Mortgage fraud was rampant, US inquiry is told

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The FBI is investigating 2,800 cases of mortgage fraud, it was disclosed on the second day of hearings by the Financial Crisis Inquiry Commission in Washington.

Regulators and government officials testified that failures of oversight and gaps in the regulatory framework allowed rampant mortgage fraud to develop in the middle of the last decade.

"Many consumers have only a limited ability to understand details of standard mortgage contracts, let alone the complex mortgages that became common during this period," Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, told the bipartisan commission. "Unscrupulous mortgage providers capitalised on the widely advertised benefits associated with mortgage refinance, and took advantage of uninformed consumers."

Ms Bair, whose agency is responsible for protecting depositors, called for much more stringent regulation to protect borrowers, too. Mortgage broker fraud – and lies told by some borrowers themselves – contributed to the surge in mortgage defaults that began cascading through the financial system in 2007.

Eric Holder, the attorney general, testified that the number of mortgage fraud cases being investigated by the FBI has risen by almost 400 per cent in the past five years, to 2,800 case.

It also emerged yesterday that the commission will call Ben Bernanke, chairman of the Federal Reserve, and his predecessor, Alan Greenspan, to discuss how low interest rates and poor regulation of the mortgage industry by the Fed could have contributed to the crisis.