Freddie Mac announced last week that it had unknowingly purchased mortgages with "unacceptable refinance practices." National City Mortgage, a customer of the GSE, discovered the tainted loans that were made through a California-based mortgage broker. Analysts said that this situation is a reflection of the post-refinancing wave environment where mortgage brokers have to keep origination volumes up, with some resorting to unethical practices.

"The lesson here is that as refinancings decline, brokers are under a certain amount of financial stress to boost their income," said Art Frank, head of mortgage research at Nomura Securities International. Frank added that both the mortgage banks and the GSEs should carefully scrutinize the loans that they purchase. Frank added that in this particular case, prosecutors could help to the extent that fraud was involved and the civil court system could also help in correcting the situation.

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