Mortgage Fraud in America
A Failure of Professionals & Everyone Else!
by Olen Soifer
Help Yourself and Help Us Help You!
Our Ten Promises to Prevent Mortgage Fraud

A Few Profit Now; Many Lose Later:

When risky borrowers are approved for loans for which they do not really qualify, and the loans "go bad", the effect is to raise rates and costs for future borrowers as the lenders attempt to recoup their losses. In addition, the underwriting process and guidelines can become over-complicated as lenders feel the need to be over-cautious in their efforts to prevent similar future losses. You can be sure that requests for certain documentation from lenders that prompt you to ask, "Why do they want that?!", originated because the lenders were "burned" before they required that documentation. 

In the short term, when properties are over-valued in appraisals, property prices and maximum loan sizes increase because they are based on the size of actual sale prices. If enough sales take place at higher than present values, even if only justified by inflated appraisals that slip by lenders, then prices in the real estate market jump upward. 

Bear in mind that true realty values rarely soar or drop at precipitous rates.  It is true that real estate values tend to increase because, as Will Rogers said, "G-d isn't making any more of the stuff."  But that increase is usually at a slow, steady pace.  The downside of prices that unjustifiably rise at an explosive rate, are plummeting prices when the "bubble bursts".  Values that  increase at a more leisurely pace are more immune to the effects of transient economic variations. But, the unusually large increases in value recently are likely to leaves owners with over-valued properties and lenders with loans unsupported with sufficient collateral.

Unfortunately, in the long-term, there will be a downward rebound of real estate prices as lenders eliminate abused mortgage programs; require larger down payments; become more distrustful of appraisal values and more cautious in approving borrowers,  Less mortgage opportunities means fewer qualified borrowers for the same number of homes available for sale.  Included in the mix are the borrowers who will experience large jumps in payment size as their adjustable mortgage rates jump. 

 When homes with little equity drop in value, they cannot even be sold for the amount of their mortgage balances.  The Savings and Loan crisis in the 1980s left taxpayers with a $132 billion tab to cover federal guarantees to S&L customers. A good portion of that loss resulted from real estate loans that were larger than property values supported.  Whether you blame the real estate sales industry for listing properties higher than justified OR the appraisers for justifying the inflated listing prices, a lot of loans that went bad were not recovered by the S & L's.   

Professional Failures:

The Office of the Comptroller of the Currency has released new standards on residential loan practices, that make it clear that any attempt to influence the independent judgment of a real estate appraiser violates federal standards.  No-one would argue that the listed or sales price, or the size of the proposed mortgage, has any inherent relation to the market value of a property or that they should influence the value determined by an appraiser.  Unfortunately, the disclosure of the proposed mortgage amount, &/or the sales price, to an appraiser is, in itself, an undue influence.  

Maybe it should be a crime to disclose the proposed mortgage amount or sales price to an appraiser?  An appraiser should not be able to come up with a value higher than the market indicates simply because a mortgage, that is higher than the value justifies, has been requested.  But, unfortunately, that is not today's reality.  Appraisers realize that their repeat business from mortgage professionals is, to a large extent, dependent upon their ability to match the appraised value to that assumed on the mortgage application.  As a result, many lenders are justifiably distrustful of appraisals.  It forces them to review every appraisal with a "fine toothed comb" to satisfy themselves that the indicated value has been determined appropriately.

Similarly, it should be obvious that real estate sales people often list property at above market value simply because sellers want more than it is worth.  Unfortunately, the same competition that exists for appraisers also exists for real estate agents.  The person that claims to be able to sell a property for the highest price often gets the listing...over the honest professional who proposes a listing price more in line with the genuine market value.  

There are two possibilities for the conclusion to these bogus listings, and neither of them is palatable:  In a stable market, the property will not sell for a long time and may only be rarely shown.  In a more frenetic market, or when unknowledgeable or anxious buyers abound, the result can be sales for more than properties are worth.  The stage is set for market-influencing events if the appraisers are able to come up with higher values than the market indicates.  It may not even be a fraud, because of the inherent flexibility in values that the appraisal process produces.  

When hungry mortgage originators and lenders are added, the circle of fraud is complete. Even without intentional fraud, a lack of due diligence by loan originators and lenders can result in poor loans. The reality is that many loans are originated that are risky from the start and would not be made if the whole true were known.  An artificially induced price increase only benefit a few people, and mortgage frauds end up hurting everyone.  

