The Mortgage Manifesto!

Mortgage Lending and Greed… Just Follow The Money!

Part two -

So what to do from here? The blame can be spread among all the players. The consumer has some fault, but in my opinion, little. They can’t possibly understand all the details and the risks that lie inside the terms of many of these creative programs. It is the responsibility of the mortgage industry and regulators to educate the borrowers. PERIOD. They are to protect and advise the consumer as to what is best for them and with minimal risks based upon their specific needs and financial picture.

The FEDS are to blame for some of the sub-prime lending and the problems we face today in another way as well. The department of HUD and specifically FHA loan guarantee program, as it exists today, has pushed many consumers into the sub prime lending programs when in fact they should have been given an FHA loan backed by the federal government.

FHA guidelines were supposed to help those borrowers with little or no down payment and less-than-stellar credit to get into a home and build a financial foundation that starts with homeownership. The economy wins and the consumer wins. Isn’t that what the government is supposed to do?

Unfortunately, the high costs of audits, requirements and fees to get an FHA approval as a lender pushes nearly all smaller lenders and brokers away from seeking FHA as a program. They, then can’t offer it as a loan even if they knew it was a better alternative and thus they push the sub-prime loans as a product they can sell.

The FEDS should be looking hard at ways to give borrowers access to better FHA loans and ways to free up the process for mortgage brokers and lenders to offer it as an alternative instead of jumping on the political bandwagon of bashing the sub-prime lending that has gone sideways. Let’s offer solutions rather than focusing all our efforts on what has already gone wrong.

The credit bureaus and credit reporting industry is just as much to blame for all of this mess as well. It is almost a monopoly-like business in trying to force change and it is as inaccurate a system as there can possibly be. Reports are inaccurate. Changing them is nearly impossible. The credit scoring model itself is flawed. That scoring model has forced many deserving borrowers into sub-prime programs when they should have qualified for a conventional loan to begin with if all credit reporting had been accurate to start with. It has also created an entirely new industry with its share of crooks, that being the credit repair business.

Sub-prime lending can still work. It may need some restructuring and revised guidelines. Many consumers that got a sub-prime loan had to go that route and will continue to pay on their mortgage. Some should have never been allowed to get into a mortgage at all until they took the time and effort to clean up their credit history in the first place. Tightening of the qualifying will be good for the industry as a whole.

There must be a way created for the borrowers that have these mortgages to refinance into another program that allows them to remain a homeowner and rebuild their finances. FHA could be a way to do that if the FEDS and politicians stepped up in the way they should rather than simply screaming for the sake of being heard.

Did the industry have a few bad-guys. Obviously. Not unlike any industry. Are some of the no-income or no-doc loans bad loans, yes. But they should still exist for the borrowers that need them; just with guidelines that make sense and don’t put borrowers in financial risk that can’t afford to be there in the first place.

Finally, I think we all have to examine the motive behind some of these sub-prime, creative and exotic loan programs. Was it really to make homeownership available to more people… even those with poor credit or difficulty in qualifying by more conventional means?  Or was it the need to do more and more business, make more and more profits and do so by putting consumers at risk financially even when we knew deep down that those certain borrowers should never have been ‘sold’ that loan program in the fist place? Was it also an industry that knew that if they wrote enough of these loans that those same borrowers would have to come back and fix the mess and thus build into their loan portfolio, an entire new boom of refinance business? Hmmmm

Mortgage Lending and Greed… Just Follow The Money!

Just watching the mortgage meltdown that is unfolding is of little surprise to some of us veterans from the mortgage industry. It has been a train wreck waiting to happen.

The ‘NOISE’ being made all over the media and political arena is well deserved… sad to say. That said, it is important to note that it is probably a small percentage of the mortgage industry that have taken advantage of the process to line their pockets that are causing all this turmoil.

The issues are being fully dissected by the press and of course those grand-standing in politics. It is my belief though that the real problems, not just in sub-prime lending but in lending in general, is not being addressed… and maybe purposely.

The meltdown we are seeing today is focused on the sub-prime arena. That market may be just the beginning. It will spread to other types of mortgage lending including the non-conforming markets where the ‘real creative’ programs exist.

When we look deep into the meltdown problem, as usual, the root of the issue is… GREED. Guidelines for many loans have been loose for sure. For us in the business for years have really been amazed by some of the programs introduced over the past few years.

