Appraisal Fraud - A Reader's Comment

A mortgage loan officer and a reader of this blog sent me this email regarding appraisal fraud which I found interesting; he gave me his permission to share it on this blog. So here it is in its unadulterated entirety (although I did remove his place of employment and contact information from his signature):

Marinite:

Thought you would be interested to read this. Among all the investigations of appraisal fraud and fraudulent activities and title companies, the FBI is striking out bad on their fraud investigations. Stated income loan fraud is so wide-spread in areas of the East and West coast, there are actually mortgage brokers who openly admit to doing it. I myself am a broker and am subscribed to an industry internet message board at www.brokeroutpost.com. I posed this question: "What causes you to use a stated income loan program?". The following are some of the answers I received:

Quote: "boarder income..."

Quote: " Another reason is the wife or husbands credit is garbage"

^^^ That would imply that they are stating the spouse's income that is not on the application as the income that the spouse who IS on the application receives from their employment. Fraud.

Quote: "I write them all the time. Often if the wife has a higher credit score and less income."

^^^ Same deal. Using income from a borrower that is not on the loan application to qualify the loan.

Quote (in response to me saying that the previously mentioned activities are fraudulent): "You are getting confused. We aren't using the co-borrower's income for the borrower. You can "state" the income for both borrowers. Stated Income does not mean we are making John Doe who works at Burger World suddenly make $125,000 a year. Nor are we making someone unemployed suddenly employed. The employment is still verified, the income is not. And yes, it is legal and there isn't anything unethical about it."

^^^ Simply amazing. Basically, this loan officer was implying that he can put whatever income he wants on the loan application, as long as he verifies the person works at the place of employment they claimed. Apparently, he believes that their actual level of income is irrelevant. Fraud.

This was my response:

"Have you read the little print on the 1003 right above where the borrower signs? You do understand that is a federal document, correct?
The FBI or DoJ investigators must just jump with glee every time they log into this website."

Now, here is my point:

These people are so naive, crooked, or comically misinformed that they are actually posting this on a PUBLIC internet forum! Considering the fact that there are actually enough mortgage companies participating in this that they have LO openly discussing it on an internet message board, how many "smart" crooks do you think there are that DON'T discuss it?



The following is an article I wrote on the state of mortgage fraud in the world of mortgage brokers. Somebody had better stop this stuff, fast:

http://mortgagecents.blogspot.com

Rough times ahead for people who bought houses at inflated prices:

This is a bit of an elaboration on the consequences that some individuals in certain sections of the nation are about to experience as the result of fraudulent loan activity and property values that are overly inflated:

Stated income mortgage fraud.

You can bank on the prediction that stated income loan programs will be the subject of massive federal investigations in the coming months and years. In a stated income loan program, the loan officer takes the loan application, and puts the income the client says he makes on the application. The bank does not verify that income. Instead, the bank simply approves the loan based on the word of the loan officer and loan applicant.

How does it get abused?

When a borrower can't afford to buy the house because their debt ratios are too high, an unscrupulous loan officer says, "well, gee, Mr. and Mrs. Borrower, if I put you in this stated program, we can say that you make any income that we want!" At that point, the loan officer puts in some arbitrary number that is supposed to be the amount of money the borrower makes every year. Instead, it's the amount of money that the application needs to show to make the debt ratio fall into the range that makes the loan approvable.

The worst part is, a BUNCH of lenders have this program and it allows you to borrow 100% of the purchase money for the home. So now, the borrower is not making a down payment, has no equity in the home, and they have been convinced by the loan officer to sign a fraudulent loan application so that their debt ratios will make the loan "work". Incredibly, loan officers will openly admit that they practice this in expensive markets on the east and west coast.

