Technology of a stoneJoe Cornofraud, eliminating the human underwriter, risk-based underwriting Fraud appears to be running rampant in the industry. Scaring us with the consequences has been diminished in an appreciating market. After all, where does the lender suffer any loss from false data on stated and other types of applications? Let's face it, we have had an amazing business financing collateral that continually appreciates in value. I can understand that the 125 percent loan-to-value loans, in the early part of this century, contributed to a "let's be crazy" application process. Also, we "dumbed-down" the industry with automation, and companies are being fully engulfed with the matrix only concept and eliminating the human underwriter from the process. With borrower scores, not FICO, and broker professional opinions (BPOs), the data points to being a "human element" where fraud is being experienced. I wonder how many of you brokers know that lenders have grades on you as well. There are sources available for every manner of risk that can be experienced in a loan file--and it includes real estate agents, the broker, borrower, appraiser and the electronic conduit used to transfer the information. We have averaged, measured and actuarially forecasted ratios and reserves into a boulder of data that truly represents nothing. My word processor just automatically processed out the comas that I placed in the last sentence of the above paragraph. My word, what happens if proper English returns? Okay, let me get back into the loan business and rephrase the question. What happens when property values flatten out or actually decline? What if my forecast of flat to declining interest rates in a devalued collateral market becomes a reality? We are seeing it today. Lenders who have not changed their guidelines to fit today's borrower are attacking the mortgage brokers and pointing fingers for damages. They will have the power and position to take the industry away from the mortgage brokers and reclaim what was taken from them due to the mortgage brokers. Wow! We actually arrived at the source of the fraud debacle in five paragraphs. Antiquated loan guidelines that no longer fit today's borrower. Downpayment, income ratios, cash reserves and assets have no impact on late payments, loan default or foreclosure. Yet they represent how lenders evaluate loan approval. The matrices and automation has taken on the weight of a large stone when mortgage brokers attempt to place the single mother with children into a loan. There is no way to verify income, yet she will never miss a mortgage payment and represents 16 percent of the borrowers in the industry today. What about the firefighter? He works four days a week for the fire department and has another job the other three days that is impossible to document and is a fantastic borrower. What about the domestic partnership that has stellar credit, yet is not part of the existing guideline statistics? Income has increased 22 percent over the past three years, while appreciation has increased 170 percent in some areas. Then we evaluate the various loan categories. Please e-mail me with the definitive answer to what constitutes an alt-A or sub-prime loan. We are introducing alt-B and other silly titles, which is just another placebo for inducing more fraud. The real issue is the industry failing to recognize and service the borrower of today. We need to develop new guidelines based on risk and call all the programs the same. We have the technology. We are weighted down by the loan qualification concepts that were created when there were no pagers, cell phones, calculators, copy and fax machines, and the modern paralysis of analysis. The data that we feed in is the very stone that invites today's borrower into lying and falsifying in order to qualify. When we see a moderate decline in value, along with flat and lower rates of interest, the lending institutions will use the fraud laws all the way to recapturing their lost industry. The best way to evaluate a borrower is risk-based. Here are the true parameters of a loan: -Occupancy; -The purpose of the loan; -Credit score; -The type of property; -The loan recording position; -The qualifying documentation; -Loan-to-value; -Loan amount; -Loan program; and -If there is a pre-payment penalty. Ratios, reserves, assets, and sourcing income and funds are eliminated. Okay, this is where I introduce what really causes late payments, default and foreclosure. The loss of a job, divorce and major medical, are the items that result in a loan going bad. If we can forecast when someone will be fired, get divorced and go in for major medical, we can risk-base evaluate a loan file. Where are these statistics you ask? The insurance industry has been calculating and utilizing them for decades. The insurance industry has detects and resolves fraud in their business. An employer grade and how long the borrower has worked there is much more important than how much income they earn. The borrowers of today need guidelines to fit the family make-up and culture of today. Fair credit should be established on risk-based evaluation founded on actual events that cause negative results, rather than income status and how much money a borrower has in the bank. The technology exists to adjust the underwriting guidelines for true and fair qualifying. The stone grows even bigger and drags down business to the level in what we are witnessing today. The lenders will call due and payable any falsely stated or misrepresented loan when values drop. The mortgage brokers will be found out in the cold and labeled the "new criminals of tomorrow." Each and every mortgage broker should be yelling and demanding that lender guidelines develop into a true representation of the real risks of a loan and eliminate the fraud that the old rules perpetrate. People want to buy and own property. This may be an aggressive article to comprehend, but why not develop loans to let them do so without lying and deceiving? The answer may have been stated multiple times in this article. Could it possibly be that banks, real estate investment trusts, financial planners, lead generating companies, etc. want to take the industry back? It is interesting to me that these entities are owned by the same lenders who make up the guidelines for mortgage brokers to comply to. I do not know, it is just an observation. I just want to get everyone thinking and focusing on resolving a problem rather than masking over it. If we want to maximize software and detect potential fraud in the process, let us utilize the data and re-enter the parameters that work and make an impact. Risk-based underwriting is the resolve--not just another mask program. We have the capability to create loan products that will be securitized on the open market. Credit unions and savings and loan companies are recognizing this and coming forth with their own products. The tax identification number borrower and reverse mortgages are not emerging into these companies. The credit unions and savings and loans are doing what the mortgage broker did years ago. They are meeting and getting to know the borrowers of today. The industry must recognize that you fail when you know the borrower, but do not meet their needs to finance property. Do this, and the world is ours--even with a declining collateral market. Joe Corno is president of Utah-based We Be Consulting and Seminars. He may be reached at (801) 836-2077 or e-mail [email protected].
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