Help Yourself and Help Us Help You!

We urge you to realize that stopping these frauds not only benefits you, the borrower, but the lending industry as a whole.  This crisis is not likely to end any time soon, but you, as a borrower, should realize that the intent of the mortgage approval process is not to prevent loans from being given.  It is to ensure, to the best of a lender's ability, that the loans are being made to qualified borrowers for qualified properties...loans that are most likely to be paid and in a timely manner.  To help us, help yourself and help our real estate and lending industry, please keep these tips in mind:

1.  When shopping for real estate, try to differentiate between your wants and your needs.  You may be able to afford a property that satisfies your needs, but your wants may be beyond your financial means. 

• Get a pre-qualification from a professional loan officer to determine what you can afford without having to resort to tactics that artificially reduce your actual debt loan or artificially increase your actual income.  Make sure that the pre-qualification is realistic.
• In regard choosing to the home you want, versus the home you dream of owning, bear in mind that the average tenure in a home in America, these days, ranges from 5 to 7 years depending upon whether it is a first or subsequent home.  If you cannot get your dream home today, you probably can do so in the future.  
• The trick is to buy something...between the tax advantages of ownership and appreciation, you will almost always be in a better buying position than if you continue to be a tenant, as long as you buy at market value.  Acknowledge that there is no shame in buying a "starter home" and moving up later.  
• Contrary to earlier times, saving and saving, to enable buying a more home than you qualify for now, is often fruitless because the values increase beyond your ability to save for the down payment on the larger home.

2.   Accept that a realistic appraisal value helps, rather than hurts you, if it discloses value less than the listed or contract price.  Certainly, there are many honest and professional real estate professionals out there, but there are also many that take the easy route to getting listings by tantalizing sellers with promises that they can sell properties for more than they are worth.  

• When buyers let their emotions, instead of their financial capacity, rule their decisions, market prices soar with nothing concrete to support the higher prices. 
• When you are given fantastic promises of huge returns in a short period, you should, in most cases, "run like hell."  When it comes to real estate, if it appears too good to be true, it probably is.

3.  Don't ask us to produce or accept fraudulent documentation, like bogus rent receipts, pay-checks or tax returns, for conveyance to our underwriters.  The trouble this can get you or us into very serious trouble.  The FBI says 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.  Don't expect us to take part in this as there are so many legitimate ways of obtaining mortgage funding these days to risk the severe penalties that can be meted out for fraudulent practices.

4.  Don't expect your CPA to make unjustified claims for you.  Without substantial evidence, their ethics and licenses do not allow them to:

• Attest to your employment, your self-employed status or it's duration
• Claim that your gross income is net income
• Attest to the amount of personal debt that is paid by a company

5.  Don't better your credit rating through the process of creating a new identity or identification number.  This is illegal.

6.  Realize that limited documentation loans, such as those that allow "stated income", were not created to encourage lying about one's income.  The intent of these loans is to allow true income that cannot be easily documented.  But the availability of these loans has encourage lying about income.  Some mortgage brokers, especially the new crop attracted by the booming refinance market, can be attempted to be paid commissions by encouraging borrowers to overstake income.

7.  Don't get taken in by fraudulent home improvement contractors who bloom each spring along with the flowers.  Use your head by checking their credentials, by speaking to at least 3 contractors for the same work, by getting the recommendations of friends and relatives, by refusing to be rushed into signing a contract, by refusing to pay huge up-front monies, etc.

8.  Don't get taken in by telemarketers or other scammers offering miraculous real estate investments.  Make no mistake about it, there are still thousands of scammers "selling the Brooklyn Bridge" every day...and every year millions of hard-earned dollars are lost by hopeful investors on real estate scams.

9.  Don't get sucked into as a the 

10.  Don't let yourself be fooled by lenders who say, or imply, that your income or debt levels don't count and then encourage you to accept funding that you know you can't afford.  Contrary to popular opinion, legitimate lenders are not hoping that you default on a mortgage so that they can foreclose on the property and "make a killing" upon reselling the property.  Legitimate lenders are quite happy to collect interest on the mortgage and, in truth, are horrible conservators of real estate.  BUT, there are a number of "equity lenders" who lend at high interest rates for a low loan-to-value ratio who would love to see the borrower default so that they can pocket the equity.

