Lenders Held Accountable For Bad Loans

Most lenders sell their loans on the secondary market the moment the deal is closed. This allows the lender to get back the cash they just loaned out, keeping as profit the loan fees they collected from the borrower. They can then lend the money again, collect more fees, - a cycle that keeps money flowing to borrowers and profit streaming into the bank.

In order to sell these loans, the bank must guarantee that there is no fraud in the loan package. For example, the borrower's income can not be inflated or the appraisal can not be inaccurate. And to keep the bank "honest", they must sign an agreement that says if fraud is found, the bank must buy back the loan.

To no one's surprise, not every loan is completely factual. In the past, the odds were pretty good that one or two lies could easily slip through the system. And if the borrower did have problems making a loan payment, the home could always be sold for a profit, since everyone knows that real estate never decreases in value...

Well - now that the bottom has fallen out of the real estate market and borrowers are defaulting at record numbers, the secondary market is taking a long, hard look at the loans they purchased. Freddie Mac and Fannie Mae, the largest purchasers of real estate loans, are reviewing every loan that defaults. If they find fraud, they are requiring the lenders to buy back the sub-standard loans.

Of course, banks are not eager to do this, partially because they do not want the non-performing loans, but also because many banks to not have the cash reserves to buy the loans. Lawsuits are being filed and the government is considering requiring banks to keep a larger cash reserve. And even if the real estate market revives soon, you can bet these loan fraud problems will affect real estate lending for many years.

We Need Your Help

A request has gone out to the real estate and mortgage industry asking for ideas on how to stem the mortgage and housing crisis. So I'm asking....

Do you have any ideas that might help pull the country out of this mess? If you do, please email me. I'll post the best responses here, and I'll also pass them along to the folks correlating this data.

THANKS!

Realtors Help Defeat "Declining Market" Policy

On May 2, I told you how Fannie Mae's "declining market" concept was seen by many as just another name for redlining. (See Declining Market Just A New Name For Redlining?). This program requires borrowers in "declining markets" to have 5% more equity in homes they wanted to purchase or refinance if they want to get a loan backed by Fannie Mae.

This policy was strongly denounced by the National Association of Realtors (NAR), who claimed that it was bad for the housing market because it discouraged consumers from buying homes in markets hardest-hit by foreclosures. "It stigmatized communities with lower sales and prices," said Dick Gaylord, president of the NAR.

NAR met several times this spring with Fannie Mae officials and sent letters reflecting members' unease with the policy. “We heard the concerns of NAR and we reviewed and determined that changes in our policy were needed,” said Gwen MuseEvans, Fannie Mae vice president for credit policy and controls.

So, effective June 1, the policy will change, allowing borrowers to get loans up to 95 percent loan-to-value, even in markets in which prices have been falling. “This new down payment policy reinforces our goal to support successful home-owning,” says Marianne Sullivan, Fannie Mae's senior vice president of credit policy and risk management for single-family homes.

Fannie Mae Tries to Save Drowning Borrowers

Fannie Mae has announced a new program meant to help borrowers who are "underwater", homeowners who owe more on their homes than the home is presently worth. If these borrowers tried to sell their homes, because of the decrease in value, they would have to bring cash to the closing in order to make up the difference between the sales price and the loan amount. If, instead, they wanted to keep the home but refinance for better rates or terms, they would also be required to add cash to make up the difference between the new appraised value and the old loan amount.

Fannie Mae's new program will refinance mortgages at up to 120% loan to value. It is limited to loans that are paid to date and that Fannie either owns or insures. Fannie estimates that 150,000 homeowners could be helped by such a program.

The thrust of the program is obviously to buy time. Fannie is betting that, by refinancing homeowners, it will assist them in keeping payments current and that in the long-term, house prices will improve. Critics say that this is just pushing today's problem into tomorrow. But given the number of foreclosures, anything that helps with today's crisis is worth trying.

Zillow Branches Out

Many people have heard of Zillow, an Internet site that helps people determine property values. Now Zillow has branched out to matching up borrowers and lenders. Many Internet sites already do this. But what makes Zillow unique is that the borrower is not required to provide sensitive personal information, such as name, social security number, address, etc., in order to get a free rate quote.

The borrower creates an anonymous mortgage request. The money can be used for a purchase, refinance, or a home equity loan. The borrower will be asked to provide information on the property, type of loan, income, debt, and an estimate of his credit rating. Of course, the more accurate the information you provide, the more accurate the loan quotes you will receive.

Lenders (an unlimited number of them according to Zillow) review the mortgage requests and submit mortgage quotes for those requests. These will not be "insta-quotes" done by a computer but rather personalized, hand-written quotes. The quote consists of an interest rate with specific lender fees, easily broken down into average monthly payments that meets the requirements of a particular loan product (e.g., 30-year fixed rate).

