Regulations can’t spell the end of mortgage loan fraud
Mortgage loan fraud, virtually a cottage industry during the Great Recession, has thankfully disappeared from the economic landscape, as the financial crisis blows itself out.
It has, hasn’t it?
Don’t be silly; borrowing and lending are done by human beings, and a real estate loan involves thousands, or millions, of dollars. When there’s big money on the table, somebody will always try to sweep some of it off into the wastebasket. There were plenty of real estate loan scams before the feeding frenzy of the early 21st century, and later, piranhas didn’t go extinct just because Congress created the Consumer Financial Protection Bureau.
Fraud was and is as varied as deals are different. It can be an elaborate structure, involving, say, a title company, an appraiser, a mortgage broker and a Realtor, or simply a knee-jerk reaction to a transactional problem.
A short while ago, I got a call from a Realtor friend in a resort town. A buyer had made an offer on a luxury condo, and specified in the offer than the unit was to be an investment. My friend was looking for the best loan program, and, of course, I told him that a second home would qualify for the best deal. The other broker’s response to that was, “Well, we’ll just take that out of the contract.” My friend, the straightest arrow in the quiver, would have none of it. But the other agent had just suggested occupancy fraud, perennially the most prevalent scam. It’s a simple maneuver, without complexity, and not too easy to spot. It’s practically never discovered unless the subject loan goes into default. In the real estate and lending businesses, it’s very easy to get chalk on your shoes.
Another oldie but goodie is the double contracting ploy. A buyer doesn’t have enough for a down payment, so a contract is written at, say $100,000 sales price for the lender, with the real sales price being $90,000. Voila! Ten percent down at the click of a key.
I first ran into this back in 1964, when contracts were written on typewriters. It’s still going strong; it’s such an easy way to solve a problem.
Lending fraud is generally perceived as almost a victimless crime. Who’s hurt but the lenders, and they more or less deserve it. Many of us have known of neighbors who flipped a house that they lied about living in, or mortgage brokers who created bogus documentation, but at the time it probably didn’t occur to us to blow any whistle. Of course a lot of us, perps and bystanders alike, were in trouble when the chickens flew back to the coop and we lost jobs and homes.
The great majority of fraudulent loans turned into foreclosures, as the bottom fell out of the real estate market, and then the stock market, and a lot of other markets.
But we can’t be too hard on us common folk. Little companies and big, community financial institutions and mega-banks were sucked up in the felonious whirlwind.
Fannie Mae — and you don’t get bigger than that unless you’re a country with a GNP the size of Russia — bought from Taylor, Bean and Whitaker a big chunk of some $500,000,000 in loans that didn’t exist. Fannie cut TBW off when it found out about the swindle, but just sort of forgot to notify Brand X, Freddie Mac, its sister government-sponsored enterprise, which went on to buy a boatload of mortgages that weren’t mortgages.
Fannie also didn’t notify its government regulator. After all, what bank, big or little, is going to pick up the phone and say, “Hey, Feds, we really screwed up. Please have the examiners here at 8 o’clock tomorrow morning.”
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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