Subprime Lending Woes and Mortgage Fraud

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Today, the stock market dropped considerably over continuing concerns about the stability of the so-called sub-prime mortgage lending market. Discussing consumer sub-prime mortgage market woes, the Associated Press described recent lender problems as follows:

Investors, bracing for a wilting economy, fled the already deflated subprime mortgage sector on more news that lenders New Century Financial Corp., Accredited Home Lenders Holding Co. and General Motors Acceptance Corp.'s residential unit are facing financial problems. The Mortgage Bankers Association bolstered the belief that the struggles are widespread after it said new foreclosures surged to an all-time high in the last quarter of 2006.

Investors may have some serious concerns about these once high-flying lenders and may be in a position to demand accountability in certain circumstances. For example, shareholders may demand accountability if it appears that officers and directors of some sub-prime companies traded stock before public disclosures about adverse news affecting company stock prices. Moreover, adverse accounting errors allegedly contained in company financial reports may have artificially and fraudulently inflated stock prices for sub-prime lenders and have led to criminal inquiries into at least one company, the New Century Financial Corporation.

It remains unclear how the fallout from sub-prime lending scandals will affect the overall market for mortgages. However, finding a mortgage will likely become more diffiicult in the short term.