Does mortgage fraud pose a danger for the recovery

It is well known that the current economic crisis was triggered by bad loans in the sub-prime mortgage business. Lenders were granting mortgages to house owners more easily to those with previous bad credit ratings or to the individuals who could not comfortably afford the re-payments. When 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 whole thing snowballed.

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

Because of the direct and strong link that the housing market has with the economy, mortgage fraud poses a very real threat to the possibilities of a full economic recovery.

Mortgage fraud entails one or more of the parties involved in a house purchase giving false or misleading information. It might be information concerning the property itself or concerning the ability of the borrowers to repay the loan however 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 instance, a person with a house worth $100,000 might use deceitful means to persuade the buyer and lender to buy the property for $300,000. This instantly leaves the borrower in negative equity because irrespective of what they may have paid for it, the property is still only worth $100,000. The borrower then has only two choices: to remain in the house, taking another property out of circulation on the market or selling at a loss.

These over inflated costs even mean that it's harder for people to purchase homes, once more contributing a negative issue to the market overall.

One more case of mortgage fraud is when a ‘buyer’ purchases a house making use of a false persona. The fake buyer agrees to buy the house and applies for the mortgage, once the mortgage is approved; the seller offers 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 might generate bad loans which in turn, lead to restricted flow of money. This will have an adverse impact on the chances of full economic recovery because at the moment the economy needs as much money circulating 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 cause a panic. As demonstrated with the sub-prime loan problem, a bad situation may snow ball into a disastrous state of affairs which means that mortgage fraud poses a very real threat to lenders and the economy in general.
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