Tuesday, November 25, 2008

Sub-Prime? The Next Generation! FHA? (really?)


They're Baaack! Just when we thought it was safe to go into the wate.. no no no, I meant the mortgage market! This time, FHA loans are the mark.

With the drying-up (or is that drying-down?) of the credit and especially the mortgage market, as announced, the Federal government is trying to re-start the housing market. One way to do that is to use already existing programs, like VA, FHA, USDA Rural Home, etc. Each of these programs is very good at what it does, and with all three of them it is to make loans, specifically mortgage loans to current or existing homeowners.

There is always a catch - some mortgage brokers are committing the same kind of fraud with FHA loans as were prevalent with other loans, such as those made by IndyMacBank, Wells Fargo, Option One, Ameriquest et al. Mortgage applications and documentation is not meant to be an exercise in creative writing. Unfortunately too many mortgage originators do not understand that.

The tricks are the same -altering an application after the borrower has signed it so income can be added to make the loan more attractive to an underwriter. Getting someone in a Bank to falsify Verifications of Deposit or Verifications of Mortgage, also works well to fool the folks making the decisions. Having fake appraisals done, where the value is placed well above the market is another favorite. In June of 2008, the Massachusetts Attorney General announced that the principals of Direct Finance Corporation, which was licensed by the Division of Banks, and at least two employees of community banks were indicted for mortgage fraud and various other matters, for doing just those things.

FHA was too trusting of its originators because they were usually trustworthy. Once the "bad guys" lost the ability to do conventional non-agency loans, like to the lenders mentioned above, these middlemen/women just took the same techniques and applied them to the VA/FHA/USDA field. We might think that these groups would have been more vigilant but...

In the 1980s, while I was working with the Maryland S&L crisis, running failed S&Ls I came across a true story about mortgage fraud that seems both comical and sad now. There were two older women who had been in the mortgage business for years. Keep in mind, that in the mid 80s interest rates were in the mid teens, like 15% for a NORMAL residential mortgage rate.

These women worked with FHA and VA loans almost exclusively. To make a loan more appealing, they would alter an application, make up Verifications, change documents before, during and after closings. Remember, PCs were just getting started so the method was the comical (now) side. They had no fewer than 10 typewriters of different manufacture so they could match the type style. Additionally, they had several IBM Selectrics, the ones with the little interchangeable steel ball, so they could use a hundred different type faces and fonts. They were caught by chance and went to jail for several years (the sad part). Point is that the mortgage fraud business has always been alive and well.

Author's Copyright by Richard I. Isacoff, Esq - November 2008


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