Real Estate Industry Problem – Mortgage Fraud
Mortgage fraud may continue to plague the real estate industry. Maybe, I am seeing only the 20% Fraud for Property/Housing, as defined by The Federal Bureau of Investigations.
Reasons why mortgage fraud may continue:
1) The escalating cost of housing and the “American Dream” of owning your own home.
2) Licensing for real estate agents and mortgage brokers is much too easy. The requirements for licensing need to require a greater level of education, more than a high school degree as a prerequisite for licensing and harder licensing requirements, such as more pre-licensing education and harder tests. This will result in better people and less people entering the real estate profession.
3) Lenders need to offer less loan programs, for example, stated income loans (some refer to this as inflated income loans) and no doc (no documentation loans).
4) Most lenders require an IRS (Internal Revenue Service) Form 4506 at time of closing. Now, there is something that an underwriter or lender can request information and stop an inflated (a.k.a. stated) income mortgage application dead in its tracks. If they lie on their income tax return, is it possible that they would lie on their mortgage application?
5) Lack of educational programs in the real estate profession to identify mortgage fraud – could be wishful thinking, due to the Privacy Act – but at least a start. Where individuals and professional can report suspected mortgage fraud situations to the appropriate law enforcement authorities.
6) The credit reporting and scoring system needs an overhaul. Too often, I find errors on credit reports, where the creditor is not reporting timely or accurately information. For example, a customer settled in full his collection action in the later part of February ’06. The collection agency in the later part of April is still showing a portion of the account as outstanding with a current date. Yes, they reported the payment, but did not remove the negotiated portion of the balance.
7) Lack of control points within the existing system.
What could possibly be done to reduce the mortgage fraud:
1) More checks and balances within the system to identify potential mortgage fraud situations.
2) More education for all real estate professionals – real estate agents, REALTORS, underwriters, lenders, etc.
3) Greater licensing requirements for all. And licensing requirements where no licensing is required at this time.
4) Implementation of a “whistle blower” protection system and telephone hotline.
5) Proactive preventative action on the part of lenders.
6) Enforcement of Section IX – “ACKNOWLEDGEMENT AND AGREEMENT” located on page 3 of the Uniform Residential Loan Application (FNMA 1003):
“Each of the undersigned specifically represents to Lender and to Lender’s actual or potential agents, brokers, processors, attorneys, insurers, servicers, successors and assigns and agrees and acknowledges that: (1) the information provided in this application is true and correct as of the date set forth opposite my signature and that any intentional or negligent misrepresentation of this information contained in this application may result in civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Sec. 1001, et seq.;…7) the Lender and its agents, brokers, insurers, servicers, successors and assigns may continuously rely on the information contained in the application, and I am obligated to amend and/or supplement the information provided in this application if any of the material facts that I have represented herein should change prior to closing of the Loan;…”
7) Enforcement of the paragraphs from the typical mortgage, which reference the borrower’s loan application and acceleration clauses: Borrower’s Loan Application. Borrower shall be in default if, during the Loan application process, Borrower or any persons or entities acting at the direction of the Borrower or with Borrower’s knowledge or consent gave materially false, misleading, or inaccurate information or statements to the Lender (or failed to provide Lender with material information) in connection with the Loan. Material representations include, but are not limited to, representations concerning Borrower’s occupancy of the Property as Borrower’s principal residence.
Acceleration; Remedies. Lender shall give notice to Borrower prior to acceleration following Borrower’s breach of any covenant or agreement in this Security Instrument…(d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument, foreclosure by judicial proceeding and sale of the Property.
8) Better and possibly required education of prospective borrowers, so they can recognize the impact and identify situations.
Implementation of number 6 above will send shock waves into the communities and cause the less desirable professionals out of business and awareness to borrowers. Many may argue that this will be costly to the overall economy or lenders if foreclosure proceedings are needed, but in the long run there could considerable savings for all.
In summary, mortgage fraud may continue, until such time that the losses reach greater levels unless there is a proactive preventative overall program to curb it. Old country saying “you don’t close the gate after the horse leaves the corral.”