Friday, May 19, 2006

Mortgage Fraud

In yesterday's Inman News morning report there was an article on mortgage fraud. Those of you that know me, know that I want people to get a fair shake with their financing as well as a good price for either the sale or purchase of their property.

I wanted to share with you my thoughts on the subject, which I did share with the author of the article.

Dear Ms. Mara,

This morning's article in Inman News regarding Mortgage Fraud was most interesting (usually I say enjoyable).

I am a Florida Licensed Real Estate Broker and Mortgage Broker. Prior to entering the real estate profession my background was in Accounting and Auditing, a specialization in Accounts Receivable turn-arounds in the hospital industry. In the area of accounts receivable turn-arounds, I had to be familar with the Fair Debt Collections Practices Act as well as the Fair Credit Reporting Act. While in the role of Internal Auditor for a Greater Boston area hospital, I conferred with an agent within the Commonwealth of Massachusetts, Attorney General's office, Medicaid Fraud Unit, regarding silver recovery and its reimbursement. This led to 2 corporations and numerous individuals being indicted.

Being a real estate professional and with my background, I find that mortgage fraud will continue to plague the industry. Maybe, I am seeing only the 20% Fraud for Property/Housing. Here are my reasons:
1) The escalating cost of housing and the "American Dream" of owning your own home.
2) Licensure for real estate agents and mortgage brokers is much too easy. The requirements for licensure need to require a greater level of education, more than a high school degree as a prequisite for licensing and harder licensing requirements, such as more pre-licensing education and harder tests. This will result in better people and less people entering the real estate profession.
3) Lenders need to offer less loan programs, for example, stated income loans (I my humble opinion it is probably inflated income) and no doc.
4) Most lenders require an IRS Form 4506 at time of closing. Now, there is something that an underwriter or lender can request information and stop an inflated (aka stated) income mortgage application dead in its tracks. If they lie on their income tax return, is it possible that they would lie on their mortgage application?
5) Lack of educational programs in the real estate profession to identify mortgage fraud - wishful thinking on my part, due to the Privacy Act - but atleast a start. Where to report suspected mortgage fraud situations to the appropriate law enforcement authorities.
6) The credit reporting and scoring system needs an overhaul. Too often, I find errors on credit reports, where the creditor is not reporting timely or accurately information. For example, a customer settled in full his collection action in the later part of February '06. The collection agency in the later part of April is still showing a portion of the account as outstanding with a current date. Yes, they reported the payment, but did not remove the negotiated portion of the balance.
7) Lack of control points within the existing system.

What could possibly be done to reduce the mortgage fraud:
1) More checks and balances within the system to identify potential mortgage fraud situations.
2) More education for all real estate professionals - real estate agents, REALTORs, underwriters, lenders, etc.
3) Greater licensing requirements for all. And maybe licensing requirements where no licensing is required at this time.
4) Implementation of a "whistle blower" protection system and telephone hotline.
5) Proactive preventative action on the part of lenders.
6) a. Enforcement of the following from the loan application (FNMA 1003):
"Each of the undersigned specifically represents to Lender and to Lender's actual or potential agents, brokers, processors, attorneys, insurers, servicers, successors and assigns and agrees and acknowledges that: (1) the information provided in this application is true and correct as of the date set forth opposite my signature and that any intentional or negligent misrepresentation of this information contained in this application may result in civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Sec. 1001, et seq.; (2) the loan requested pursuant to this application (the "Loan") will be secured by a mortgage or deed of trust on the property described herein;.. (6) any owner or servicer of the Loan may verify or reverify any information contained in the application from any source named in this application, and Lender, its successors or assigns may retain the original and/or an electronic record of this application, even if the Loan is not approved; (7) the Lender and its agents, brokers, insurers, servicers, successors and assigns may continuously rely on the information contained in the application, and I am obligated to amend and/or supplement the information provided in this application if any of the material facts that I have represented herein should change prior to closing of the Loan; .. (11) my transaction of this application as an "electronic record" containing my "electronic signature," as those terms are defined in applicable federal and/or state laws (excluding audio and video recordings), or my facsimile transmission of this application containing a facsimile of my signature, shall be as effective, enforceable and valid as if a paper version of this application were delivered containing my original written signature."
b. Enforcement of the following paragraphs from the mortgage itself:
Borrower's Loan Application. Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of the Borrower or with Borrower's knowledge or consent gave materially false, misleading, or inaccurate information or statements to the Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower's occupancy of the Property as Borrower's principal residence.
Acceleration; Remedies. Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement in this Security Instrument. The notice shall specify (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument, foreclosure by judicial proceeding and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration and the right to assert in the foreclosure proceeding the non-existence of a default or any other defense of Borrower to acceleration and foreclosure. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may foreclose this Security Instrument by judicial proceeding. Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this Section, including, but not limited to, reasonable attorney's fees and costs of title evidence.
7) Better and possibly required education of prospective borrowers, so they can recognize the impact and identify situations.

Implementation of number 6 above will send shockwaves into the communities and cause the less desireable professionals out of business and awareness to borrowers. Many may agrue that this will be costly to the overall economy or lenders if foreclosure proceedings are needed, but in the long run there could considerable savings for all.

In summary, mortgage fraud may continue, until such time that the losses reach greater levels unless there is a proactive preventative overall program to curb it. Old country saying "you don't close the gate after the horse leaves the corral."


