Mortgagefraude

One of the neat things about the German language is how they often put short words together to make one long word that gives it a larger meaning. Three of my favorites are Anrufbeantworter, Schadenfreude, and Weltanschauung (read to the end for the definitions!).

I thought about trying this in English. How about this one? Mortgagefraude. This isn’t a word but it ought to be. Fraud is so basic in the mortgage industry that we deserve our own special word!

A common type of mortgagefraude is when a buyer or borrower lies to get their loan approved. They can’t lie about their credit anymore; that’s virtually bulletproof.  But they can lie about their income with a “no income verification” loan or show fabricated paycheck stubs.  They can move someone else’s money around to make it appear that they have more in the bank. And Turbo Tax can be used to generate a completely fraudulent tax return. 

What they are doing is committing fraud on the lender, who would not actually approve the loan if they really knew the facts. Check out the fine print just above the signature space on a loan application. There is a statement that talks about the civil liabilities and criminal penalties that could occur in the event of intentional or negligent misrepresentation: Fines and Imprisonment!  That warning doesn’t seem to worry anyone, and they are almost never imposed on an individual basis.

In other cases of mortgagefraude, sellers get in cahoots with agents and an appraiser to sell a home at a value higher than the real market price.  The buyer ends up with a home he may not be able to afford, can’t refinance, and can’t sell. Ultimately, the lender forecloses, perhaps the real intent of the fraud all along. The resulting credit damage messes up the buyer’s credit score for 7-10 years.

The most common type of mortgagefraude is that perpetrated on borrowers by unscrupulous lenders.  A simple type is when a lender is in the subprime business and a prime rate client shows up.  Perhaps the borrower knows he has a credit problem, thinks it is bad, but doesn't know that it isn't that damaging.  He would go off to a subprime lender who charges 8%, for example.  The loan officer looks at the deal, and if he were honest, would say, “You qualify for an A-paper loan at 6%.  We don’t do those, but you can just go to your bank.”  But they don’t say that. They do the deal anyway and pocket the commission. Regulators of the big banks require that those applications be sent over to the A-paper department, but this doesn’t happen with other lenders like the big subprime ones. Is that fraud? Or is it just a naïve customer who didn't do his homework? 

Another common mortgagefraude is when a borrower goes to a lender who is pushing his staff to do a particular type of loan. The lender might even be paying extra commission – spiffs – to motivate the sales force.  This loan may not be suitable for the client, but the loan officer pushes it anyway instead of showing borrowers alternatives that would better help them meet their goals. Is this fraud?

A borrower initiates an application and seems satisfied with the terms as laid out on the Good Faith Estimate of Closing Costs and the Truth-in Lending (yeah right!) Statement. When it’s time to lock the loan, the loan office says, incorrectly, that rates have gone up a bit.  So he gets the customer – who trusts his loan officer – to agree to pay 6.25% instead of 6%.

Or, in a similar situation, let’s assume that the market gets better and rates go lower. A truth-teller would call his client and say, “You’re lucky. Rates have fallen and I can now get you 5.75% instead of the 6% I originally quoted.” But he doesn’t tell the client that, and the loan closes at 6%.

In both these situations, the lender - be it bank, mortgage banker, or mortgage broker – would earn an additional 1% of the loan amount; say $3,000 on a $300,000 loan. That’s all gravy. We even have a term for this in the industry: it’s called "overage."  Indeed, a part of some loan officer’s compensation packages is an agreement as to how the company and the loan officer will split up overages. 

In this situation, the company is not only NOT looking our for its customers’ interests, they are consciously creating conditions in which they encourage the loan officers to earn extra compensation at their customers’ expense!  Is this fraud?

Well, I think that these are all cases of mortgagefraude. Sadly, no regulatory agency exists at the federal nor the state level who seems interested in this.  They assume that “market forces” will prevent it.

Dream on!

As promised, here are the definitions of the German words:

Anrufbeantworter – telephone answering machine

Schadenfreude - enjoyment obtained from the troubles of others, or taking comfort at another person’s misery

Weltanschauung – world view, a comprehensive conception or apprehension of the world, or how your psyche thinks the world works

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