By Cesar Zambrano at ForexFraud.com

During the middle part of this decade the United State housing market was the talk of the town. Real estate was the asset for many investors to buy. Homes were appreciating at such a high rate that buying and selling homes within a few months created wealth for many. No one really understood at the time why so many could afford multiple homes. The homes were appreciating every day so loans were extended to most everyone who wanted to buy real estate as an investment. The assumption was that if the borrower stopped payment, the asset was going to be worth enough to cover the loan. Many of these loans were taken by those who really didn’t have a lot of money to afford multiple homes. The banks gave them a low interest rate for the first year, which made the investment home affordable.  When the rates reset a year later and the borrower still could not find buyers, his new higher interest rate become too much to pay. With no one willing to buy the home, real estate investors simply stopped paying mortgages. Some of these investors had three or four homes that they intended on flipping for profit. Investors knew they could not keep them forever, but obviously thought that the demand for housing would never subside. As the foreclosures started to go through the courts later in the decade, we began to uncover why so many were able to get loans that they couldn’t afford.

It all started with the mortgage brokers giving out loans to those who had no intention or didn’t have the funds to pay the loan off. These brokers were sometimes even convicted criminals. In states like Florida it was later discovered that an alarmingly high rate of the licensed mortgage brokers had prior felony convictions. Florida typically won’t allow prior felons to obtain business licenses without a thorough screening. During these years they simply gave licenses to anyone who applied. Any mortgage broker out there, convicted felon or not, was paid on commission from originating a loan. The more loans they gave out the more money went into their pockets. Banks at the time would not keep the loan with them, but instead sell the loan off into the secondary market. The mortgage market is quite large; however most mortgages are bought by government agencies, which were created to buy the loans from banks, so that the bank could create more loans to qualified homeowners. This whole concept of investors buying loans from banks was based upon the belief that banks had made the loans to well qualified borrowers with a steady job and money in the bank.

If the borrower had a solid job then he could make the monthly payments. If there was money in his bank account it gave the lender the ability to go after their funds if the borrower had to sell the house at a loss. Sadly enough, most of the banks never even checked if they had sufficient funds or a job. The fraud that occurred here was most likely the borrowers fault for falsifying information on their loan application. Lying about monthly income and assets on the application was the issue. But for mortgage brokers not to ask for proof of their income and assets was equally appalling.  The bank simply did not care whether or not they had the ability to repay a loan it created, the loan was sold the next day into the secondary market. Both the bank originating the loan and the mortgage broker profited so what was the reason not to continue this process? There was none, and over the course of a few years millions of loans were created without the banks ever asking the borrower for any of the required documents to prove their income. They later became known as NINJA loans, meaning: No Income, No Job/Assets.

The impact that these loans is having is quite sever. Since banks and investors got burned by so many bad loans, they are requiring tighter lending standards these days. You might have a decent job, but if your employment history is not long enough you might be turned down for a loan.  These tighter lending standards are helping drive down prices. The housing market that was once affordable to everyone because of easy money now has far less potential buyers that are able to access loans. This will create an inventory surplus. Simple economics will tell you that more supply will drive down prices. Buyers will be pickier and selling your home will be difficult because of all the competition. Depending on the region that you are selling in, the increased competition is in the form of bank properties that were foreclosed upon due to mortgage fraud. Foreclosed homes tend to sell at prices below other homes in the area. This is because they bank don’t want to own the property, so they lower the price below any other comparable home in the community to get it sold first. If there is more than one foreclosure in the community the banks are essentially competing against each other for buyers. This creates a scenario where both banks competing for buyers bring down the property values of the surrounding homes.

Not being able to obtain a loan will ultimately create some increased demand for rental properties. Everyone needs a place to live, if you cannot buy then renting is the only other option. Rents are reasonably low right now; so many potential home buyers consider this the better decision even if they can get a loan.  Recently investors have been buying up these foreclosed homes and renting them out. They are buying these homes at such low prices their return on their investment is far greater than what you would get from buying government and corporate bonds or from currency trading.  Any investor can compare the interest they would receive from holding currency versus the return they would receive from income producing property by contacting a currency broker and looking at their daily rates. Real estate also has tax benefits that wealthy investors would like to take advantage of.  These real estate investors are defiantly helping take supply off the market, however there are still more properties coming on to the market daily.

The mortgage fraud is even leading to the disintegration of certain neighborhoods. There are some neighbor hoods that have been so affected by fraud that over half the homes in the area are owned by the banks. These vacant homes lead to crime. Many homeless people live in them, as well as prostitutes and drug dealers. The banks are so overwhelmed by the amount of homes that they own all around the country, taking care of all of them is simply not possible. The influx of crime onto a community then leads to the depreciation in value of surrounding properties. No buyer wants to live in a community of criminals and homeless squatters. This leads to very little or no demand for the asset, causing others to stop making payments because the value of their home is far less than the amount they owe on the loan. There is also no demand for the home; buyers just don’t want to buy a house in a community like these.

Cities such as Detroit have even thought of tearing down sections of the city and restoring it to farm land. The land is worth more as a vacant lot with grass, than a half standing dilapidated structure. The idea of tearing down structures that are used for illegal activity is necessary if the city wants to improve going forward. The city needs the land to be used where it can have the highest value, so they can collect as much tax revenue as they can.  The falling home values started by the mortgage fraud have made the county tax assessors lower property values considerably over the past few years. The lost revenue then affects the county citizens who lose city services like police, fire and schools. There are many sad stories about what mortgage fraud has done to the communities and the people that live in them. We can only hope that as we all move forward into the future the banks are more prudent in whom they loan money to.