Apparently, they do not realize that a mortgage loan application is an official Federal document, and lying on it makes you subject to jail time, huge fines, and other penalties. Additionally, unscrupulous loan officers have made statements similar to this: "Hey, I didn't realize they were lying, it's not my fault!" Give me a break. Just who do you think the Federal Government is going to pursue in these fraud cases? The little borrower who claims "I was just doing what the 'professional' said I could" or the loan officer that pleads ignorance about the borrower's financial situation. The entire situation can be compared to negligence suits where an individual's irresponsible actions (in this case, the loan officer either "coaching" the borrower on what income needed to be shown on the loan application or otherwise not properly investigating a borrower's income) results in harm to others. That individual pays fines, goes to jail, or is otherwise punished. If loan officers think they are going to be immune to this, they are kidding themselves.

Here are the original purposes behind the stated income loan program:

If you are dealing with a borrower that has maybe been working a side-job for the last couple of years doing lawn care, and they get paid entirely in cash, but never document that income, this was supposedly a way to use that income to qualify the loan. Of course, it begs the question: "Why wasn't this person reporting this income on their taxes?" Additionally, if you had a borrower that was working on a job where most of the income came from tips, such as a hair-stylist or restaurant worker, this was supposed to be a way for them to document their cash income from tips. Yet again, the question arises: "Why aren't they reporting it on their taxes?”

If you are a borrower who is self-employed and has very strong credit, trying to document their income from the business they own can be difficult. If they claim large amounts of deductions on their taxes, a traditional loan must be qualified on the income AFTER deductions. The stated program was intended to allow you to use the income level BEFORE the deductions.

If you are a borrower that has income coming in from all over the place, and very strong credit history, you can simply elect to do a loan that has reduced income documentation to save you the time of verifying 5-10 different sources of income.

The purpose of stated loan programs was never to artificially inflate a borrower's income, but that is what is happening. On one popular internet discussion forum for loan officers, the discussion at that site on this issue is mind-boggling. There are loan officers on there who outright admit that they use stated income programs to exaggerate income, because they claim that without them, they could never approve anyone for a loan in expensive areas. That raises more questions.

Do these loan officers understand that the FBI regularly reads that site, and that just because an agent isn't knocking on their door with a search warrant today hardly means that they are immune to prosecution in the future. A lot of mortgage fraud cases take a long time to investigate. At this site: www.mortgagefraudblog.com you can read about some of the cases of fraud that have been uncovered in recent years. They are very complex, but are also easy to uncover. It is stunning that individuals actually believed they could get away with some of this stuff.

I wonder if the loan officers understand that part of the reason that housing prices exploded to ridiculous levels in the last few years is because of the ease of obtaining credit to purchase homes. When credit is easier to obtain, more people can qualify for the purchase. When there is more demand, prices are higher.

Potential long-term implications of fraud:

Part of the reason for the rapidly appreciating property values we have seen in the last few years have been historically low interest rates and loan programs that make it possible for people to purchase homes that they have no business purchasing, when taking their income into account.

What do you all think is going to happen when easily defrauded loan programs start to disappear and interest rates continue to rise?

First, houses are going to be a tough sell, because they are going to be unaffordable until prices adjust in a downward direction to a level that makes it realistic to buy them. Loan programs that allow easy approval of loans for people that otherwise should not be able to afford a house are about to disappear.

Second, when the values shift downward, you are going to have these “home owners” who were put into incredibly bad loan programs, didn't make a down payment, and can't afford their house payment. When they try to sell the depreciating property, they aren't even going to be able to pay off their mortgage in its entirety. If they don't pay it off, then the next buyer can't finance the purchase.

As a final slap in the face, people that are in terrible loan programs such as an adjustable-rate mortgage in which they lack equity to refinance will be faced with increasing payments that they cannot afford. Since they can't sell the house to get out from under the mortgage that they can’t pay, they will just foreclose. That translates into a massive loss for the banks, which means further evaporation of bad mortgage programs and tightening of requirements on existing programs (if we're lucky).

In a strange sense of irony, all of the foreclosures will actually result in housing that may once again be affordable. It's an interesting cycle.



Hope you have time to read all of this.


Sincerely,

Matt Norris

____________________________
Matt Norris
Mortgage Loan Officer