Slower Home Markets Increase Likelihood of Mortgage Fraud

There are many factors involved in a slow housing market:

• Increased interest rates
• Overvalued markets
• The need for unique financing

Of growing concern in this particular downturn, moreover, is that diminished business will cause an influx of mortgage brokers to look the other way when generating leads and underwriting Florida home loans.

“Brokers have more financial incentive not to examine deeply all of the applicants and deal characteristics that they probably should,” says Mark Clifford, chief information officer of GE Home Finance.

This relaxed, laissez faire attitude could reverberate up the funding chain to financial institutions and then out into the secondary market where Florida home loans are purchased by investors.

That’s where, Clifford notes, “any claim that the loan source (broker) is solely culpable will not hold up under legal scrutiny. The argument that the lender did not gather information directly from the customer and thus shouldn’t have any liability in the transaction is viewed with increased skepticism by the courts,” he reports.

A case in point is the recently suspended, new ordinance in Montgomery County, Md., which would hold liable investors and buyers of a mortgage loan on the secondary market and be subjected to substantial monetary fines for violations of the law’s anti-discriminatory requirements.

The Mortgage Bankers Association argues that “as a result of this potential substantial monetary liability for violations, lenders, investors and buyers would have a great reluctance to make, sell or buy loans made in Montgomery County.”

Mix of challenges within the home loan world

As if the natural arc of business expansion and contraction were not challenge enough, loan originators also have to labor in a market overshadowed by the federal Do-Not-Call law, enacted three years ago and now blanketing more than 40 percent of all U.S. households. It is significantly limiting brokers’ previously unfettered telephone access to prospective borrowers.

Regulatory and legal issues aside, it is economic issues – notably tighter margins – that fuel the diligence problem, according to Chris Stimac, credit risk manager, Oak Street Mortgage.

“It is only natural,” he holds, “that with shrinking profits, there is less incentive to drill down in those mortgage applications and fewer personnel to do it.

“Obviously you’re not going to pay more people to take longer to look at loans,” says Stimac, who suggests brokers and loan officers ought to turn to technology for the heavy lifting.

This is especially important for the small- to mid-size originator who could be hurt by a slew of buybacks, or literally put out of business by serious litigation like a class-action lawsuit.

One mortgage company executive, who preferred not to be named, says he believes better data and more reliance on technological protections would enable lenders to take a more proactive stance on due diligence and fraud problems that might ensue. He claims today’s originators do not have the same level of expertise they had 20 years ago and that could silently contribute to more fraud.

The lesson, as always, is to be careful with your Florida home loan. Use the Wen to conduct your own research instead of putting all of your trust in a broker.