The borrower can then review the quotes and contact any lender whose offer is appealing. Of course, once the borrower makes contact, they are no longer anonymous. And the borrower can not consider these quotes as actual loan offers. The lender will need to verify the borrower's information before a firm offer will be made.

A very nice feature of the site is that borrowers can rate lenders with whom they have been in contact. This rating system will be available to other borrowers, so they can consider an lender's "score" when deciding which lender to use.

I did a test of the site, requesting a 30 year fixed rate loan for a refinance. I received responses from three lenders. One offered me a 5 year fixed rate instead of the the 30 year rate I requested. I gave him a poor rating. But the other two offered reasonable rates and fees.

This is a great tool for anyone who is loan-shopping. Even if you don't use one of Zillow's lenders, it's a good way for you to compare rates and terms offered by other lenders.

House Stealing - The Latest Scam on the Block

This is a repost of an article on the FBI website. You can see the original by clicking here.

What do you get when you combine two popular rackets these days—identity theft and mortgage fraud? A totally new kind of crime: house stealing.

Here’s how it generally works:

… The con artists start by picking out a house to steal—say, YOURS.
… Next, they assume your identity—getting a hold of your name and personal information (easy enough to do off the Internet) and using that to create fake IDs, social security cards, etc.
… Then, they go to an office supply store and purchase forms that transfer property.
… After forging your signature and using the fake IDs, they file these deeds with the proper authorities, and lo and behold, your house is now THEIRS.*

There are some variations on this theme…

… Con artists look for a vacant house—say, a vacation home or rental property—and do a little research to find out who owns it. Then, they steal the owner’s identity, go through the same process of transferring the deed, put the empty house on the market, and pocket the profits.
… Or, the fraudsters steal a house a family is still living in…find a buyer (someone, say, who is satisfied with a few online photos)…and sell the house without the family even knowing. In fact, the rightful owners continue right on paying the mortgage for a house they no longer own.

It can get even more complicated than this, as we learned in a recent case out of Los Angeles that we investigated with the IRS. Last year, a real estate business owner in southeast Los Angeles pled guilty to leading a scam that defrauded more than 100 homeowners and lenders out of some $12 million. She promised to help struggling homeowners pay their mortgages by refinancing their loans. Instead, she and her partners in crime used stolen identities or “straw buyers” (people who are paid for the illegal use of their personal information) to purchase these homes. They then pocketed the money they borrowed but never made any mortgage payments. In the process, the true owners lost the title to their homes and the banks were out the money they had loaned to fake buyers.

So how can prevent your house from getting stolen? Not easily, we’re sorry to say. The best you can do at this point is to stay vigilant. A few suggestions:

If you receive a payment book or information from a mortgage company that’s not yours, whether your name is on the envelope or not, don’t just throw it away. Open it, figure out what it says, and follow up with the company that sent it.
From time to time, it’s also a good idea to check all information pertaining to your house through your county’s deeds office. If you see any paperwork you don’t recognize or any signature that is not yours, look into it.

House-stealing is not too common at this point, but we’re keeping an eye out for any major cases or developing trends. Please contact us or your local police if you think you’ve been victimized.

Resources:
- Los Angeles investigation press release
- Mortgage Fraud: General overview and statistics
- Related story

* - Since the paperwork is fraudulent, the house doesn't legally belong to the con artists.

Declining Market Just A New Name For Redlining?

Banks used to "redline". Red lines were drawn around certain neighborhoods where the bank did not want to make loans. It was, quite simply, discrimination and it is now, thankfully, illegal. However, Fannie Mae and Freddie Mac are being accused of re-instituting this old practice under a new name, the "declining markets" lending policy. Under this policy, they charge borrowers higher fees and demand larger down payments when properties are located in areas where the lenders believe prices have dropped. Some industry estimates put the total number of Zip codes affected across the country at between 8,000 and 12,000.

Realtors groups are strongly protesting this policy. Timothy Sandos, president and CEO of the National Association of Hispanic Real Estate Professionals, says this makes buying homes disproportionately more costly for minorities and moderate-income families who can't afford the higher down payments and fees. Labeling an area as "declining" becomes a "circular, self-fulfilling prophecy," says Sandos. By making it more difficult to buy in these neighborhoods, the prices of homes drop. Richard Gaylord, the president of the National Association of Realtors, asked Freddie Mac and Fannie Mae to "discontinue the policy of stigmatizing entire Zip codes or metropolitan areas" as declining since they "typically include widely differing" local neighborhood conditions.

A Fannie spokesman said the company has heard the critiques on declining markets designations, "and we take (them) seriously." Freddie Mac said through a spokesman that it is "re-evaluating" its policy. But is it really appropriate to allow Freddie Mac and Fannie Mae to self regulate? What do you think?