Mortgage Loan Defaults On The Rise!
A new study has found that up to 70% of mortgage early payment defaults and can be linked to a significant misrepresentation on the original loan application.
The purpose of the study was to investigate the link between fraud and payment trends during the early life of the loan. The result of the study concluded that loans that contained egregious misrepresentations were up to 5 times more likely to default in the first six months than loans that did not.
“Many lenders are facing increases in repurchase requests and early payment defaults. The cost of mortgage fraud is borne by every person or family who buys or sells a home.
The studies showed 16,000 loans that were confirmed to contain egregious misrepresentations in the loan file that later led to a default. These misrepresentations included fraud such as: income inflated by as much as 500%, appraisals that overvalued the property by 50% or more, fictitious employers and
falsified tax returns. The study concluded that misrepresentations can grossly affect the risk of a loan.
Traditionally mortgage lenders have relied on credit scores to assess the risk of a borrower. Credit scores effectively predict risk when the facts on the application are true. However, when a borrower or broker misrepresents fundamental characteristics such as: income, employment, debt or the value of the property, the credit score risk assessment isn’t as effective.
The loan program features that have proven to be of greatest risk and highest default include: Stated income and no-income verification type loans, No-Doc loans, Optional-payment type loans, and unfortunately sub-prime loans.
Does this mean we may see some of those more ‘creative’ loan programs go away? I don’t believe so. What we will see though, are much higher rates on those programs where verification of income and assets are not as strict; as a means to offset the risks of originating those loans.
You know what is really sad in all of this? More often than not, it is the lender/loan officer that convinces the borrowers to ‘fudge’ on their income or assets to get their loan approved and closed… and often this happens without the borrower even knowing it or knowing the risks of committing fraud when doing so.
On the investor side of things, what does this mean? Foreclosures will continue to climb and there will be both opportunity for some investors to purchase foreclosed properties and secondly, the results on values in some areas will be adversely affected. Beware of the values if you are looking at recent foreclosures!
I was reading an article the other day that was shocking but right in line with what you are saying.
Foreclosures and delinquencies rising in 2007
New data out shows that mortgage delinquencies are going to be bad in 2007. People bought homes with interest only loans in huge numbers this year and now they’re having trouble making the payments. People are already calling their mortgage companies asking for leniencies, according to Fitch, which rates commercial mortgage services. Fitch has just put out a report showing delinquencies going up about 15 percent. About one in 100 homes is in foreclosure right now and about 5 percent of homes are in delinquency. So, people are going to face some serious difficulties in the coming years. Now is the time to eliminate as many problems as possible. If you sense that making payments will be difficult, you need to reconsider your path. Another issue is the fact that floating mortgages readjust. If you’re thinking of staying in a home for a number of years, go ahead and refinance into a fixed rate loan or an ARM that is fixed for at least five years. There are decent deals out there. But the greatest worry is for people in what are called “option payment mortgages.” Overwhelmingly, these people are not able to pay enough each month to keep the loan amount from rising. Do not worry about your credit card bills if you don’t have enough money to pay your mortgage. Your mortgage comes first! You may trash your credit, but you’ll keep a roof over your head. Food on the table is next. And credit cards are last, despite how many calls you get from creditors or collection agencies.
Posted by: C Brown | February 24, 2007 at 11:55 AM
Thanks Ray. That is my mission... it is time to let the consumer and yourselves as real estate agents, know what can be done to protect yourselves and to save money at the same time. Help me get the word out with your fellow agents and clients. If there is anything you need from me, just let me know. R
Posted by: Ron | February 24, 2007 at 08:16 AM
Great stuff, Ron. And very timely. If this information was more readily available instead of the industry 'hiding' it, perhaps there would be less mortgage fraud and predatory lending. Thanks for telling us 'the rest of the story!'
Ray Nutaitis, owner/Broker
RAVE REALTY
602-315-4877
RaveRealty@cox.net
www.LovelyArizonaHomes.com
Posted by: ray nutaitis | February 22, 2007 at 02:52 PM