It should come as no surprise that fraud and misrepresentation costs the mortgage industry a lot of money each year and we all carry the burden of paying those costs through higher interest rates and fees. Prior to the mortgage meltdown that began in 2008, loans that did not require any income documentation or asset verification were both popular and abused. Many homebuyers were able to obtain financing that proved to be beyond their means to pay back. When homeowners had to walk away (or simply chose to walk away) from their mortgage obligation, banks along with end investors such as Freddie Mac, Fannie Mae and HUD lost enormous sums of money. Rates and fees on new mortgages take those potential losses into account.
A recent example of fraud that appeared in newspapers involved a mortgage originator who told the prospective homebuyer that he really didn't have to rent out his departure home but just had to say that he was going to. This scenario is a common dilemma that the prospective homebuyer finds himself in when he currently owns a home but wants to buy another home to move to. Since most homebuyers do not have enough income to qualify for two mortgages and since they do not want to sell their current home before they buy, the mortgage industry may allow the move up buyer to offset a portion of the mortgage payment on the current home with rental income. However, to count rental income, the requirements are quite strict. For example, the prospective borrower must have a tenant, a signed lease and the first month's rent. To top it off, the mortgage industry will still not count rents if the homeowner owes more than 70 percent of the value of his home (75 percent for an FHA loan).
Planned occupancy of the purchased property is also a major source of fraud. Since interest rates are lower for mortgages on owner occupied homes, a prospective homebuyer might state he is going to occupy the new property as his principal residence when in fact he plans on renting out the home. The mortgage industry is tuned into this kind of fraud and may do an occupancy check of the home after the new mortgage is in place. If the homebuyers are not found to be living in the home, the lender could and will call the loan due within 30 days. That would require the homeowner to do some scrambling in order to procure other financing if, indeed, financing were to be available at all.
We had a situation wherein a wife wanted to obtain a mortgage without disclosing that her husband had just gone through a short sale. Once the underwriter discovered that the wife was the only borrower because the husband had to short sale his home, the loan was denied.
It is incumbent upon Realtors, mortgage professionals, appraisers, escrow and title personnel, etc. to keep a sharp eye out for potential misrepresentation and nip it in the bud before anyone gets in trouble. After all, closing one more deal is definitely not worth the grief that could follow if the transaction was not done honestly and ethically.
Local mortgage consultant Peter Boutell has been writing a weekly column for the Sentinel since 1995. Send questions to 'Lending a Hand,' 1535 Seabright Ave., Santa Cruz, CA 95062, fax them to 425-1044 or email them to email@example.com. Archived columns are available at www.peterboutell.com.