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PreQualPal introduces automated qualification/referral suite

Jun 05, 2006

The sub-prime forum: Fraud isn't just for the FBIKen OrmanMortgage fraud Welcome to "The sub-prime forum," a column designed to help improve your knowledge of alt-A lending and offer tips to increase your share of this lucrative market. Author's note: I would like to take this opportunity to introduce myself as the new author of "The sub-prime forum" and thank a great business partner and friend, Richard Bitner. Mr. Bitner, the former president of Kellner Mortgage Investments (KMI) and author of this article up until last month, left KMI and Plano, Texas to pursue other opportunities within the mortgage business and has moved to North Carolina. We certainly wish him the best. As for me, I've been writing mortgage loans for 14 years, now. I am a finance company veteran (that's no joke—I literally have a scar to prove it). The mortgage industry has been wonderful to me, and I consider myself very fortunate to be a part of an amazing and compelling industry. In 2005, sub-prime lenders set another volume record, as they have every year of the last five years, growing by 400 percent. That kind of stout volume growth brings with it a slew of problems, with mortgage fraud and misrepresentations of material facts being two of the most serious. In fact, these issues are so serious that the federal government requires that form FNMA 1003 (Uniform Residential Loan Application) disclose the punishment for such violations by stating in Section IX, " ... penalties including, but not limited to, fines or imprisonment or both ... " In December 2005, the FBI issued a press release that stated, "Mortgage fraud is one of the fastest growing white collar crimes in the United States," and that lenders are projected to lose more than $1 billion in 2005. The press release also stated that 80 percent of mortgage fraud was perpetrated by industry professionals who commit "fraud for profit," which usually involves multiple transactions, straw buyers, inflated appraisals and occupancy misrepresentation. My company lost hundreds of thousands of dollars, last year, because of fraud. I would like to share with you some basic principles, regarding fraud and how you can keep from writing fraudulent loans. First, you must acknowledge that there are individuals in your town, on your phone and on your Web site who are plotting to use you. They want to use you to help them steal. To confuse the issue, the schemes are devised with the help of real estate professionals (real estate agents, builders, investors, appraisers, title representatives, accountants, loan officers, processors, etc.). These individuals are experienced and educated in the inner workings of the mortgage process and are motivated by greed. They will lie, alter documents, misrepresent ownership and inflate value. They want you to risk your livelihood, reputation and freedom by turning your head, closing your eyes and embracing negligence. Many of our colleagues find themselves faced with these temptations and choose to go along with the farce. Second, you must formulate and practice a consistent quality control review of new applicants, even if they are referred to you by a trusted source. In the past year, I have witnessed loan officers whom we trusted submit fraudulent loan packages to our underwriting department. These loan officers did not verify the authenticity of the documents with which they were presented. They simply assumed the documents were legitimate and relied on the lender to alert them to any misrepresentations. For the obvious misrepresentations, here are some steps you can take to verify the authenticity of the documents: Pay stubs, W2s and stated income • Check Social Security and Medicare withholdings. The accurate percentage is 6.2 percent for Social Security and 1.45 percent for Medicare. Compare it with both current earnings and year-to-date earnings. If the calculated figures do not calculate, it may not be fraud, but you will know to ask more questions. • Check Social Security earnings. The cap was $90,000 in 2005 and $94,200 in 2006. Medicare earnings are not capped. • If you are still skeptical, ask the proposed buyer to execute a 4506T (IRS Form 4506T—Request for Transcript of Tax Return) and ask one of your trusted lenders to run it through its quality control service. We are happy to help our brokers through that process. • Stated-income, no-doc and no-income loans have higher incidences of fraud. Perform reverse phone searches on the employer and the buyer's current residence. In several incidences recently, we have found serious discrepancies. Sales contract • Most fraudulent loans exclude real estate agents and multiple listing services. Many of the subject properties have had ownership transfers in the most recent 12 months. Ask the proposed buyer how he came across your name or company. Also, ask how he came across the subject property and if he is aware that the seller acquired it in the last 12 months. •Research the buyer and seller through the tax assessor's Web site. Discovering the number of properties your proposed borrower and seller own is easy to do with a couple of clicks of the mouse. Many buyers of flipped properties will have recently purchased multiple properties, which are not listed on the real estate-owned section of the 1003. Additionally, a professional real estate investor typically will not buy a flipped property. These tips are good first steps to ensuring that the loan packages you intend to submit to your lenders have had at least a cursory quality control overview. Third, work closely with your lenders. You assure your lender that you are a responsible partner by taking remedial steps to verify details of the loan and loan documents. Unfortunately, loan officers, processors, appraisers, brokerage owners, etc. misrepresent facts to lenders every day, which creates an environment of distrust. Lenders appreciate brokers and loan officers who are serious about their reputations and intend on making the mortgage industry their careers. Fourth, hire employees with character. Experienced loan officers and processors may be able to help your company grow without a lot of training, but they may also bring with them unacceptable referral sources or knowledge of how to twist the system for illegitimate gain. When interviewing a candidate, ask specific questions about where he worked, why he left and how he generated leads. Ask for several professional references with at least one coming from a direct supervisor. Additionally, get permission to pull credit. Credit reports detail residency and work histories, and might shed light on discrepancies and help you make a more informed decision about your prospective employee. This issue is not complex. The bad guys inflate property value, flip properties, lie about occupancy, lie about being real estate-owned and lie about income. They will even falsify federal documents to try to pull it off. By instituting a consistent quality control review that includes reviews of loan documents, borrower verification and property ownership transfers, lenders and brokers will have taken the first steps to becoming more responsible partners in the mortgage process. Let's all mind our stores better this year, and maybe we can get a few more unscrupulous peers out of the business and off of the street. Ken Orman is president of Kellner Mortgage Investments, a nationwide wholesale sub-prime lender based in Plano, Texas. He can be reached at (866) 416-9995, ext. 105 or e-mail [email protected]
About the author
Jun 05, 2006
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