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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Highlites for May 17th

PROPERTY INSURANCE:
Gov. Jeb Bush signed property insurance bill SB 1980 this morning, calling it a tough but necessary choice that he and others hope will keep coverage available in Florida. He acknowledged that it won't stop rates from going up in the short-run, but said there's ''really no other option.''

NATIONAL HOME PRICES:
The growth in single-family home prices in the U.S. continued to cool in first quarter 2006, but many metro areas are still showing double-digit annual gains, according to NAR. The national median existing single-family home price was $217,900 in the first quarter, up 10.3 percent from a year earlier.

HOUSING STARTS:
The U.S. Commerce Department reported this morning that the number of housing starts in April dropped 7.4 percent to a seasonally adjusted annual rate of 1.849 million units, the lowest level in 17 months and weaker than analysts expected.

OCEAN FRONT PROPERTY:
Despite the threat of hurricanes, prices for coastal property along the Gulf of Mexico and the Atlantic continue to climb, especially in Florida, because more Americans can afford to live there, according to real estate analysts.

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Market Watch

The second-home market may be solid, but economists point to three subtle signs that the overall housing market is cooling:
• The yearly increase in mortgage interest paid by households rose to 15.8% in the first quarter-a 24-year high-from 2005's annual growth rate of 14%, indicating that borrowers are using variable rate mortgages to afford costlier housing.
• The national homeownership rate slipped from 69.1% last year to 68.5% this year. "This decline in homeownership has occurred in the face of strong rental-to-condo conversions of apartment buildings, which have expanded the supply of owner-occupied units," says Jan Hatzius, chief economist at investment firm Goldman Sachs.
• The owner-occupied vacancy rate is rising sharply. At 2.1%, the current rate is the highest on record. Hatzius believes this over-supply of homes for sale has already pushed existing home prices downward, and that home price inflation will turn negative by the end of the year.

Closer to home, there are other signs of a slowing market. Jacksonville-based St. Joe Co., reported a 76% decline in first-quarter profit, which it attributes to sagging resort residential sales. In a company statement, St. Joe says speculators are "no longer a major demand element" in the Florida real estate market, and that buyers are taking more time to shop.

David Lereah, NAR's chief economist, agrees the market is settling but says job growth and a growing economy should offset some of the effects of rising mortgage rates. His predictions for the balance of 2006: Long-term mortgage rates will climb to 7% this summer and hold steady through December; existing-home sales will drop 6.4% to 6.62 million (after reaching a record 7.08 million in 2005); the median price for all existing home types will rise 5.7% to $232,200; new home sales will decline 11.6% to 1.13 million (after reaching a record level of 1.28 million in '05); and housing starts will fall 3.7% to 1.99 million (after reaching 2.07 million in '05).

HOME SALES:
In first quarter 2006, Florida's housing sector followed the national trend, demonstrating signs of a market adjusting to rising mortgage rates, higher inventory levels, and a better balance between buyers and sellers. Sales of single-family existing homes totaled 45,864 statewide during the three-month period, a decrease of 20 percent compared to the same quarter a year ago. The statewide existing-home
median sales price rose 20 percent to reach $248,000.

CONSTRUCTION COSTS:
Rising costs and a shortage of construction materials continue to dog the building industry in Florida and other states, leading to price increases for new homes and home remodeling projects, as well as higher rental rates for apartments and offices.

naples real estate

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Blips and Burbs about real estate for May 15th

EMINENT DOMAIN:
A bill that immediately limits the ability of local governments to condemn homes and other property for private redevelopment projects became law Thursday with Gov. Jeb Bush's signature.

SECOND HOMES:
A new survey of second-home owners by NAR shows that baby boomers continue to dominate the market, and minorities own a growing number -- more than one-in-ten. A surprising majority of respondents own multiple properties in addition to their primary residence.

Minorities own 11% of second homes-up from 6% in 2002, according to a new NAR survey.

