It can of course come in many forms, some of which I’m sure we haven’t even caught yet. Sometimes it’s very obvious, sometimes it’s not as easy to spot. Unfortunately it costs all of us money! And even worse, at times it is encouraged (or at least facilitated) by the person on the other side of the desk from the borrower!
As you may recall on September 7, 2008 the Treasury Department seized control of both Fannie Mae and Freddie Mac. This means “we the people” now own Fannie Mae and Freddie Mac. This was due to multiple influences to be sure not the least of which was what I call organized fraud. I remember describing to a reporter what lending was like back in the middle of 2005 and 2006. I said “I used to have a little mirror in my office that I pulled out and asked the person to try to fog it. If they were able to fog the mirror I would exclaim ‘you’re approved!’”. The reporter looked back at me with wide eyes apparently not knowing whether to believe me or not. I reassured her I didn’t actually have a mirror. However, it was just about that easy to be approved for a loan back then. Now fast forward….
These days it isn’t nearly as easy to get a loan. It’s unfortunate as now in some cases I have to delay financing for some people that actually deserve to be approved far more than many folks did 2 years ago. The old adage is true, a (relatively) few bad apples spoils the whole barrel. I came across one of these bad apples recently and thought I’d tell the story about “Pat” who committed mortgage fraud at our (and Pat’s) expense. Way back in December of 2003 while living out of state….
Pat bought a condo in Destin. It was a 1,200 square foot $210,000 condo that Pat financed as a “second home” with a 7 year ARM. Pat’s timing was, while totally accidental, entirely perfect! Before Pat actually sold the condo Pat must have realized the potential of this get rich quick program because Pat bought another 1,200 square foot condo in August of 2004, financing it as yet another “second home” when it was only a mile away from the other “second home” she bought just 9 months earlier and still owned. Just 14 months after the purchase Pat sold the first “second home” for $195,000 more than Pat paid for it. Unbelievable huh? Imagine how much time Pat spent counting money both in hand and yet to come!!! Why not get richer???
2 months later while still owning one “second home” condo Pat bought a third 1,200 square foot condo very nearby calling it a “primary residence” and financing it with a monthly adjustable negative amortization loan where the payment was far below the actual amount of interest accrued and did nothing to pay down the principal. She got this aggressive loan on a property Pat intended to live in? Hmmm… Well “primary residence” means something different to Pat as Pat listed the condo for sale just over a month after purchasing it. Unfortunately for Pat the housing market that made Pat rich is also the housing market that financially ruined Pat. Now with 2 condos on the market the law started knocking…
Pat has been foreclosed on one property and the other is in pre-foreclosure. The list of legal action against Pat from lenders, taxing authorities, and homeowner associations is very lengthy. Now where was the actual fraud?
- A good underwriter will not let someone finance multiple homes calling them “second homes” or “primary residences” that are similar and are close by each other. An ethical Loan Officer won’t even take an application from a borrower trying to get preferred financing by calling the home a residence when it obviously won’t be.
o The Underwriter was committing fraud, or just didn’t care enough to actually look at the file. The borrower could fog a mirror….
o The Loan Officer either coached this borrower this way (fraud), or was so poorly trained that he or she didn’t know how to look at things logically.
o The borrower committed fraud when the borrower signed forms stating the condos were a type of residence they weren’t intended to be.
- Reasonable Underwriting guidelines would never allow a person to finance these homes this way.
o As all of these loans were with Countrywide Home Loans, we can reasonably assume that this single school teacher financed these homes using Countrywide’s “Fast and Easy Program” which allowed a borrower and Loan Officer to claim an income that made the deal work, whether it was a legitimate income or not was immaterial. This was like a petri dish for fraud!
It’s true that lending is more difficult these days. It takes more documentation, more signatures, and more patience. It’s because of people like “Pat”, the unethical Loan Officers that helped facilitate the behavior, and incautious loan programs like Countrywide’s now famous “Fast and Easy Program”. Hopefully all 3 have disappeared.
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