Mortgage Fraud: You got away with it...or DID you?

Recently, mortgage fraud is a hot topic on the Active Rain social network. Before the real estate bubble popped, it seemed that along with the rapid appreciation in the value of homes in Riverside County there was a depreciation in ethics. Suddenly things that seemed a matter of right and wrong became grey when you ...or did they?

Let the Hemet Home Loan Guy share a little about mortgage fraud from the perspective of a loan officer...but if you haven't read either of these two blog posts on mortgage fraud, do that first:

• You Want My Client to Do What? by Bryant Tutas
• Mortgage Fraud Thrives - The Players are the Same by Lenn Harley

Examples of mortgage fraud:

• A person misrepresents his or her income, employment history, assets or credit history to obtain a refinance or purchase loan.
• An employer falsifies the borrower's job history when a mortgage loan processor or underwriter calls to verify employment.
• A buyer or loan originator creates false documents such as bank statements, pay stubs, rental agreemtents or W-2s.
• A borrower applies to buy or refinance a home on behalf of someone else who can not qualify for the mortgage loan (called a straw borrower)
• An appraiser uses comps (or comparable sales) that are false, incomparable or innapropriate in order inflate the value of a property artificially.
• A mortgage company, real estate agent or appraiser receives kick backs, referral fees or other illegal income from sale or refinance of homes of inflated value or price.
• A borrower or loan originator stating a false purpose for the home; for example: saying that it will be their primary residence when they intend to rent it out.

In recent years there has been so many people buying or refinancing real estate in Hemet, California and across the United States that it has been nearly impossible to maintain quality control over all the lending industry. Now that values have started to level off and depreciate in most real estate markets, we are going to see an increase in mortgage fraud cases.  Why?

If you've wittingly or unwittingly committed mortgage fraud and gotten away with it, there's a good chance it will catch up with you.

Most people that falsified information to get a mortgage loan are finding themselves in a situation where they can't refinance or sell the property...but they can't afford it, either.

So when you worked with your direct mortgage lender or mortgage broker, they delivered that loan to an investor: companies such as Countrywide, IndyMac, Freddie Mac, Fannie Mae, etc.

As long as you make your payments on time, your loan might not be scrutinized. But when you don't, or when that company comes on hard times (read the news lately?), the investor will take another look at the loan files, scrubbing them to find any errors, ommissions or fraud. They will look at the appraisal, the purchase agreement, the verification of income and employment, the credit report...they will look at everything until they can find a reason to force the direct lender or broker to buy the loan back. This is an iron-clad part of the contract between the copmpany that originates home loans and the investor.

When an investor forces the mortgage broker or direct lender to buy a loan back, we call that "Forcing it down their throats." Doesn't sound pleasant, does it? It's expensive, and more and more smaller lenders and brokers are being forced out of business.

If you have a home loan, the investor now has your Borrower's Authorization. This is your permission in writing to verify everything that the loan originator was supposed to verify.

They can call your employers, pull your credit file, order copies of your tax returns and even perform an inspection of your home to make sure that it's owner-occupied.

The loan documents that you signed give the investor permission to call your note. That means that what you owe becomes due and payable immediately. If you don't have $417,000 in the bank or can't find someone to quickly refinance your home loan, they will foreclose on you. Guilty parties may also be prosecuted for mortgage fraud in the courts.

With the way things are in real estate today, do you have any doubt that a fraudulent buyer, mortgage loan originator, appraiser or Realtor will have trouble defending themselves in front of a jury?

By the way...Patrion Mortgage has never been forced to buy back a loan and hasn't foreclosed on a property since sometime in the 1980s. Some people say that's because we're too conservative. We like to think that we're doing our clients a favor by being upfront and honest about their mortgage loan and by hiring underwriters that are the best in their industry. Some loans we put in our portfolio, and some we sell on the secondary market. Investors love us because we have clean files.

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Bonus: FRAUD or NOT FRAUD

Here are some bonus scenarios that I would like to see some comments on:

• The buyer's wife has awful credit, so they process the home loan in his name only. However, he doesn't qualify with only his income, so the originator does a stated income loan, inflating his income to include her earnings.
• The appraiser is having a hard time supporting the value of the sale price, so the listing agent or buyer's agent provides him with other comps. These comps are recent enough, but don't reflect more recent sales in that neighborhood.  Because of the business relationship, the appraiser uses the older comps.
• A real estate investor buys a home 50 miles away in a resort area. If it was an investment property, they would have to put 10% down, but she only wants to spend 5%. She puts on her application that the home will be used as a vacation home, intending to stay there sometimes and rent it out sometimes. No rent income for the property is included on the mortgage application.

Joey Aszterbaum is the Hemet Home Loan Guy and a member of the Active Rain social network since 11/06. Patrion Mortgage is a division of Altura Credit Union, formerly known as Riverside County's Credit Union. We are a direct lender.