True Lies

In case you missed it, Ken Harney had a great article in the Washington Post at the end of September and anybody in the Real Estate Industry, especially mortgage professionals need to take note of what is coming down the pipe.

Starting last week, it just got a lot more difficult for borrowers to lie about their income on their mortgage applications.  The Internal Revenue Service has announced that it is overhauling a key income verification tool used by lenders.  It is now going to be much easier to pull up electronically a borrower’s confidential income tax information.  This new process will revolutionize and replace the current process that most lenders use to verify income, the IRS Form 4506-T. 

Most Lenders currently require a borrower to sign a form 4506-T at application and at closing.  This form allows the lender to request a copy of an applicant’s Income Tax Transcripts, in order to compare them to what is submitted at application.  In practice though, this process takes so long that most lenders don’t use it for anything more than auditing and quality control on their inventory of closed loans.

The new electronic process though will be quick, easy and affordable for lenders to get borrower’s income information from the IRS.  What used to take weeks, can now be obtained in as little as 2 days.

In the past the biggest problem facing the mortgage industry might have been predatory lending, but currently rampant mortgage fraud has dwarfed any other issues in the industry.  You can’t even open a newspaper or turn on the television without hearing about another case of fraud, and these are only the few that get crooks who get caught.  It is a problem from the top of the industry to the bottom.  Earlier this week, the Detroit News reported about a multi-million dollar fraud scheme that rocked Fifth Third Bank in some of Michigan’s priciest neighborhoods.  Banks are constantly changing their processes to help curb fraudulent behavior before it happens.

One of the most popular mortgage products these days is a loan known as a “stated income loan.”  When used properly, these loans can help a self-employed borrower or borrower with another unique situation qualify for a loan, but when used improperly, these loans encourage low or moderate income borrowers who live on a fixed hourly or salary wage to “lie” about their income in-order to afford a loan.  Many industry critics (I count myself in this group) have long urged that these “liars-loans” are the most significant factor to the current rise in foreclosures.

The FBI warns that mortgage application fraud is a multi-billion-dollar-a-year problem and falsified income tax filing, W-2s and pay stubs are a contributing factor.  The new electronic verification system could be huge in spotting and preventing mortgage fraud up-front.  But until lenders end or severely limit the process of stated income loans (read blatantly lying in order to get a loan) then we are still far away from fixing the growing mortgage problem in this country.