It is a myth that the high foreclosure rate is the result of interest rate resets. True, there is a coming tsunami of Options ARMS that will reach their maximum negative amortization, but it is not here yet. Early evidence suggests that somewhere between 40% and 50% will default immediately. But the real problem remains fraud, fraud and more fraud. First in subprime, now in Alt-A.

Buyers — many with Latino surnames — bought homes in new subdivisions in Watsonville for $600,000 to $700,000 with loans that didn’t require proof of income. In the industry, they were known as “no documentation loans.” Biancalana called them “don’t ask-don’t tell loans.”

Emilio Martinez, a private investigator running for City Council in Watsonville, said many Latino borrowers came to him claiming they had been cheated by their mortgage brokers.

But in reviewing the documents, he found that in a majority of cases, the incomes of the borrowers had been inflated to qualify for the loan. One example: a couple employed at a sandwich shop earning $35,360 bought a $628,000 home with 100 percent financing and no down payment.

It is interesting to me that the US, with its extreme religiosity, shows dishonesty on such a massive scale. Lenders are doing everything in their power to avoid recognizing this problem because it is a political and public relations disaster. Also, in many cases, the lenders were guilty of at least turning a blind eye. Although some went even further. Remember the art department? It should be no surprise that extending even more credit to allow borrowers to bring their payments current just puts off the problem.