By Kevin Chiu
Government efforts to stabilize the financial system have kept interest rates low, and bought up more than $1.4-trillion in mostly failed mortgage-backed securities. But widespread fraud and other government efforts may already be driving the development of another housing bubble.
The FBI says mortgage fraud is still at epidemic levels, which may be fueling the development of local bubbles. Government backed low interest rate mortgages offered by the Federal Housing Administration (FHA) are showing signs of wide abuse by home buyers. The Internal Revenue Service is investigating an estimated 100,000 to 350,000 tax payers who may have cheated taking the first time home buyers tax credit.
The U.S. government is in unchartered territory as it moves to stabilize the economy through quantitative easing and is proceeding through a play book of moves to right the worst economic downturn since at least the Great Depression.
The arsenal of moves the Fed and Treasury department are using comes from historical observations by Fed Chairman Ben Bernanke and presidential advisors. The Fed is trying to unwind the crisis gradually. However, if housing prices continue their decline in the majority of the country as forecast it is likely advisors will have to deal with a new national bubble.
The sort of bubbles that developed following the U.S. Savings and Loan scandal in 1993-1995 were in smaller communities scattered throughout the country, including Spokane, Washington, which didn’t see a major bubble during the S&L crisis. Smaller regional bubbles like Spokane’s may already be developing and are demonstrated by housing inflation isolated to their communities.
“Mortgage fraud has been a crime of opportunity,” said Merle Sharick of the Mortgage Asset Research Institute (MARI). “Now it’s become a crime of necessity.” MARI developed the Mortgage Industry Data Exchange as a weapon to defend against mortgage fraud.
Low downpayment FHA loans aren’t the only mortgages that are being tapped for fraud. Veteran Administration (VA) and the U.S. Department of Agriculture’s rural home loan program are also being eyed by investigators as mortgages that have been used by borrowers to fraudulently obtain financing.
Federal investigators are looking into a series of schemes that victimize home buyers and businesses, including low income families and real estate investors, who are being saddled with over-inflated mortgages in growing numbers.
The IRS says that that some of the most common types of fraud include property flipping, double sets of closing statements and fraudulent qualifications.
Flipping property is legal in most circumstances when a buyer pays a low price and then resells it quickly, but is illegal when false statements are made to a lender.
Double settlement statements reflect the accurate selling price of a home on one of the statements, while a second set is given to the lender showing an inflated selling price helping to trigger a local housing bubble. The lender provides the loan in excess of the real value and the proceeds are divided among the conspirators. In the case of fraudulent qualifying, unethical real estate agents and loan brokers assist buyers who would not otherwise qualify by fabricating their employment or credit histories.