mortgage

Fraud and foreclosures

WHITHER RATES: Bankrate's weekly rate survey is conducted today, with the results coming late this afternoon. I'm guessing that it will show that the 30-year fixed hasn't changed much since last Wednesday, when it averaged 6.03 percent.

By conducting the rate survey weekly instead of daily, we smooth out the hills and valleys. In the second half of last week, the 30-year fixed jumped around 20 basis points, then it fell back at the beginning of this week. Our survey won't reflect that two-and-a-half-day rise.

Last week's rate jump was accompanied by a decrease in mortgage applications. The Mortgage Bankers Association says applications fell 14.2 percent from the previous week, and were down 3.2 percent from the same week a year earlier, when the average rate was a quarter-point higher.

FRAUD AND LOSS MIT: Paul Jackson, of Housing Wire, looks at today's lousy foreclosure-prevention efforts and says that the problem lies in plain sight: Fraud was rampant during the go-go years, and dishonest borrowers aren't seeking relief for fear that they'll land in trouble.

Jackson read the same report that I commented on yesterday -- the one from the State Foreclosure Prevention Working Group -- and focused on a different facet of the problem. He notes that, of the subprime mortgages that are about a year away from their first rate reset, 28.5 percent are already delinquent.

"That sort of failure only happens when you're talking about rampant, across the board, pervasive fraud -- fraud that is as hopelessly intertwined with the borrower who didn't know or care what terms came with their mortgage as it is with the lender who decided to make the loan because investors were willing to buy it," Jackson writes.

He adds that this is why so many borrowers aren't trying to get workouts such as rate freezes. "What incentive do they have? Offering strong and credible proof that they were party to mortgage fraud?"

Many borrowers exaggerated their incomes so they could get approved for mortgages. Jackson and I believe that inflated incomes were more of a problem with Alt-A than with subprime loans, but they indeed were an issue for both types.

The theory is that when these borrowers call their servicers and ask for a workout, and the servicers ask for proof of income, the borrowers know that if they fax in the documents, they will incriminate themselves. The servicers will say: "Wait a minute. You said in 2006 that you earned $75,000 a year, but your tax records show you made $40,000. Please explain." And the truthful explanation is that the borrower lied, then signed the application that said, on penalty of perjury, everything on the application was true. So the borrower ceases contact with the servicer and lets the mortgage go to foreclosure.

Jackson ends with wise injunction that this situation is complex. As he points out earlier in his piece, it's all too easy to villainize Fannie and Freddie for imposing stricter lending limits that squeeze first-time buyers. Things are much more complicated than that. For example, those stricter lending guidelines are a rational response to the dishonesty and stupidity of the boom years of 2003 and into 2007.

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