Predatory Borrowing?

Sunday's Times reported here on a study by BasePoint Analytics of more than three million loans.  According to the article, the study found that "[a]s much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications . . . . Applications with misrepresentations were also five times as likely to go into default."  The article explains: "In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application . . . ."  The study is not posted on the web, but you can request a copy from BasePoint here.  In some cases, borrowers have claimed that the mortgage broker misrepresented facts in the applications without the borrower's knowledge, see e.g., Matthews v. New Century Mortgage Corp., 185 F. Supp. 2d 874 (S.D.Oh. 2002), so I'm curious to see if the study sheds any light on who is responsible for the fabrications.

Comments

[Underwriter]

Having worked as an underwriter and account executive for several major lenders over the last ten years I can say that the adverage borrower is not sofisticated enough to commit fraud without being caught. There are many, many ways for an underwriter to verify the information and documentation required to close a loan.

As an account executive I identified fraud in nearly every file I previewed. My course of action was to contact my boss or an underwriter and tell them the scenario. In return they gave me several ways to get around the problem at hand. As an underwriter I was instructed to take any negative information out of the file and send the mortgage broker a list of conditions required to close the loan such as: your tax returns are unacceptable but I will except a letter from A CPA stating the borrowers income. ( we (the underwriters) were not required to verify the CPA letter or check to make sure the person writing the letter was even a real CPA).

These actions are not the actions of a rogue employee trying to make more money. All employees were required to get "creative" during the loan process. As a matter of fact most of the time no fraud was committed. The lender (ie someone in the corporate office) would sign off on exception after exception to get the loans closed. They were not concerned with the long term affect because they had Wall Street investors lined up to buy these loans with the retirement funds from the local teachers union.

Although at the time it seemed like it was our job to advocate for the borrower, trying to get them into a new home. In retrospect we were coerced into doing all
the dirty work so the Lenders Executives and Wall Street portfolio managers could get rich. While the teachers loose there retirement funds, the employees loose there jobs and 401Ks and the borrower loose everything.

[Account Deleted]

I can't speak for the borrowers in the study, but I am not surprised to hear that statistic. I have interviewed numerous people who had misrepresentations--usually of income--on their loan applications.

Many point it out to me first, in fact, as evidence of fraud by their mortgage broker. They do not seem to understand until I explain it that their signature on the application means that it was actually they who made the misrepresentation.

Some knew about the misrepresentation in advance. Most claimed they did not. I cannot sort out the honest ones from the liars, but I suspect there are more of the former.