Question from Ms. Mara:
I've been told that stated income loans are referred to by some in the industry as "liar's loans," do you think they should be done away with?

My response:
LOL - I never heard that term used with stated income loans. Prefer the term inflated income because sometimes the borrower is not fully educated nor fully explained about the loan programs. This includes those wonderful option ARM's with the low rate of 1.0% or .95%. Just heard that about 4% of the mortgages are in arrears nationally and that some people that purchased within the past 2 years could face a situation where the market price of the property could be less than the amount owed on the loan.

Although no one has a crystal ball - someone with some common sense, during the rapid increase in property values should have tightened up credit for some borrowers or implemented a better system of checks and balances before making a loan. Could the horse be leaving the corral at this time?

With the Naples area, there is an area where 100% financing and the buyer's closing costs paid by the seller is very common. With some of the loans, there is a hard prepayment penalty of 5% for 3 years! Imagine the issues that some of those people will have to face, if they run into a bad financial stretch, relocate, or for any other reason need to sell.

You asked do I "think stated income loans be done away with?" I did not answer your question very directly - but there is a gray area that needs to be addressed - how does their stated income compare with their reported income per income tax returns or via some other independently generated documentation. Two other alternatives - credit scores above a higher than existing level or a margin above or below the reported income. Although we are discussing stated income loans (or "inflated"), what about someone that deflates their income? Question is "are they committing fraud to obtain a loan by under-stating their income?" Could this be where stated income loans really originated and for the purpose of wealthy people not having to disclose their true income?

Very interesting subject matter.



Ms Mara:
Yes, it's all very interesting! I never realized until I read your e-mail what a hardship a prepayment penalty could be. Do I understand correctly - means that if you pay the loan back before the 30 years are up, you have to pay a penalty, which means if you want to/have to leave the state for a new job or something, you have to pay a penalty?

My response:
First, there are 2 types of prepayment penalties:
1) hard prepayment - this is where regardless of a refi or sale of the property the borrower pays a prepayment penality
2) soft prepayment - this where the borrower pays the prepayment penality only if they elect to refinance.

The prepayment penality ranges from 1 to 3 years (3 years is the maximum that I have seen), not 30 years.

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5 comments:

Mack Perry said...

Glenn,

You have hit the nail on the head.
The biggest problem that I see in the mortgage industry is that loan originators are not held to the high ethical standards that REALTORS are held to. I believe that all originators should be liscensed and be held accountable by a higher authority. If they knew that they could very possibly loose their ability to feed, cloth and house their families by having their liscense revoked they may very well clean up their act.

While the article addresses inacurate information provided by a buyer, I feel that the other parties to morgage fraud should also be looked at. Appraisers have a large hand in fraud also, even if not intentional. Inflated appraisals are also inacurate information. Why does an appraiser want a copy of the contract before apprasing the property? Does the contract effect the value? I don't think so.

Mack Perry
RE/MAX Around Atlanta
www.mackperryhomes.com

Jade456 said...

Another reason why people should trust their realtor. Any legitimate realtor will be able to recommend a honest lender with whom they have a good working relationship and have used in the past. My wife, Jacqui will only refer customers for financing to our friend Sam. He has done all of our home loans and all of our relatives. I agree that there needs to be some kind of accountability. Any Joe Shmoe can be a mortgage broker.

Bob said...

Glenn,

Great points. I think Charles (jade) touched on a very important point and that is the role of the real estate agent. I routinely look over the shoulder of the lender, call them on Good Faith Estimates that are inaccurate or flat out too good to be true.

I have had numerous lenders get irritated, irate and, in a few cases, threatening because of my involvement. I think many agents just dont care and others dont want to rock the boat or risk a deal falling apart, even if it means doing what is right.

maria said...

Just a thought, If lenders offered less programs wouldn't that mean less buyers for the realtors? To just reflect a moment on the comment of originators not liking a realtors involvement with a client. That might have something to do with the fact that many realtors have incentive programs in place if they refer to their own "preferred lenders" and for the most part I think you would find that the originator is just trying to hold on to their client because they have probably already incurred costs as well as time. Not all realtors are ethical and not all brokers are as well. You have plenty of problems in your area of work as well as we do.
I personally have wonderful relationships with my realtors as well as my clients and know that not everything is perfect in any profession so therefore, I worry about myself and learn to work with others and hope that they are as honest and do their job just as well as we do and have the client in mind instead of their pocket. Like I said, just a thought. www.affordablehomefunding.us

Glenn M. Ginsburg said...

Maria,

There maybe less buyers for REALTORS. But at the same time the buyers will be better qualified and real estate transactions for all parties concerned will be less stressful.

Frankly, an "incentive program" for real estate agents by a mortgage broker or loan officer, may in fact be a violation of RESPA.

So, if a real estate agent is driving business to a "preferred lender" because of the "incentive programs" is exactly what needs to be eliminated from the real estate industry.

Over the few years real estate as a business has been a boom, as with any boom, less qualified and possibly those individuals with less ethics enter the business for the quick buck. When these individuals enter the business, we all suffer.

Just a thought - what are the socio-economic costs associated with those that are not honest? Frankly, I do not like ultimately paying the costs of someone else's unhonest and unethical practices.