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This week Bruce is joined once again by David Kittle. David began his mortgage banking business in 1978. In 1994 he founded Associates Mortgage Group, and owned it until 2006. He is a past chairman of the Mortgage Bankers Association, and is currently senior director for IMARK.
Mortgage brokers are required to have checks and balances to ensure that funded loans are legitimate. Brokers table fund loans and sell those loans to other loans, who then sell those loans to Fannie or Freddie. Fannie Mae does have rules requiring the underwriting lender to check for fraud, but this is not necessarily the requirement of the mortgage broker.
Most quality control plans require a minimum of 10 percent, and some lenders have gone higher than that. David Kittle recommends that you go as high as 25 percent. We need to do as much as possible to detect fraud before loans are funded. We need to personally call the people being written down as home buyers to ensure that they approve of the transactions occurring with their names. Sometimes identity theft occurs, and the people stealing your identity will sell your house.
The most frequently committed fraud that has occurred over the last few years has been performed on no income/ no asset loans. On these loans, people will lie about their job and income details with the intent to flip a property. Many fraud schemes are occurring over the internet, because documents can be easily and convincingly produced.
There is a lot of talk about mortgage fraud, and you would think that people would get the message that committing fraud can be severely penalized. David claims that the government is primarily focused on attacking fraud cases involving citizens with larger incomes. He believes the more fraud is penalized, the less people will try to commit fraud.
Bank of America recently claimed they save approximately 15 percent when they accomplish a short sale rather than a trustee sale. There are transactions known as flopping in which an investor will submit an offer on a property at a reduced price. The broker will then submit the offer to the lender. The lender will be looking at a broker price opinion that they believe is accurate, and that will set up the purchase price. Shortly after, this house will be sold at a different price. This is a new kind of fraud, which Bruce and David recently learned of within the past few days.
Bruce and David discuss fraud and short sales and what’s being perceived as fraud and what is not. Disclosure is key as is disclosure. David would agree as long is there is full disclosure and all paperwork is correct, that this is not fraudulent.
In 2005, Bruce filled out a loan application for a 10-31 exchange. When Bruce read the loan documents, he noticed that the paperwork had been radically changed. He called the broker and told her that the loan application had been changed. She said, “Your application was too complex and confusing, so we simplified the paperwork to get the loan done.” Bruce told her that is considered loan fraud, and she then got offended. She exclaimed, “We do this for all our clients.” This amazed Bruce, because they did not even discuss the changes with him. If he had signed those papers without re-reading the documents, he would have taken part in fraud without knowing it. David says this kind of fraud happens all the time. If a borrower notices this sort of change, they should report it as fraud immediately. Loan applications are very complex and difficult to understand, so few people read their loan documents. So when documents get switched after the application process, they walk away thinking that everything is fine.
At the present time, we are probably making the best loans we have made in 15 years. Nobody wants to be involved in a risky loan. It is up to the mortgage bank to make sure that the people they hire are responsible. Mortgage banks need to do a better job of checking on their employees. If a loan officer goes from a mediocre loan officer to top producer in a few months, that should give you a warning sign.
To get a loan modification, you must have hardship. Right now, people are trying to get loan mods by attempting to look poorer than they really are. We need to be honest with people receiving loan modifications. Giving them a loan modification will not save them from default. In another 5 months, they will most likely redefault. The best way for an alcoholic to recover is for them to reach their lowest point. We need to reach our lowest point on values, and then the market will be able to recover.
When Kittle’s company investigates loan fraud, they do not walk to each person involved in the loan and conduct an interview. They collect the loan information from whoever filed the claim, and then they call the people involved and ask them if any sort of misleading information was placed on the loan. IMARK has over 100 employees in Santa Ana, California who were recruited out of college. Those students are trained to look at files very quickly to determine whether or not fraud may have been committed.
If fraud is involved, lenders may be asked to repurchase the loan for a number of reasons, but then the lender will turn around and make a claim on the mortgage insurance. The mortgage insurance company will want to check out the loan to make sure that the person who made the loan did everything they were supposed to in order to prevent fraud. Kittle’s company determines whether or not the loan maker did their job, and then they send that information to the mortgage insurance company. The mortgage insurance company then determines whether they will pay for the costs, or kick the loan back to the lender. Not all denied mortgage claims become criminal files. If the loan is kicked back to a bank, it becomes the bank’s loss. Sometimes the lender has bought a kicked-back loan from a broker or mortgage lender, and sometimes the lender will go after those people.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.