Lax Florida Mortgage Underwriting Fuels Foreclosure Crisis
Underwriting practices for Florida home loans have come under scrutiny in recent months, in light of widespread foreclosures and reports of mortgage fraud.
The job of an underwriter is to vet Florida mortgage applications. But some consumers and investors are now complaining about home loans that got what amounted to rubber-stamp approvals during the real estate boom.
Alejandro Alvarez, an executive at United Parcel Service who lives in Coral Gables, says negligent underwriting on the part of JP Morgan Chase allowed him to become a victim of mortgage fraud.
Thieves broke into his home and made off with a jewelry box containing his social security card. About a year later, Alvarez learned two west Kendall homes had been purchased in his name from the Florida mortgage lender, who was suing him for foreclosure.
After obtaining copies of the loan documents, Alvarez says he discovered the only correct information in the mortgage application was his Social Security number.
”This could have been so easily prevented,” he says. “I mean, if they had made one call.”
A spokesman for Chase Home Lending, the lending arm of the company, says the loan was bought from another originator, and that Chase acted quickly to address the identity theft once they learned of it.
One reason for lax underwriting is that companies sell home loans down a chain of investors, and so have little incentive to make sure they are sound, says Dale Ledbetter of Fort Lauderdale-based Ledbetter & Associates.
Wholesale lenders often buy loans from Florida mortgage brokers and immediately sell them to big investment firms. These firms in turn issue the loans to other institutional investors, who include them in mutual funds and pension funds as asset-backed securities.
Therefore, it’s the end investors who lose when loans go bad. Ledbetter’s firm has recently filed several lawsuits against Wall Street investment companies, alleging they failed to protect investors by properly scrutinizing loans.
Problems with underwriting grew largely out of the real estate boom, when lenders assumed that rising property values would cover the cost of bad loans, says Juan Carlos Perdomo, vice president of sales for Miami-based Verification Bureau. His company provides fraud prevention and data verification systems to mortgage lenders.
”They didn’t want to look into very deep detail because they were concentrating more on getting the commission and getting the deal done,” he says. “They weren’t looking at the long run.”
Lenders also faced manpower and time constraints, Perdomo says. The sheer volume of applications prompted some lenders to turn to automated underwriting systems rather than a set of eyes to comb through documents.
In places like the South Florida housing market, where property values appreciated by double digits every year, some loans were issued with few, if any, documents vouching for a borrower’s income or assets. These loans came with higher interest rates and potential for profit, but also opened the door for fraud.
An audit by one lender showed that borrowers’ income was exaggerated by more than half in nearly 60 percent of its loans requiring no documentation.
“If Wall Street had said, `We are going to be more careful about what we are going to take. We’re going to do more due diligence,’ then [Florida mortgage] fraud would not have proliferated to the extent that it did,” says attorney Ledbetter.
SOURCE: The Miami Herald