Unfortunately too, the laws and regulations that monitor mortgage marketing, advertising and disclosure have been ‘turning a blind eye’ to all of the consumer ‘bait and switch’ and the disclosure process that probably 75% of consumers could never begin to understand.

We have all seen and heard the ads… “Rates as low as X”. The laws that require an Annual Percentage Rate (APR), although well meaning, are often ignored and even when applied, not honestly quoted, hardly understood or paid attention to either.

Rates and mortgage markets change daily, hourly and every minute, How can we expect the consumer to ever understand something so complex as the mortgage marketplace when only the most brilliant on Wall Street can even attempt to understand it?

We have all heard the saying “when it sounds too good to be true, it probably is”! It most definitely applies to the business of mortgages and interest rates.

Why doesn’t a whistle go off when the consumer hears the ads like ‘no-closing-costs’ and shouldn’t someone ask, “if I don’t pay them, who does?” It is because we have all been conditioned to look for the free-lunch that doesn’t exist. Does the consumer actually believe that the lender advertising the free closing costs is just feeling extra generous that day and all the serviced providers are as well and everyone is doing it for them for nothing? When does common sense kick in?

I am not trying to say that it is the consumer’s fault. As much as it is their finances and they should be as careful as they possibly can be… the mortgage marketplace and the well-trained sales staffs (some crooked as they come) have done a wonderful job of selling consumers into financial time-bombs.

It is my opinion, that the real crooks in the business start with the mortgage telemarketer illegally selling sub-five percent mortgages and who’s income depends upon selling a mortgage product that puts the consumer’s home at risk. The well-known culprits are the very ones we see in the news with lawsuits and now going out of business as well. That is consumer gouging to the highest and yet even among all this media, it continues.

Stay tuned for more on this subject.

Fraud: Part 4

Fraud: Last but not least…

Aside from income, employment and asset verification fraud we have outlined in the first 3 parts, the other areas of fraud usually occur in real estate purchase transactions. The most obvious are:

Two different settlement or closing statements: One or more of the parties to the transaction (buyer, seller, title officer, lender or real estate agent) coordinate to have one statement ‘created’ showing the seller receiving all the funds in the sale of the home. Then there is a second settlement statement ‘created’ that is the actual agreement between the seller and buyer where the buyer receives cash after closing from the sale transaction (in other words from the seller) but that settlement statement the lender never sees. That is fraud.

Seller pays cash to the buyer after the close of escrow:  Unlike the example above where there was a coordination between all the parties, there are transactions where the buyer and seller agree to have the seller pay the buyer some cash amount after the transaction closes and the title co, real estate agent or lender may or may not have known at all. This often occurs...

Lending practices draw fire

Home loan lenders, the financial services superstars that helped fuel the nation's housing boom with adjustable-rate financing, no down payments and loans that didn't require a verified income, are stumbling through a hostile new world.

As more of their loans go into default, Wall Street is punishing their stock prices. Federal and state lawmakers are threatening tougher rules to rein in their loosened lending standards. Mortgage companies across the nation and close to home, which shut down suddenly two weeks ago -- are imploding under the weight of risky loans and rising defaults. One of the biggest of them all, Irvine-based New Century Financial Corp., which specialized in risky, or sub prime, loans to borrowers with bad credit history, is in tatters.

On the street even more people who received easy money from mortgage firms are themselves reeling. They're missing payments, being served with notices of default and losing their piece of the American dream.

Today good, functioning communities are suffering because of foreclosures. Following a recent committee hearing rife with horror stories -- about lenders inflating borrowers' incomes, not explaining what they were getting into and committing outright fraud. It's a profound and sudden shift in fortunes for a home loan sector that many now believe flew too high during the boom.

As the recent housing euphoria has morphed into an era of rising foreclosures and overdue mortgage payments, government officials and others are wondering how much responsibility lenders bear for a sudden and worrisome new economic landscape. It's a question with serious reverberations for the future. Borrowers may find it tougher to qualify or refinance, and mortgage firms say that could adversely affect the real estate market. Developers and even sellers of existing homes worry that a reduced number of buyers could significantly curb sales and values. That has real consequences for an economy that has thrived as the housing market boomed.

There is plenty of blame to go around. As home prices soared in recent years, the mortgage industry produced a dazzling array of innovative and riskier ways for borrowers to surmount the affordability problem, in many states across the country. And a new generation of borrowers seemed ever willing to suspend common sense and overlook the fine print -- adjusting interest rates, prepayment penalties, the consequences of minimum payments -- to buy the house of their dreams, no matter how far beyond their means. People know if they agree to these things they'll get the house tomorrow, and that's their only concern.