10.  Don't let an unscrupulous broker flash a pre-approval in your face and then switch it for a less favorable loan.  It is often found that a pre-approval cannot be closed as more information about the borrower's financial situation comes to light.  However, a true mortgage professional will not issue the pre-qualification without adequate information in the first place.  Just remember that pre-qualifications given without sufficient information are "not worth the paper they are printed on."  On the other hand, if a legitimate lender cannot perform as promised because additional derogatory information came to light, accept the blame that you probably should have disclosed that information earlier...if you were aware of it all along!

11.  Be cautious of foreclosure bailout mortgages that require you to sign over the title to your home in exchange for having the present troubled loan repaid, with a later option to regain title.  There are legitimate companies that do this...but there are also scammers doing it.  One couple lost a home because the person who took title to their home refinanced it himself, defaulted on the loan and lost the property for himself and the original owners.  Consult legal counsel before using this "last-ditch" method of saving your home.  You need the protection a lawyer who will insist upon protection of your future rights to redeem your property.

12.  Don't defraud yourself by getting involved in a loan that you can pay today, but not in the future:  Certainly, we hope that your future income will support loans that may have increased payments, but that is not always the case.  Almost any type of available loan is justifiable in some circumstances.  But, there are a number of loans that should only be accepted after lots of thought, planning and caution, such as:

• Adjustable Rate Mortgages with high "per adjustment" or "lifetime" caps.  
• Loans with "interest only" payments...sooner or later you must start paying principal.  If you accept a 30 year loan, with interest only for 10 years, you will end up with a 20 year fully amortized loan after 10 years.  If you don't qualify for a 30 year fully amortized loan now, you have to consider whether you will be able to afford the much higher payments in 10 years.
• Loans, such as Option ARM's that allow smaller than "interest only" payments, resulting in "deferred interest", aka "negative amortization".  The interest you don't pay now must be paid at some time, along with the original principal.  In effect, each month you owe more than you did before.  Again, at some point you will end up with payments based on a shorter amortization period.  Will you be able to afford them?  Well structured Option ARM's increase the minimum payments every year so that the borrower never has to suffer one enormous jump in their payment.

13.  Be suspecious of low rate/low fee print or TV ads.  Make no mistake about it, mortgage originators live on fees, whether they are charged up-front to the borrower; are add-on discount points or are received from the ultimate lender based upon the rate quoted versus a break-even rate.  It is common for the advertised rates to be "low-balled" or for borrowers to face fee surprises at settlements.  Either of these situations constitute unfair business practices even if they stem from the brevity of these ads than cannot possibly accomplish full disclosure even if they wanted to.  Be an informed buyer by:

• requesting a list of all fees that will be charged so that you can compare all lenders on an equal basis;
• determining that the rate offered can be locked for a sufficient time to allow processing, approval and closing;
• getting full pre-payment penalty disclosure to ensure that such penalties, if present, are acceptable to you.  

14:  Be patient with underwriters when they ask for documentation, or further documentations.  Underwriters are trained to look for "red flags" and, although you make not be committing a fraud, it still may appear that way.  The caution of underwriters ensures that every loan that is written is justified and keeps rates and fees reasonable for all of us.  Here are a few "tip-offs" that underwriters are sensitive to, and the reasons they are "red flags":

• Borrower is asked for 2 or 3 current, consecutive bank statements and pay stubs, but those submitted include gaps or are old...the underwriter is justified in thinking that pay is not consistent, that the borrower doesn't have the job any longer, that deposits claimed did not occur, that there are payments or bounced checks that were not disclosed, etc.
• Borrower claims to be receiving rental income and has been for some time, but the deed does not show that the borrower is an owner, or the lease does not include the borrower, or the deed or lease cannot be produced, or the rent is paid in cash and the borrower cannot show similar deposits.
• Borrower cannot verify identity or citizenship with appropriate ID's, or the borrower does not have a social security number, but claims to be a US citizen, or the ID number conflicts with that on the credit report, or the credit report states that no SS number can be found as issued for the borrower...may indicate that the borrower is lying about his citizenship, legal residency or legal right to work in the US.
• Expenses on the Good Faith Estimate are understated to encourage loan approval, but have no logic or reality to what the actual loan expenses will be.
• There are large unexplained deposits on bank statements...which implies that apparent income is actually a gift or personal loan.
• The borrower's "stated income" is not consistent with the borrower's occupation in the area where they work.