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How Will a Crackdown on Loan Fraud Change the California RE Market?

An article in the American Chronicle on loan fraud gives a good overview of the various methods that have been used to fuel the “housing boom.”

Bernanke spoke this week about cracking down on lenders – and I think the area of particular concern are the income-stated loans, known affectionately as “liar loans.”

If indeed there is a crackdown on this type of loan fraud (where a cashier at a grocery store claims a monthly income of six grand or the like), it has to change the California market dramatically, simply because very few people are left to qualify for 600K-plus loans in a state with about a 50K median income. So we find ourselves with a catch-22 – as more fraud becomes obvious as defaults sky rocket banks are forced to cut down on liar loans, and hence, fewer buyers qualify, fewer houses bought, and the market has to begin to rebalance based on FUNDAMENTALS rather than phony appraisals and phony loan docs.

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