Washington, D.C.     Two years ago, when interest rates were low and housing prices were soaring, credit was easy to get. The strongest growth in the mortgage lending market occurred in subprime loans. Since then, interest rates have been rising and monthly payments increasing on newly popular adjustable rate mortgages, while property value declined. Now an estimated two million homeowners burdened by subprime mortgages are at risk of losing their homes.

By late spring of this year, the housing market had experienced its worst sales in 18 years; and foreclosures were up 47 percent compared to the previous year. The FBI reported that in less than five years, its investigations of mortgage fraud had increased by137 percent of which 80 percent involved agents, appraisers, mortgage brokers, loan originators, or bankers.

A misrepresentation of facts that alters a business decision such as the granting of a loan is fraud--a state and federal crime punishable by up to 30 years in prison and a $1,000,000 fine.  Mortgage fraud may involve overstating the borrower’s income, assets, or collateral; failing to fully disclosing the borrower’s debts and credit history, fictitious employment data, or faulty appraisals to increase the value of the borrower’s equity to make up for no downpayment. To conclude loan agreements, lenders may be tempted to allow such misrepresentations of the underlying facts.

This spring, U.S. Senators Dick Durbin and Barack Obama introduced a bill, known as the “Stop Fraud Act,” that would ratchet up enforcement of mortgage fraud and create a national database of brokers who have been disciplined. “Mortgage fraud and abuse are costing thousands of Americans their hard-earned life savings and their dream of homeownership,” said Senator Obama. “As the number of foreclosures skyrocket and the housing market becomes more vulnerable, we must establish stiff penalties to deter fraud and protect consumers against abusive lending practices.”

Senator Durbin lamented: “Too many people in my home state of Illinois have been victims of abusive, misleading, and confusing lending practices. It is time that legislators step forward with a federal definition of mortgage fraud.”  The Stop Fraud Act would allow bankruptcy courts to modify repayment terms on mortgages for primary homes. That could keep an estimated 600,000 hard-pressed borrowers in their homes while paying off their mortgages over longer terms and at a lower interest rate.

Durbin and Obama’s bill requires “a wide range of mortgage professionals to report suspected fraudulent activity, and gives these same professionals safe harbor from liability when they report suspicious incidents.”  The measure protects the rights of borrowers to challenge lending practices in foreclosure proceedings, particularly in cases of high risk loans when the borrower does not have the ability to repay at the contracted interest rate, when the true long-term costs are not clearly disclosed, or when the lender tries to impose unreasonable penalties.  The bill also remedies current law that makes mortgages on primary homes the only type of secured debt that is ineligible for bankruptcy protection, while owners of vacation homes and commercial property can modify those debts in bankruptcy court.

Here in Washington, one gets the impression that the Administration does not consider the troubles of the mortgage industry an urgent problem. In a reference to the mortgage meltdown, President Bush called the troubled housing market "challenged" but thought that the economy can "deal with it", "particularly if we keep the taxes low."

While under free enterprise conditions the state has no obligation to bail out a troubled mortgage industry, government does have a responsibility for closing loopholes in the legal protection of borrowers and lenders.