On both the consumer and corporate sides of the coin, fraud has truly begun to stain the mortgage market. However, federal investigations and new regulations, measures are underway to bolster a bedrock of our economy to return it to the productive and structured state in which it once operated.

The Federal Bureau of Investigation announced yesterday they have begun investigating four past giants of the mortgage market for their possible role in the collapse of the industry. Fannie Mae, Freddie Mac, AIG, and Lehman Brothers have been added to the list of 26 corporate lenders currently under federal investigation. The FBI’s investigation comes on the heels of the government’s proposed $700 billion bailout. According to federal officials, the investigation will focus on “financial institutions and the individuals that ran them.”

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Last week was one of the most tumultuous weeks the financial markets have ever experienced. If you’re looking for a free tool to guide you through the latest financial developments, and explain to you where the markets may be headed, be sure to subscribe to HSH’s weekly financial newsletter Market Trends. The latest issue, Mortgage Rates and New Market Realities, goes though each of the markets’ latest developments, from Lehman filing for Chapter 11, to the doubling in LIBOR rates:

September 19, 2008 – Just a week after announcing that Fannie Mae and Freddie Mac won’t go out of business, cascading changes in financial markets left Federal regulators with no remaining appetite for the machinations of the private sector. The agonizing writhing and twisting of markets saw the failure of Lehman Brothers, the announced sale of Merrill Lynch to Bank of America, and the need for an $85 billion stabilization plan for AIG, a huge insurer.

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Only a few hours into the first trading day after Wall Street lost two of its oldest financial institutions, and investors are reacting typically to a very uncertain situation. Investors are making a “flight to quality,” pulling their money out of riskier investments and parking their funds in safe, low-yield investments like Treasuries.  “This is the normal course of action,” said HSH Vice President Keith Gumbinger. “People are not investing, they’re parking their money until they know what’s happening.  It’s defensive positioning:”

Individual investors should sit on their hands right now, said Matthew McCall, president of Penn Financial Group LLC, a registered investment adviser.

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As deals from Barclays and Bank of America fell through to purchase Lehman Brothers over the weekend, the 158-year old company was forced to file for Chapter 11 bankruptcy protection early this morning:

Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.

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The bailout of Bear Stearns occurred on a Sunday evening. The takeover of Fannie Mae and Freddie Mac was announced late last Sunday morning. The latest news about a potential buyer of Lehman Brothers said it could happen as early as this weekend. Why are most of the major financial developments announced over the weekend?

The simple answer is you never want to risk panicking the markets on a Monday. It’s much easier for regulators to strategize and plan when the stock market is closed and quiet. Developments that formulate over the weekend have more time to be planned out without the potential flux of the stock market to worry about.

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The Federal Reserve and the Treasury Department are “actively helping” Lehman Brothers search for a buyer, a deal that the government hopes will happen this weekend, according to the Washington Post. Before you get too worked up, the Fed and the Treasury Department are searching for a private buyer for Lehman, one that does not involve taxpayer support. One possible scenario could involve multiple buyers which would take control of different parts of the company.

Unlike Bear Stearns, which suffered heavy losses when investors stopped investing in them, Lehman has been the victim of their own investments in real estate and mortgage backed securities. Although the government fully participated in the acquisition of Bear Stearns as well as the takeover of Fannie and Freddie, the same will be highly unlikely for Lehman Brothers: Read the rest of this entry »

As most of you already know, Lehman Brothers have been in the midst of a nose dive for some time now. According to Reuters, Lehman stocks fell as much as 46% on Thursday. On Wednesday Lehman announced a record third-quarter loss of $3.9 billion. Continued bad news and reports have only served to send customers and investors running.

If Lehman is not shopping for a buyer, they should be. But, it begs the question — who is willing, or better yet able, to buy Lehman much the way JP Morgan purchased Bear Stearns with help from the government?