Newsham 27:02

  Yeah, it's like commercial investment.

  Chuck Marohn 27:05

  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. Those securities were bought by banks and pension funds and all kinds of things that are like, "Hey, I've got a mortgage backed security now, it's 1000 different loans, including 1/100 of Chuck Marohn'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 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, all of a sudden now there's an underlying risk profile in the entire foundational product, mortgage backed security, in our market, with a much higher risk profile than anybody imagines or understands.

  Abby Newsham 28:24

  So then let's talk about why this is so common, and why this apparently is happening across our government. I would imagine it happens beyond just government officials, if it's popping up this much.

  Chuck Marohn 28:41

  It happens all the time. I think 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. And while that's the life that most people live -- I mean, I don't have a second home. I don't know if you have a second home, Abby. I suspect not.

  Abby Newsham 29:08

  No, I don't.

  Chuck Marohn 29:09

  Most of us don't 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. You know, ultimately, that's what I did, even though there was a little bit of overlap between when 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 the edge cases are starting to become bigger players in the system. They're starting to become more consequential and more meaningful. You have lots of baby boomers who have saved up and bought two houses. You have a lot of more affluent people who are owning multiple homes, that's just a part of the experience. You have people who are buying homes as investment properties. And I know that the YIMBY crew doesn't like when you talk about that, because that gets into some of these supply side issues. But you know the reality 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 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 say, it's not Monte Anderson. I love Monte 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 the incremental developer that we talk about probably most often. It was not Monte 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 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 as your primary residence." I'm listening to this, and I'm like, "Wait a sec, this person is teaching us how to commit mortgage fraud."

  Abby Newsham 31:38

  Yeah. That's terrible.

  Chuck Marohn 31:41

  It's terrible, but yet, look at it from a standpoint of "what's the greater good?" 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 not trying to cast 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, you get all these weird distortions. And people who are just like, "I'm focused on zoning" or "I'm focused on single staircases," 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 mortgage insurers, and you basically create this utility around the housing finance system, you are going to get very weird outcomes. One of them is that housing is not going to reflect supply and demand, and it's going to become broadly unaffordable.

  Abby Newsham 33:14

  So what do you think the intent here is in making this...I guess it's a political maneuver, but bringing this to light? I mean, is the intent to actually curb mortgage fraud in a meaningful way? Not that you can speak for what they're doing, but it's like, what's the plan here?

  Chuck Marohn 33:42

  At the risk of brushing up against politics for a second, let me make an observation. To me, what we have seen over a number of decades now, but particularly starting in 2016 up till today, is what I think would be called lawfare. 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 we warn people against visiting, but we see it now increasingly happening in our country. And you know, if you are a Republican, you can point to many cases where this has been done against Republicans, and if you are a Democrat, you can point to many places, and now an increasing number of places, where this has been done against Democrats. It's unsavory. I don't think any of them care, quite frankly, about mortgage fraud. I don't think the New York Times doing an investigative series on Ken Paxton the Attorney General really cares that he committed mortgage fraud. I think that they probably don't like Ken Paxton very much and this is an issue they could write about. 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 in the later one with Lisa Cook, they're going, "Wow, the big issue here is the lawfare against a Federal Reserve." So they have different sensitivities too, right? I think that mortgage fraud is endemic to our system. By endemic, I mean 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 things that we would otherwise talk about. If you say the speed limit on this road is 55 and everybody's driving 65, everybody's breaking the law. But the person who will get pulled over is the person who's driving 70. They won't pull everyone who's driving 65 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 becomes an easier target, because they don't have the same argument that, say, my wife and I would have that "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 in the 55 who owns eight houses that they're flipping all using the system, right? You get what I'm saying.

  Abby Newsham 36:55

  Yes, I do get what you're saying. This seems like a system where, if this was a problem that people really wanted to solve, there would be a way to solve it. I mean, it seems that there's a way to break down these incentives and to keep mortgage fraud from happening, but it just seems like it's a system that doesn't have those stop gaps. 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.

  Chuck Marohn 37:45

  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."

  Abby Newsham 37:52

  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, they're gonna pull all that. So 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.

  Chuck Marohn 38:21

  I think that would be the easiest thing, to say, "You only qualify for one 30-year mortgage." Here's the problem with that from a practical standpoint. We want more 30 year mortgages. Part of what happened in the run up to 2007, 2008, and the great financial crisis was that 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 security instrument that doesn't exist. It's not backed by any mortgages. It's not backed by anything. But it mimics the behavior of the one that is real. It's a synthetic one. Then we can create, out of that, all kinds of derivative products." 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 and no job history the big, huge loans, 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 that's 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."

  Abby Newsham 40:45

  Yeah, exactly. That's kind of the question I'm asking. It seems solvable, and it's not being solved.

  Chuck Marohn 40:56

  This is the essence of "Escaping the Housing Trap," the book that Daniel and I wrote. 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. If you're about housing affordability, 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 the speculator or the investor to gamble on housing and pay more. 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 in your pension fund, that all of a sudden has become riskier because way upstream the profile of the properties have changed, you don't want to encumber that risk. 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.

  Abby Newsham 42:17

  I'm really glad that you broke all this down in the way that you did, because before today, I had not considered how mortgage fraud is constraining supply on the system and causing prices to inflate. I feel like that's just a whole new piece of this puzzle on housing that, again, sounds solvable, but sounds like a lot of people don't have an interest in solving.

  Chuck Marohn 42:49

  A year later, I don't think many of the YIMBYs that I was tweet fighting with last Labor Day know it either. So don't feel bad. 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 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. 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, literally, they did not understand the mechanics of how the market actually even worked. And these are the highest level regulators in the country. Who are, 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 so advanced that I'm not even going to pretend that I can even smell an understanding of what it is. So mortgage fraud is the easy stuff.

