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Yesterday, Federal Reserve Bank chairman, Ben Bernanke, vowed to crackdown on mortgage loan abuses. Although Identity Theft may have played a role in Mortgage Loan abuses, other factors have also contributed to rising delinquencies. In a previously published article, we emphasized that despite a substantial increase in Mortgage Fraud Suspicious Activity Reports (SARs) from 1996 to 2006, as published by the Financial Crimes Enforcement Network (FinCen), Mortgage Loan Fraud SARs for 2006 comprised less than 0.1% of total mortgage applications for the year. In addition, FinCen discovered that less than 1% of all Mortgage Loan Fraud SARs were characterized by Subprime Loans.

Nevertheless, once Mortgage Loan Fraud occurs, Identity Theft and Identity Fraud do seem to be significant contributors. FinCen concluded that as much as 3.9% of Mortgage Fraud is characterized by Identity Theft, and as much as 23.12% is characterized by Identity Fraud (as implied by a random sample of 1,054 narratives). To remind our dedicated readers, Identity Theft is characterized by the assumption of someone else's identity, while Identity Fraud is characterized by the misrepresentation of some data underpinning one's identity ( such as using someone else's social security number, but not someone else's name).

Bernanke identified some contributing factors to rising mortgage delinquencies such as loan flipping. Most importantly, Bernanke emphasized that additional pain may be felt in the housing market, with delinquencies and defaults continuing to rise, as adjustable-rate mortgages reflect current interest rate levels.

This would suggest that a contributing factor to rising mortgage delinquencies can be traced to the fact that some home buyers should not have qualified for loans approved. In many cases, individuals were approved based on their ability to meet initial monthly payment requirements, with no consideration of how such adjustable payments may increase in a rising interest rate environment. Such short sided affordability analysis is also exacerbated by the fact that when interest rates rise, property values may also drop due to lower demand. Hence, individuals who committed to low up-front mortgage loans, expecting to possibly sell their property in a few years, suddenly face rising financing costs, and declining property values, making it difficult to sell their property without incurring an equity loss.

When the dust settles and hearings are concluded, it would make sense for the mortgage industry to start qualifying home buyers based on the prevailing long term fixed rate of interest, rather than short term interest rates. The industry can also stipulate that every adjustable rate mortgage must be convertible to a fixed rate mortgage, and that applicant eligibility must be evaluated based on ability to make payment as implied by fixed rate convertibility. In addition, practices such as "no/low money down", "no doc loans", etc... have to be addressed.

Despite the fact that Identity Theft and Identity Fraud have played a role in rising Mortgage Delinquencies, such role is minor. The major contributing factor to rising Mortgage Delinquencies is lax lending practices, rising interest rates, rising housing supply, and falling housing demand.