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Mortgage Fraud Crackdown A Good Sign for Industry’s Future

What’s striking about recent mortgage news is how much of it is dominated by stories about investigations and indictments related to mortgage scams. Federal authorities have announced a nationwide crackdown, and local authorities have been active in many communities as well.

There were other, less dramatic stories on the mortgage front:

These other stories are worth reviewing, but ultimatly they are best put in context by the crackdown on mortgage scams.

No Breakthroughs on the Mortgage or Housing Fronts

It is increasingly clear that mortgage rates are responding to inflation, and there is no easy answer to that problem. The Federal Reserve does not control mortgage rates, and members of the Fed are beginning to recognize that the extent of earlier moves to lower the federal funds rate have probably added fuel to the inflation fire. Naturally, higher mortgage rates discourage mortgage borrowing, and this was reflected in mortgage application activity for the week ending June 13, 2008. Mortgage application activity for the week declined 8.7%, dampening optimism from the prior week’s increase in activity. 

As for existing borrowers, rising mortgage rates increase the urgency for them to refinance or renegotiate their mortgage terms if they are having trouble meeting their monthly payments. The latest initiative by the Hope Now Alliance calls for a speeding of response time from lenders to borrowers who have applied for mortgage relief. The Hope Now Alliance has been criticized for not doing enough, but perhaps it is appropriate that their latest action is procedural rather than anything more substantial. There is no magic pot of gold that is going to bail out home owners who are in over their heads, so the best that can be done is streamline the process for helping those trying to find a way to pay. 

Meanwhile, the housing bill was delayed by a mortgage controversy in the Senate. Two Senators allegedly received favorable mortgage rates from Countrywide, and some want to investigate whether this has had an effect on mortgage regulation, including the pending bill. In some ways, the delay just underscores the limits on the government’s ability to solve this problem. There are certainly better controls that can be put in place for the future, but there is no quick fix for the current problem.

How Cracking Down on Mortgage Scams Helps

As for the crackdown on mortgage scams, this may seem like yet another sign of mortgage industry turmoil, but it is perhaps the week’s best piece of news. Mortgage scams ultimately cost honest borrowers by making it more expensive for lenders to do business. Also, as the extent of mortgage fraud across the country becomes apparent, it seems there is much more to the wave of foreclosures than just some home owners getting in over their heads. This won’t alleviate the amount of distressed properties being put on the market, but it may mean that the number of legitimate households at risk is actually less than the foreclosure numbers would suggest.

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