Now many of those borrowers are getting walloped, and the lending industry is receiving a large share of blame for stoking the fires beyond all reason. On both sides of the lender-borrower divide, people who should have known better didn't say "no." What now? Experts say in coming months there will be more legislative moves to rein in the most aggressive lending practices. That will likely spur orchestrated resistance by sectors of the mortgage industry.

Already 26 states have done so. --Whether Congress will enact a "suitability standard" requiring lenders to be certain a borrower can afford the loan. On the backside of a sensational five-year housing boom, changes are clearly in store. Earlier this month, mortgage giant Freddie Mac said it will no longer buy the riskiest loans that lenders offer unless the borrower can afford its highest-possible interest rate. Many qualify for such loans based on the ability to afford "teaser rates" as low as 2 percent. Mortgage lenders now are beginning to tighten their own lending rules.

Now, borrowers who might have qualified for 100 percent financing are being asked to put money up front and show more detailed proof of their incomes. At a recent state Senate hearing on mortgage industry practices, lenders also blamed "bad actors" in their ranks and argued against systemic overhaul. Indeed, industry leaders claimed so-called "nontraditional" loan products -- offering low initial rate that later reset to higher payments, for example -- have helped millions buy homes they couldn't otherwise afford.

Reverse Mortgages and the hidden traps

Asset-rich but cash-poor retirees have been rushing into reverse mortgages. The market has doubled in size in less than two years.

But there are calls from the industry and those who sit on the sidelines for greater regulation and protection for consumers, some of whom are the most vulnerable borrowers in financial history.

The industry is likely to come under even greater scrutiny. The consumer organization Choice is soon to release the results of a shadow shopping exercise involving brokers and the sale of reverse mortgages.

People realize that they need to draw down money just to live, but the problem is that it is an entirely unregulated market.

Strong growth in the reverse mortgage market has followed the boom in property prices and heightened expectations that retirees will fund their own retirement lifestyle.

Reverse mortgages have been around for a while but it wasn't until about three years ago that people started to think 'It's my money and I should be able to use it as I like

Sometimes it is because their circumstances have changed. Perhaps they are grandparents and have to look after grandchildren. But it's also because they have living expenses that they can't meet.

The report of the consumer credit review warns there has been an increase in the number of non-conforming lenders offering reverse mortgages.

In its submission to the review, they warned there are significant risks associated with the loans, including higher than usual interest rates and uncompetitive pricing.

Reverse mortgages carry health warnings because the borrower is not required to pay back any portion of the loan - interest or principle - until the property is sold.

Mainstream lenders insist borrowers are a minimum age and own their own home outright. They also limit the loan-to-value ratio to about 35 per cent or less.

The loans have a "no negative equity" guarantee.  Not all contracts are as watertight as they should be. Some lenders have default provisions that mean they could withdraw the 'no negative equity' guarantee.

Once that guarantee has been granted, all lenders should offer it on an unconditional basis. That means it can't be taken away.

Mainstream lenders won't trigger a default unless there is willful negligence on the part of the borrower. Even then some have an opt-out period where they try to work out with the borrower what can be done to resolve the problem.

Although there is a wealth of difference between mainstream lenders and those who operate on the sidelines, default triggers and "no negative equity" guarantees have yet to be tested.

Fraud Part 3: The impact?

   

Fraud: Part 3
What is the impact?

The regulators are focusing on mortgage fraud and will come down hard on firms that do not have the appropriate checks and balances in place.

Financial crime manifests itself in varying degrees of severity, making it difficult to determine what constitutes a breach in the law for brokers and their borrower clients.

A client tweaking their salary to get the loan they need to buy a property may seem acceptable (after all, it isn’t hurting anyone, right?), as might the act of getting an estate agent to inflate the price of a property so they can pocket the extra on the loan.

But jail sentences are applicable for both of these examples. For many, this type of ‘white collar’ may be regarded by some as perfectly acceptable. Sad, but true.

And these are exactly the sorts of areas the various agencies are clamping down on. Together with cooperating lenders, these watchdogs are working hard to sift out not only blatantly criminal acts but also the sort of ‘white lie’ activities that put borrowers in a position whereby they take out mortgage loans they are unable to afford.