  Abby Newsham 44:31

  Well, maybe we'll leave it there. I hope 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. I want to explore this a little bit more. It's fascinating, and again, a little bit over my head, but I think I understand it more than I did when we started this conversation. All right, let's do the downzone, Chuck. What do you have for me this week?

  Chuck Marohn 45:03

  I could not decide. 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 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 putting them together with, like, the duct tape and baling twine of the time. They're going along and 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 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 Apple's relationship with China was problematic from a business standpoint, that it made them one of America's most fragile companies. This book took that intuition I had and amped it up to 100. 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 is really, really eye opening. 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. And you look at things like tariffs. I don't know if you noticed, but Tim Cook went and got his own Apple carve out in all the tariffs, and has really been doing everything he can to butter up to the administration, because even a modest tariff would destroy their business model. 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: the strange tales of a celebrated scientist, a rodent dystopia, and the future of humanity." The book is by Lee Allen Dugatkin. This one is about this scientist who would run these mouse and rat utopias to study overpopulation, and he would allow the universe to grow and then watch the collapse. 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 dialog of overpopulation, and what have you -- I think, a dialog that is still with us today, despite, I think, some of the evidence not correlating with reality. For anyone who is interested in the intersection of science and culture, this was a fascinating insight into how scientists often don't make the best cultural interpreters of their work. So, yeah, I mean, this was super fascinating book.

  Abby Newsham 49:00

  I thought the third one was going to be a children's book, not gonna lie.

  Chuck Marohn 49:08

  Well, the guy worked for the National Institute of Mental Health, which is abbreviated to NIM. And the actual book, "The rats of Nim," was inspired by his work. So, yeah. So if you have ever read "the rats of Nim," which is a children's book, you've read work that was in written by someone who worked collaboratively with this doctor and then was inspired to write this tale and others as a result.

  Abby Newsham 49:42

  Fascinating. Well, I don't have any books for you this week. I'm in the middle of doing some home renovations. I don't know if you've noticed, but I'm recording from not my home right now. There's loud noises going on in my house right now. So that's happening, kind of chaotic. Otherwise, I may have mentioned this in a different week, I don't remember. 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?

  Chuck Marohn 50:36

  Abby, I have watched the entire seasons of House like three times.

  Abby Newsham 50:43

  I knew it. Okay because 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 Sherlock Holmes structure of story, but medical mysteries, and 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 House, which I guess was just me until about a month ago.

  Chuck Marohn 51:12

  What season are you in?

  Abby Newsham 51:14

  I'm in season two. Season Two, I think, like episode 20 something.

  Chuck Marohn 51:20

  I have to say Season Four was my favorite. I feel like when they got to season four, they had to up the lunacy level, and it didn't lose its good writing and its interest until you get to like season seven. I think in season four, it still is really good, but it got crazy in a way that I found hilarious. So tell me when you get to season four, because I want to talk to you. I thought that was the most fun season.

  Abby Newsham 51:54

  I'm looking at the episode guide right now. Oh, you know what? So the last episode of season two, he has that crazy dream after he gets shot. So I'm in season three now. I think I'm on episode two of season three.

  Chuck Marohn 52:26

  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 pick some residents to work with House.

  Abby Newsham 52:39

  Oh, my God.

  Chuck Marohn 52:41

  It is hilarious. It is it is one part genius and one part hilarious, and it brings out kind of the craziness of the show in a really, really cool way.

  Abby Newsham 52:52

  So I'm about to bring this full circle, because the episode that I'm on, 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."

  Chuck Marohn 53:11

  There we go!

  Abby Newsham 53:14

  So that's my next episode. Great timing.

  Chuck Marohn 53:18

  I like how YouTube has got me figured out that it can sucker me in with House shorts. So, yeah, that's where I'm at.

  Abby Newsham 53:33

  That's awesome. 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 hooked, and I have been wondering if you are a fan of the show, and 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?"

  Chuck Marohn 54:10

  Can I give you one detail that I did not know until I had watched the entire thing?

  Abby Newsham 54:14

  Yes.

  Chuck Marohn 54:16

  Hugh Laurie, House is British. The entire show he talks as an American. And I had no inclination that that he was not actually having an American accent.

  Abby Newsham 54:36

  It's a great accent.

  Chuck Marohn 54:37

  Wild, great. I mean, he does it so well, it's crazy.

  Abby Newsham 54:43

  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.

  Chuck Marohn 54:54

  First time I heard him talk, I'm like, "Why is he talking in a British accent? Like, what is this?" And then it's like, no, that's great acting.

  Abby Newsham 55:04

  Yeah. Big fan, big fan. Well, nice to see you, Chuck, and hope to see you next time. Thanks for joining today.

  Chuck Marohn 55:14

  Thank you. Thanks for having me. Thanks for keeping everything going.

  Abby Newsham 55:17

  Of course. Well, thanks to your team for helping with the schedule. We'll keep it going. And thanks everyone for listening to Upzoned. Bye, Chuck

  Chuck Marohn 55:26

  Take care.

  Norm Van Eeden Petersman 55:31

  This episode was produced by Strong Towns, a nonprofit movement for building financially resilient communities. If what you heard today matters to you, deepen your connection by becoming a Strong Towns member at strongtowns.org/membership.

ADDITIONAL SHOW NOTES

• “Ken Paxton Claimed Three Houses as His Primary Residence, Records Show” by Pooja Salhotra, The New York Times (July 2025).

• “Mortgage-Fraud Accusations Are Trump’s New Political Weapon” by Gina Heeb and Brian Schwartz, The Wall Street Journal (August 2025).

• Chuck Marohn (Substack)

• Abby Newsham (X/Twitter).

• Theme Music by Kemet the Phantom.

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