You knew there had to be more to this than simple greed by home buyers, right?

Well, there apparently was.

In an expose on mortgage fraud, the Washington Post appears to have blown the doors off a problem that nobody is really talking about in the lending - and homebuilding marketplace.

Yet.

That problem? Radical, extensive, and pervasive fraud in the mortgage and home buying process.

Some quotes....

"These "stated income" loans were designed for a limited purpose: giving self-employed people a crack at home ownership. But during the boom, the number of such loans exploded to the point that they became a running joke in the industry, earning the nickname "liar loans."

Estimates vary widely, but research suggests that they made up a significant portion of all mortgages during the boom -- 58 percent in a study by First American LoanPerformance.

Mortgage lenders in theory have a right to compare loan documents to a buyer's tax returns, but they rarely do. In the few cases where it has been done, results were startling. In a study published by the Mortgage Asset Research Institute, one lender sampled 100 stated-income loan applicants and found that 90 had exaggerated take-home pay by 5 percent or more and that nearly 60 inflated their pay by more than 50 percent.

Mortgage originators often neglected extensive document verification because it slowed loan approvals. "Everyone in the mortgage industry is trying to approve loans faster than their competitors," said James Croft, founder of MARI in Reston. "They all offer the same basic rates and the same basic mortgage products. But if I can get the loan faster, that gives me a competitive advantage."

Oh, that's rich. So let me see if I've got this right. We will underwrite loans with a computer and not bother to actually look at any of the documentation - like, for instance, tax returns.

Why? Because it means it takes a few more days - or a couple of weeks - to process the loan. If we process it faster, we can process more of them and make more money.

But then more than half of those loans are indeed lies - the income is overstated by half or more! That's not a "small" discrepancy, and it's also not a mistake!

Now why is this bad not just for home owners but also for mortgage lenders?

Here's the dirty secret guys - if there's fraud in the loan anywhere then the originating company can be forced to take it back even though it's worthless, and it does not matter how much time has passed!

Nor is this the only story on the problem. From MSNBC we find this little gem with a few quotes:

"Any promises made, fraudulently, knowing they’re not true, that cause the buyer, the mortgagee, to rely on to their financial detriment is a fraud,” he said. “It can be prosecuted on the state or federal level. But it is a fraud.”

Berg, who says he is getting calls from subprime borrowers who say they were duped, is gearing up to commit “a great deal of our resources” for what he believes "is going to occupy a large portion of our practice.”

“The reliance on false statements is there,” he said. “I think these are good lawsuits and good criminal cases.”
......

One popular tactic among mortgage brokers looking to inflate a home’s reported value is to pitch the job to multiple appraisers at the same time, said Yovino-Young.

“They’ll send out a fax and give you the address of the property and they’ll say, ‘Can you come in at $750,000, say,’” she said. “And the first one who calls back and says, ‘Yeah, that’s doable,’ will get the job. Of course, all of this is completely illegal.”

NO contract excludes recovery for fraud. Ever. No one in their right mind would exclude such a cause of action. Ever.

I've been in business for more than 20 years, and I've never in my life seen a contractual situation where fraud does not allow whatever was "done" to be "un-done", with the original parties on the hook - 100%.

So while mortgage companies may maintain that they have "little" exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.

HALF of all stated-income loans?

This will BANKRUPT every single one of these companies if it happens.

Anyone care to bet whether or not the bondholders - many of whom are pension funds and other big institutions - will just sit silently and watch the defaults happen without looking into this - when they know that all they have to find is an overstated income and they can "PUT" the loan back on the issuer for its full unpaid face value, plus imputed interest?

There are people who say "mortgage fraud has been around forever." Indeed. But what's different here is that if these statistics are correct ninety percent of stated-income loans are fraudulent. This means that they are subject to being forcibly put back on the originator at any time!

Ultimately, the "homeowner" has committed a federal offense by lying on the application and they could be prosecuted or jailed. But that won't get the originator's money back - its gone - after all, the reason you're chasing this is that the borrower defaulted! The chain of recovery is going to stop at the mortgage originator!

I strongly urge that this area of fraud be fully investigated. This sort of nonsense needs to be exposed NOW so the culpable parties - those who had the ability to detect the fraud but decided not to perform that diligence for the sake of profit - have these loans "PUT" back where they belong!

Labels: appraisal fraud, fraud, homebuying fraud, mortgage fraud