The regulators are prepared to come down hard with fines on lenders, loan officers and borrowers who are caught in these white-collar crimes of fraud.

So what does this mean for the mortgage industry? Last April agencies launched initiatives to tackle mortgage fraud, setting up a streamlined reporting systems designed to reduce fraud involving loan applications processed by banks and brokers.

So how can brokers and borrowers ensure they stay on the right side of the law?

More Fraud...

Now, aside from the typical, average W2 employee, we have income that can be more difficult to predict, document and prove. This would be income from commissions, overtime, bonuses, and of course, the self employed borrower where the income is a combination of salary and/or profits and cash flow.

If the loan officer and borrower are unable to or unwilling to document income in the manner required by standard lending guidelines (2 year tax analysis, year-to-date profit and loss statement, etc) they often choose one of the many more exotic or creative loan programs where there is a reduced requirement for documentation.

These are known in terms such as: stated-income, no-income, no-ratio, and no-doc, among others. And it is here where we see the greatest potential for fraud. Let me first state what the actual guidelines intend in these type loans...

Loan Fraud: Did You Do That?

Loan Fraud: A Four Part Special Report         

Sometimes Committed By You And You Know It...
Sometimes Committed For You Without You Realizing It!

And… You Are Liable In Either Case!

Loan Fraud is being committed each and every day in mortgage lending. That is a fact… Period.

Fraud is getting more attention today than ever before. Why? Because there is a rippling effect of seriously rising rates of delinquency and foreclosure; and as I read recently, it is like the shockwave after an earthquake; the media, the Feds and every possible governmental and private regulating agency will be seeking reasons for the problems and solutions to them.

Below are the areas of fraud typically seen in home mortgage transactions: 

1.    Income: In most 99% of all mortgage transactions, one of the key areas of your financial picture that the lender is required to verify in writing and with documentation from your own records, a two year or more period of annual and monthly gross income and employment history. If a borrower is salaried or hourly W-2 type fixed income, it is pretty difficult one would think; to commit fraud.

That used to be the case. Now with technology, color and laser printers, lenders are seeing ‘manufactured’ employment pay stubs and W-2 forms. Sometimes it is obvious and blatant while at other times, it is nearly impossible to tell. Add to that, borrowers then have “their friend” (co-conspirator) perform the verbal verification or write the verification of employment for them. Yes, this does happen.

Those types of income or employment verification fraud are most often committed by the borrower and the lender doesn’t know.

Truth In Lending Questions

QUESTIONS AND ANSWERS ABOUT FEDERAL TRUTH IN LENDING DISCLOSURES

Federal law provides that you receive a federal Truth in Lending Disclosure Statement before consummating a consumer credit transaction.  It should be studied carefully as well as other information given to you regarding the credit transaction.

Following are some of the most frequently asked questions about the Truth in Lending Statement and their answers.

Q: WHAT IS A TRUTH IN LENDING DISCLOSURE STATEMENT AND WHY DO I RECEIVE IT?

A: Your Disclosure Statement provides information set forth by federal law (Regulation Z, RESPA).  The Disclosure is designed to give you information about the costs of your credit so that you may compare  those costs with those of other loan programs or lenders.

Q: WHAT IS THE ANNUAL PERCENTAGE RATE? (Box "A")

1% Mortgages... No really!

The 1% Mortgages – Are they real?

Mortgage bankers and brokers have been advertising the 1% and 2% mortgages and representing them as if they were fixed. You will see them as Option ARM’s, FlexPay ARM’s, Pick-your-payment ARM’s and other ‘creative’ titles.

It is a very creative loan because in each monthly statement you are given the option to pay  your choice of 4 different payments. You can pay any one of the four, including monthly interest only, a 15 year or a 30 year amortizing payment based upon the fully indexed rate and a 4th and most scary option… a payment that is less than the interest payment that is due. If you choose this fourth option, you are deferring interest and creating what is called negative amortization.

What is negative amortization you ask? Negative amortization is what occurs anytime you pay less that the interest that is due. You are going into the hole! How good or bad is this option?

For a few borrowers (very few in my opinion) should ever choose a negative amortizing type loan program. That said, for some very savvy borrowers, it can be a good tool, if it's used properly. It gives the borrower/homeowner the opportunity to defer part of your interest payment that is currently due, out to the future to pay later.

That said, it is only a good product and financial tool if you plan on and actually pay some of the deferred interest back! If you do not pay the deferred interest...