Could Bank of America's fraud case benefit mortgage borrowers?

Q: I read that the Feds are now suing Bank of America for mortgage fraud. I got my mortgage through BofA; could I potentially get anything out of this?

A: Probably not, unless you also happened to invest in mortgage-backed securities issued by BofA as well.

The latest lawsuit pertains to an alleged fraud in the sale of securities backed by mortgages, not to the mortgages themselves. The Justice Department alleges that while the securities were sold on the basis that they were backed by prime mortgages, some 40 percent of those loans did not meet the bank's underwriting standards.

While ordinary mortgage borrowers may not have anything at stake in this case, it could have implications for the future of new home loans and refinancing loans.

A central issue in this case is the securitization of mortgage debt. That means bundling several existing loans together and selling them off to third parties as securities. The owners of those securities then earn money from the interest and principal payments on those loans. However, if some of the loans go bad, investors in those securities get less than they expected.

When banks can securitize mortgage debt, it gives them the liquidity to make additional loans, which helps to make mortgages more widely available. The market demand for the resulting securities also helps to keep mortgage rates low. In short, securitization is good for the mortgage market, but the whole arrangement breaks down if mortgage lenders can't be trusted to represent the underlying loans accurately, or if the government finds it necessary to put onerous restrictions on securitization.

For these reasons, this case and current regulatory discussions about the securitization of debt will affect the future of the mortgage market. It's a fine line between holding banks accountable for their lending practices and discouraging them from making loans. The future availability of mortgages and the level of mortgage rates will be influenced by how well the government walks that line.

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