A research phase would be the best way to describe the state of affairs in my office these days. Mortgage fraud statistics are dynamic, moving targets. Many of you want to know the truth about mortgage fraud, but find it difficult to stay informed. The data is available, but is distributed in fragments, in numerous reports, studies, publications, and news articles. I'd like to share some of the core definitions and facts with you.
Definitions
Mortgage Fraud: Any material misrepresentation in a loan application that influences a mortgage lender to approve an application ... that would have otherwise been declined. The term material misrepresentation includes information that should have been disclosed to the mortgage lender, but was intentionally withheld.
Subprime Mortgage Lending: The practice of offering mortgage products with an interest rate and cost structure determined largely by borrower credit history. A subprime mortgage is often evidenced by adjustable rate and prepayment features and higher than normal points and origination fees.
Early Payment Defaults: Mortgage loans that become delinquent by more than 60 days in their first year.
Facts
- Subprime mortgages accounted for more than 50% of foreclosures initiated in the 4th quarter of 2006.
- The incidence of reported mortgage fraud was 30% higher in 2006 than in 2005.
- Employment, income, and occupancy comprise the 3 most misrepresented categories in mortgage loan packages.
- A lender is unlikely to order a review appraisal to verify appraisal fraud when another form of misrepresentation is verified.
- There's a direct correlation between the fees and points charges by a mortgage broker and the incidence of misrepresentation in a mortgage loan package.
- A mortgage loan based on an application containing misrepresentations is 5 times more likely to default in the first 6 months than a mortgage loan based on an honest application.
- Less than 10% of mortgage brokers are responsible for 100% of Early Payment Defaults.
- The probability of default is estimated to be 6 times higher for a subprime loan than it is for a prime loan.
- It's estimated that mortgage lenders lost upwards to $3 billion in 2005 because of mortgage fraud.
- According to federal authorities, 80% of mortgage fraud is initiated and facilitated by real estate industry insiders.
- Mortgage fraud was 10 times more pervasive than credit card fraud in 2006.
A Couple of Thoughts
There's a great deal of information in this post even though it's relatively short in length. There is a direct correlation between subprime lending, mortgage fraud, and foreclosure statistics. I'm not opposed to subprime lending. To the contrary, I am it's greatest advocate when practiced responsibly. Lender accountability is the key.
Federal Reserve Chairman Ben S. Bernanke recently voiced his thoughts concerning mortgage fraud prevention. Bernanke suggested that effective disclosures are the first line of defense against lending improprieties. I happen to agree. A well informed consumer is in a much better position to make decisions in their own best interest. Written disclosure is not the practice of law unless a particular point of view is advocated. Don't be afraid to warn consumers that mortgage fraud is punishable by jail time and other serious consequences. How will they know, if you don't tell them?
My suggestion: Paper your files with disclosures, prepared by you and signed by borrowers, to clearly explain anything unusual about a real estate transaction or loan product. What should you disclose in writing? Anything and everything that bothers you or makes you think twice. Don't rely on the lender or title company to prepare disclosures. When litigation rears it's ugly head, you'll be grateful that these forms exist. Have your broker call me if there's any disagreement with this suggested practice.
Also, it should go without mention that real estate agents should avoid mortgage brokers with bad reputations. It's abundantly clear that the majority of mortgage fraud is being perpetrated, or possibly orchestrated in some way, by a relatively small number of players.
My suggestion: Refuse to do business with anyone who has a bad reputation in your city or town. I know who the bad guys are in Baltimore, you know who they are in Grand Rapids, Portland, or Orlando. This practice applies not only to mortgage brokers, but title companies, investors, and builders as well.
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Ed.. Good stuff.. If the market stays depressed the bottom feeders will come out and we will see lots of offers that are not quit legit floating around..