Thursday, January 05, 2006 | Mortgage fraud isn’t always complicated.
While the big scams grab headlines, industry insiders caution that the bulk of the fraud infesting the real estate industry could well be a lot more subtle.
Stated-income mortgages do not require a borrower to provide proof of their income to a lender. Instead, a borrower “states” how much they earn on their application. Some local brokers said these loans seem almost designed with fraud in mind. They now refer to these loans as “liar’s loans,” because, they said, the freedom plays into the hands of unscrupulous mortgage brokers and borrowers.
Brokers and other industry insiders admitted such loans have made fraudulent income inflations a very common occurrence in the mortgage industry.
Sam Jarman, manager of Charter Mortgage in San Diego, made a conservative estimate that 25 percent of stated-income loans are fraudulent. However, he said such a figure was impossible to verify, because nobody seems to know how widespread the problem of inflated-income mortgage fraud has become.
Certainly, the FBI thinks such fraud is a problem.
The FBI primarily investigates large-scale mortgage crimes involving more complex types of fraud. But FBI Assistant Director Bill Swecker said income-inflation fraud is an especially acute a problem in San Diego due to the city’s high home prices and the previous real estate boom.
Swecker attributed this fraud to inadequate oversight of the industry, particularly mortgage brokers. Such brokers have played an increasingly visible role in the market since the Savings and Loans Credit Union moved out of the mortgage market.
“Mortgage brokers are the concern. They seem to be the choke point, the critical area,” he said.
Local brokers admitted that there are numbers among their ranks who do not play fair, though they insisted they are in the minority. Besides, said John Marcell, president of the California Association of Mortgage Brokers, any reputable broker will always ask for extra documentation from a client seeking a stated-income loan. That’s especially true where there’s some doubt about the client’s truthfulness, he added.
“If you have a landscaper, for example, who says he makes $100,000 a month, well that’s just not realistic,” he said.
Local lenders insist there are many situations where stated-income loans are both legitimate and necessary.
Originally, they explained, these loans were designed for the self-employed and those who earned more income than they could officially prove with their W-2 forms and pay stubs. And there’s a catch – borrowers pay a higher premium for taking on stated-income loans than full-documentation loans, brokers said.
Lenders argue that such loans face extra scrutiny by underwriters, who will assess their legitimacy based on other factors than an applicant’s income, such as their credit score, assets and savings.
Marta McCall, senior vice president for risk management at American Mortgage Network in San Diego, said the scrutiny her company performs on loans provides vital checks and balances on mortgage brokers. She said brokers who send underwriters loans based on unrealistic incomes will not be doing business with any reputable company for very long.
Nevertheless, she said, many lenders may not report brokers who attempt fraud. That’s because the industry suffers from a culture of “let it go,” she said, especially since prosecution of brokers can prove costly and time-consuming.
“It has not proven to be cost effective to seek legal remedies or take other action against brokers,” she said.
In order to check the veracity of loans coming in, McCall said, most companies implement a range of control measures, including using electronic loan verification software to randomly check the other facets of the loan such as an applicant’s assets, savings and credit rating. That frees up their underwriters to look at the “reasonableness” of the mortgage applications, she said.
However, when a company is dealing with a large volume of loans, that can prove tricky, and costly, McCall said. Therefore, a lender must, to some extent, rely on the information provided by the mortgage brokers with whom it does business, she said.
“When you’re in a wholesale environment, it is a partnership with the broker, and you do have to put some faith in the documentation that they have provided you with,” she said.
One local mortgage broker, who asked that her name not be used because she does not want to be associated with fraudulent loan applications, said that the application is not likely to represent a true picture of the borrower’s finances.
“They’re just giving us these loans that say ‘Lie, lie, lie,’ ” she said.
In the day-to-day workings of the mortgage industry, a mortgage application is only as reliable as the broker providing it. Experienced brokers know that, industry veterans said, and know that burning bridges is not the way to succeed in the real estate industry.
But Marcell acknowledged that many of the mortgage brokers at work in the industry are not such seasoned professionals. The last few years have seen a vast increase in the number of brokers in California many of whom do not belong to professional organizations and some of whom do not even hold legitimate licenses, he said.
In the dog-eat-dog world of mortgage lending, brokers acknowledge there are pressures put on them to stretch the truth when completing applications with their clients. The distinction between stretching the truth and outright fraud is often blurred in practice.
Winford Taylor, a mortgage broker in San Diego, said what is discussed between a broker and their client is often influenced by the fact that the client can always turn around and find another broker. Faced with that sort of pressure, he said, a mortgage broker walks a fine line.
“If you and I were going after the same client, what would you tell the client to persuade the client (to choose you) as opposed to me? Would it be borderline fraud or would that be within the boxing ring of doing battle?” he said.
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