Mortgage fraud - could this endanger recovery

It is common knowledge that the recent economic crisis was triggered by bad loans in the sub-prime mortgage business. Lenders were providing mortgages to house owners more easily to those with previous bad credit ratings or to the people who could not comfortably pay for the re-payments. While the economy dipped by just a small degree, this was the catalyst for debtors to no longer be in a position to afford their loan re-payments and the entire thing snowballed.

Because 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 also businesses and many businesses, when finding themselves without the capital required to operate, found themselves forced to close. Businesses closure rises unemployment meaning that more people 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 implies 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 concerning the ability of the borrowers to repay the loan but whatever the issue, it might leave the lender with a bad loan.

One instance of mortgage fraud may be using deceit to sell a home at an overstated price. For example, somebody with a house worth $100,000 may use fraudulent means to persuade the buyer and lender to buy 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 only worth $100,000. The borrower then has only 2 choices: to stay in the house, taking one more property out of circulation on the market or selling at a loss.

These over inflated prices even mean that it is harder for people to buy homes, once more contributing a negative issue to the market overall.

Another case of mortgage fraud is when a ‘buyer’ buys a house making use of a false persona. The fake buyer agrees to purchase the home 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 house goes into foreclosure.

As with the recent credit crisis, mortgage fraud could generate bad loans which in turn, lead to limited flow of money. This would have a negative impact on the possibilities of complete financial recovery because at the moment the economy requires as much money circulating as possible.

With the globe 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 scenario which means that mortgage fraud poses a very real threat to lenders and the economy in general.
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