Let me start by saying that I am not an expert on the subject of mortgage fraud. My company has become a victim of this criminal disease that is plaguing our industry. The experience of attempting to identify and work through these defaulted mortgages has compelled me to share some experiences about this subject that may be of interest or value to you all.
First, understand that mortgage fraud is a conscious attempt by an individual or group with the sole intent on acquiring property and/or manipulating the system to take equity out of a property using deceit and false statements regarding income, credit, assets and/or property values.
Also understand that fraud does not just affect the immediate parties - i.e. the lender - it has a negative impact on property values in that particular neighborhood which may impact others living there attempting to sell their home. It alters the way lenders view certain loan products. Mortgage fraud always negatively impacts some party financially, and has become one of the leading concerns in our industry nationally.
A leading national purchaser of “Alt A” loan products recently told me that this year they have experienced over $1 billion in early payment default claims. Of this amount, a staggering percentage have been directly associated to fraud. Alt A loan products typically pertain to high ratio loan to values (100 percent) and also offer stated income and interest only features as well as stated asset options. Early payment default usually is defined by lenders as a borrower going into default within the first six months after the loan was closed. Most never make their first payment.
In March, HomeSouth Mortgage purchased a loan that looked acceptable to our underwriting department. It was a fourplex, 90 percent LTV, $475,000 purchase price, adequate assets were verified and the credit score was within guidelines. The loan was closed. The first payment was the only payment the purchaser made.
As HomeSouth audited the loan during the delinquency period, our attorney contacted the purchaser and asked why they would walk away from such a sizable down payment.
The purchaser’s reply was, “I never put $47,500 down. The builder gave me the money a few months prior and told me to put it in my checking account.” The individual claimed they were told it was a part of the deal. After having no luck renting the property as it was being built, the individual chose to walk away.
In this case, the individual is claiming innocence of being involved in fraud, although they have no credible explanation why they stopped making payments. The builder, closing agent, and appraiser are the focus of the fraud. This particular property is a part of a small neighborhood, all fourplexes. All built by this builder.
DFid You Know?
• The typical repeat buyer is 46 years old and has a household income of $83,200. They placed a down payment of 21 percent on a home costing $235,000 but 11 percent of repeat buyers paid cash for their home. In all, 94 percent of buyers and sellers believe their home purchase was a good financial investment.
(2005 National Association of Realtors Profile of Home Buyers and Sellers)
Because the neighborhood was a new and small collection of fourplexes, finding comparables for the subject was difficult, a great opportunity for an appraiser involved in the scam to establish value outside the neighborhood.
The property has been foreclosed on by the national investor who bought the loan from HomeSouth. A deficiency claim is pending. The result: HomeSouth is stuck with the difference between the outstanding balance of the current mortgage versus the price sold at foreclosure. Litigation will follow. Prosecution of these criminals is favorable. Legal and court fees to prosecute will cost near six figures.
Investors are the greatest cause of concern regarding defaults, regardless of fraud or not. As property values decline along with high ratio financing, the motivation to walk from a property is high. In addition, if the appraisal was inflated, the chances of a mortgage default increases greatly.
The net result is there are huge monetary losses taken by the lender, and the values of the neighborhood become victim to the disease.
Another example is the case of a group buying four properties, all within days of each other, and with four different lenders. A straw buyer was used claiming to be an owner occupant.
A local Realtor and a part of the scam had identified homeowners who needed to sell their properties quickly and were agreeable to offering a very low price. The Realtor claimed they had individuals looking for properties in these neighborhoods.
A contract was written, and then an assignment of the contract at a much higher price was executed with the straw buyer. The settlement statement showed the fee to the Realtor as an assignment fee in excess of $50,000.
The loan made was a 95 percent loan to value with stated income and stated assets.
The result was the homes were never occupied, but rather purchased for investment property use.
The post-closing audit uncovered the multiple properties being purchased only after the mortgages were recorded weeks after the closings occurred.
The fraudulent group ended up with four investment properties with high ratio loans, and over $200,000 in cash paid to the Realtor at the closings.
There are countless examples similar to these currently on the books of lenders throughout the U.S. The cost to work out these issues including marketing and selling, legal fees and the expense in prosecuting the criminals is overwhelming.
Be aware of your customers. This problem affects us all. Sometimes it is not about the commission, but rather the quality of the customer.