What's more, about six in 10 respondents own two or more homes in addition to their primary residence, and a majority are interested in purchasing additional homes. An analysis of U.S. Census Bureau data shows there are 6.8 million vacation homes in the U.S. and 37.4 million investment units in addition to 74.6 million owner-occupied units. "We've always known that a certain segment has invested heavily in the rental market, and some people earn their living simply by holding and managing investment property," says NAR President Thomas M. Stevens. "What we see now is a crossover between largely vacation and investment homeowners, with people recognizing the value of those investments and pouring more assets into real estate."

MORTGAGE RATES:
Rates on 30-year mortgages edged down this week, the first decline after six straight increases. Mortgage giant Freddie Mac reported Thursday that rates on 30-year fixed-rate mortgages averaged 6.58 percent.

HOME INSURANCE:
Even though the insurance industry paid out billions last year in hurricane claims, insurers, as a whole, are going into the 2006 storm season riding a wave of tidy profits. Allstate, for example, had $1.55 billion in hurricane-related losses but still rang up a 26 percent profit for the year.

State Farm Insurance Co., the largest home insurer in Florida, is seeking to boost premiums by an average of about 70 percent. If approved by state regulators, the increase would be effective Aug. 15. Coverage costs for mobile homes will almost double, and about 1,500 policies held by condominium complexes will be canceled.

MOVING ON DOWN:
Seniors leaving their long-time homes for a smaller apartment or assisted-living unit now have access to companies that manage all aspects of the move. These moving specialists handle everything, including helping the homeowners choose the furnishings and belongings they will keep; donating excess belongings to charity; purchasing new furniture; and even decorating the new digs to look similar to their old house. Transitional Assistance and Design in Gaithersburg, Md., and the national Moving Solutions franchise are examples of such firms. Though the exact cost varies based on location and services performed, most charge hourly fees of $65 to $125. They believe their services are worth it, as seniors often are too emotionally tied to their homes to make the transition on their own. "We are objective, we're not family," says Sue Ronnekamp, founder of Austin-based Living Transitions. Older children generally provide financial assistance, as they may be too busy with work and childrearing to help their parents make the move.

Source: Washington Post (05/11/06)

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Today's Interesting Real Estate News

HOUSING OUTLOOK:
The housing market is settling but should experience its third best year in 2006, with job creation and a growing economy offsetting some of the effects of rising interest rates, according to NAR.

PROPERTY INSURANCE:
Southern Family, Atlantic Preferred and Florida Preferred, subsidiaries of Tampa-based Poe Financial Group, have yet to present a plan to recover from a $2 billion hit in 2004 and 2005 hurricane damage claims. Yesterday, the state asked a judge to liquidate the companies.

NATIONAL HOUSING MARKET:
Economists are pointing to several subtle signs that the housing market is cooling, including a dip in the homeownership rate to 68.5 percent this year from 69.1 percent last year, and the rising owner-occupied vacancy rate, which is the highest on record at 2.1 percent.

BUYERS MARKET: THE RIGHT APPROACH:
Homebuyers are getting the big breaks in an increasing number of U.S. markets, says Tom Early, president of the National Association of Exclusive Buyers Agents. But even as the market shifts to favor buyers, to get the best deal, buyers should take the right approach. Some advice from Early:
* Tell your buyers to stifle the guilt. Remind them, if the shoe were
on the other foot, the seller would show no mercy.
* Be patient. In slow-moving markets, it is sometimes a good bet to
simply wait until a seller sees the light and drops his price.
* When a seller drops the price, it may be a signal that he is facing
a deadline and will negotiate still more.
* Take advantage of a buyer's right to a home inspection. The buyer
may find an issue that can be used to his advantage in gaining
concessions.
* Insults don't work. Wounding the sellers' pride in their home is never
a good tactic.
* Also, making a ridiculously below-market bid may shock the owners
into refusing to talk anymore.

Source: The Miami Herald, Ellen James Martin (05/07/2006)

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