John W. Schoen Senior producer • Profile • E-mail

The federal government's multipronged response to the mortgage mess Thursday was intended to send a strong message to lending industry while helping to restore the trust of investors and consumers as the economy remains mired deep in a housing-led slump.

But it remains to be seen how effective that response will be in righting the upended financial markets and protecting home buyers from predatory lenders in the future.

Federal authorities announced the indictment of hundreds of housing developers, mortgage lenders and brokers, lawyers, real estate agents and appraisers around the country, while two Wall Street fund managers who sold mortgage-backed investments were arrested in a separate but related case.

“This operation is an example of our unified commitment to address this significant crime problem," FBI Director Robert Mueller told reporters at a press conference. "The FBI will continue to direct investigative and analytic resources towards mortgage fraud and corporate securities fraud that threaten our nation's economy."

The investigation is ongoing and also involves some 19 companies involved in mortgage lending, Mueller said. But Thursday's announcements underscored that the wave of mortgage fraud that swamped the housing industry and credit markets in the past few years was not the work of a few isolated bad actors.

“It makes clearer that the causes of the credit problems are very broad-based and can’t be put at the feet of one player,” said Mark Zandi, senior economist at Moody’s Economy.com. “And that everyone was involved to some degree or another — borrower, lender, investment banker — all the way top to bottom.”

Chip East / Reuters Ralph Cioffi was the second former investment bank Bear Stearns hedge fund manager arrested as a result of the investigation.

The arrests also heighten the debate over proposed legislation and regulatory changes that has been under way on Capitol Hill since the turmoil in the mortgage market spilled over to the financial markets last August. Opponents of tougher regulation and government housing relief maintain that the recent in surge in foreclosures resulted largely from unsophisticated borrowers reaching too far and getting in over their heads — and that taxpayer money should not be used to bail out those borrowers.

But proponents argue that lax regulation contributed heavily to the problem.

“You would think that in June of 2008, given what we knew in June of 2007 and June of 2006 that we would now have on the books very strong laws that would prohibit these kinds of activity,” said John Taylor, president of the National Community Reinvestment Coalition, which has been lobbying for such laws.

Even as the government was announcing criminal actions and calling for tougher regulations, Congress was debating a comprehensive housing relief bill that’s been in the works for over a year. The White House said Thursday that President Bush would veto the package as conservative Republicans worked to block the measure amid a scandal over cut-rate mortgages for senators.

Allegations have recently been made that Sens. Christopher Dodd, D-Conn., and Kent Conrad, D-N.D., got cut-rate home loans from Countrywide, a leading subprime lender at the center of the mortgage meltdown. Both have said they neither asked for nor knew about the special treatment.

The government’s response to the mortgage mess that has cost millions of Americans homes is following two major tracks.

One focuses on the process by which Wall Street packaged these loans and sold them to investors, offloading the risk that shaky loans would go bad. That effort brought the arrest and indictment of two former Bear Stearns hedge fund managers on conspiracy and securities fraud charges.

The collapse of two funds they oversaw last summer helped kick off the credit crisis that continues to weigh on financial markets and the economy. Prosecutors say the managers lied about the funds' prospects even as they privately voiced concerns about the funds’ viability.

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