by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Mortgage fraud seems to be the hot topic, today. I attended a party this weekend where I was pelted with questions and varying opinions about the topic. Many came from the legal crew, a few from bankers, but most were from worried consumers. The former two groups scared the crap out of the latter. Each question that was posed was answered by each of these three parties:
CORPORATE ATTORNEY: Any lie on a federal form is a felony.
PERSONAL INJURY ATTORNEY: Were you coerced by the mortgage broker? Most clients were and you could sue for damages.
BANKERS: If it’s a portfolio loan, we may pursue legal action. If we securitized it, it was built into the pricing.
My opinions to some common questions, about mortgage fraud, are below:
If I obtained a loan as a stated income loan, did I commit fraud?
Not if you didn’t lie. Stated income loans were designed for those with erratic income or rising income. The best litmus-test would be to pull the 3-6 bank statements prior to application. If the monthly deposits mirrored your “stated” monthly income, you didn’t lie. If you grossly overstated that amount, you lied and probably committed fraud. Cash flow rules.
I bought a second home with the intention to use it as a vacation rental property. I financed it as a second home, did I commit fraud?
Not if you resided in it for at least 15 days each year. It’s a “vacation” home and if you used it for vacations, you’re fine. You are still allowed to rent out a vacation home.
I bought a property, in my daughter’s name, as an owner-occupied home but she rents rooms out to students. Did I commit fraud?
FHA has the “kiddie-condo” program. Actually, that means that you can be a non-occupying co-borrower and still get a owner-occupied rate. If your daughter qualified on her own, and you helped her with the down payment by signing a gift letter, you might be liable for taxation but the transaction appears to be legit.
I have funky employment. It’s not steady so I coerced my existing employer to “fudge’ the dates on a Verification of Employment form. Did I commit fraud?
Go directly to jail, do not collect $200. Say hello to your boss while you’re there.
I added my name to my father’s Merrill Lynch account a few months before the loan application to “boost up” my assets for the application. Was that fraud?
Kosher. Your father was VERY trusting as you could have cleaned out the account but it was kosher. Parents can add children to their accounts for a number of reasons. Legally, you owned those assets for more than 60 days before application so the money was (and may still be) yours. I’d like to meet your father.
I’m about to lose my home and want to offer a “work-out” with the lender. The lender is asking for my financial statements, which don’t match up with the income I stated, two years ago. What should I do?
You have two options: lose the house or buck up and tell the truth. Why did you “lie”? Well, you lied to get the loan, right? Let’s be reasonable, though. Originators purposefully stated income due to laziness and lax underwriting guidelines. They often “coached” borrowers. Mortgage money was so plentiful, income verification was sounding as outdated as “vinyl records”. If you want to keep your home by working out the loan, give the lender the income docs; just remind them that you offered them in 2005…BEFORE they approved the loan.
Mortgage fraud is often based upon intent and subsequent actions. The FBI is most interested in fraud committed by “industry insiders”, at this time. Lenders are scrambling to cauterize wounds and want straightforward talk from you, right now. Forget what happened if you’re trying to save your home. Be honest, be forthright, and don’t get bullied by some call-center employee, reading from a script.
This is a monumental screw up of magnanimous proportion. Drastic action (even honesty) is called for in times of crisis.
THE SMALL PRINT: YOU SHOULD CONSULT AN ATTORNEY IF YOU THINK YOU MAY HAVE COMMITTED MORTGAGE FRAUD. THIS IS NOT AN OFFER OF LEGAL ADVICE, RATHER ONE ORIGINATOR’S OPINION ABOUT HOW TO PRAGMATICALLY DEAL WITH THE MORTGAGE CRISIS, BROUGHT ON BY THE DRUNKEN ORGY WE HAD, IN LENDING, FROM 2002-2006.
THESE ARE QUESTIONS I GET FROM STRANGERS BECAUSE OF MY INTERNET PRESENCE. NONE OF THE HYPOTHETICAL EXAMPLES I CITE ARE ACTUAL CASE STUDIES. I HAVE NO KNOWLEDGE OF NOR PARTICIPATION IN ANY MORTGAGE FRAUD SCHEME, PAST OR PRESENT
Robert Kerr says:
Good topic!
I’d estimate that about 100% of the borrowers who chose to go stated income either committed mortgage fraud on their income declarations or tax fraud on their IRS returns.
The typical no-doc application process I witnessed (YMMV) went like this: the lender told the buyer how much income he needed, the buyer claimed that amount of income and the loan was originated.
There’s lots of hand-wringing happening right now but there’s barely any innocence here. Everyone involved in the process, from lenders to appraisers to agents to buyers knew that the market was rife with fraud, but they all turned a blind eye to it because there was big money to be made.
March 5, 2008 — 7:26 am
Chris Johnson says:
Wow. Again impressive–I wonder what we do about people in stated programs that were prommised one thing in a business opportunity and mislead.
I think there will be few prosecutions…
March 5, 2008 — 9:46 am
Mike Farmer says:
If the truth be known, I imagine fraud is very widespread. One of my agents was running something past me yesterday that a client wanted to do creatively with a mortgage — I won’t go into details, but my answer was “The only thing wrong with the plan is that it’s illegal, you could lose your license and there could possibly be jail time for all, but other than that it’s a clever plan.”
March 5, 2008 — 10:05 am
geno petro says:
Dear Suzie Orman, (aka BB)
In August of 2007 I purchased a Single Family House with a Stated Income/Verified Assets ARM. I was informed shortly after Approval that if the loan didn’t Close by the last day of the Lock then Income would also have to be verified. The loan was placed in my Lender’s personal portfolio but I could tell by the tone of my LO that there was no more fooling around with such paper and missing the Close date would be bad. I’m afraid to go back and Refi as income since then has been erratic at best. Oh yeah, I spent most of the verified assets on renovations, vacations, and debauchery. What should I do? What if I can no longer ‘qualify’ based on commission only income with significantly reduced assets?
If I go back to the same Lender will they arrest me?
Signed,
Name Withheld to cover my ass
(Geno)
March 5, 2008 — 12:33 pm
Ken Smith says:
Robert did you come to that insightful conclusion based on the experience of your clients and your actions?
Because as someone who has used stated income loans for every purchase and refi over the last 7 years I take offense to your statement:
My loan officer would also take offense as he always asked exactly what I made the prior year and what my current income was YTD.
Stated income loans where just easier to use and with a 800 credit score I didn’t have to take a hit in the rates, or it was so small that my time was more valuable then the difference.
March 5, 2008 — 12:36 pm
Thomas Moens says:
Excellent post! The (un)funny thing is, if people were honest about their stated income, they possibly could have obtained a better interest rate or qualified for a better loan program, and they might be able to afford their house payment.
March 5, 2008 — 1:37 pm
Laurie Manny says:
Dear Lender,
I purchased my condo 4 years ago. My nasty Realtor/lender talked me into buying a 2nd condo, 2 years ago upside down $1,000 per month. They swore I would make a fortune on appreciation in 2 years when they would sell it for me.
My condo appreciated – a lot – I took a $200k heloc and blew it on dinners, clothing, vacations and drinking. The tenant in the condo didn’t pay rent, it took me 8 months to evict them. I can’t afford the combined payments anymore, my marriage is toast, the money is gone, the party is over. BTW I lied on the loan to get the 2nd condo. I want out, it’s just not fun anymore.
Sell both – short sales. Will I get into trouble? Why do I have to pay capitol gains taxes on the rental, I have been screwed over enough!
March 6, 2008 — 3:11 pm