Mortgage Fraud - Does This Pose A Danger For The Recovery

It is common knowledge that the current economic crisis was triggered by bad loans in the sub-prime mortgage business

. Lenders were granting mortgages to home owners more easily to those with previous bad credit ratings or to the people who could not comfortably afford the re-payments. While the economy dipped by just a small degree, this was the catalyst for debtors to no longer be able afford their loan re-payments and the entire thing snowballed.

Since so many banks had been hit by loans that were not repaid, the purse strings tightened and credit was no longer freely available. This affected not only homebuyers but even businesses and many businesses, when finding themselves without the capital required to operate, found themselves forced to close. Businesses closure increases unemployment meaning that more individuals have less money and we have a recession.

Mortgage fraud poses a very real threat to the chances of a full financial recovery due to the direct and strong link that the housing market has with the economy.

Mortgage fraud entails one or more of the parties involved in a house purchase giving false or misleading information. It might be information regarding the property itself or regarding the ability of the borrowers to repay the loan but whatever the issue, it could leave the lender with a bad loan.

One example of mortgage fraud might be using deceit to sell a home for an overstated price. For example, somebody with a house worth $100,000 may use deceitful measures to convince the buyer and lender to purchase the property for $300,000. This immediately leaves the borrower in negative equity since irrespective of what they might have paid for it, the property is still worth only $100,000. The borrower then has only 2 alternatives: to stay in the house, taking one more property out of circulation on the market or selling at a loss.

These over inflated costs also mean that it is harder for people to buy homes, again contributing a negative issue to the market overall.

Another case of mortgage fraud is when a buyer purchases a house using a false persona. The fake buyer agrees to purchase the home and applies for the mortgage, once the mortgage is approved; the seller provides a share of the money to the buyer. The buyer then disappears with the remaining money without making a single payment and the home goes into foreclosure.

As with the recent credit crisis, mortgage fraud could generate bad loans which in turn, result in the flow of money being restricted. This would have an adverse impact on the chances of full financial recovery since at the moment the economy needs as much money flowing as possible.

With the world still on tender hooks following the last crisis, the market can still be quite jump and any adverse statistics could lead to a panic. As demonstrated with the sub-prime loan problem, a bad situation may snow ball into a disastrous situation meaning that mortgage fraud poses a very real threat to lenders and the economy in general.

by: Cory Boatright

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