Dennis' Mortgage Blog

Making the news today was a report released by a division of the Treasury Department that incidents of reported mortgage fraud rose to their highest levels ever in 2010.  The Financial Crimes Enforcement Network, which is part of the Treasury Department, reported 70,472 "suspicious activity reports" related to mortgages and potential fraud.Since these incidents were reported in 2010 the vast majority of the actual fraud, or suspected fraud, occurred earlier when the mortgages were originated and funded.  Why are they being reported now? Because now is when they are in default, foreclosure or going through short sales and the files are being reviewed.

Once a standard part of the mortgage industry application and approval process, stated income on files are now considered the primary incidence of fraud being reported by lenders and the two major GSE's (government sponsored entity), Fannie Mae and Freddie Mac.  Anyone in the industry from 2000 through 2007 when the Automated Underwriting Systems (AUS) for Fannie and Freddie approved a vast majority of the mortgages being underwritten and funded knows that a very significant percentage of the approvals called for no income verification.

Essentially the AUS approvals required by lenders to fund mortgages so they could be sold to Fannie or Freddie were requiring only verification of employment but not income.  As a result millions of mortgages were funded in which at application the question was asked, "how much do you make?"  The question was answered and put on the application and that was the end of the income component of the application process.  Now as loans originated in 2004, 2005, 2006...go into default Fannie and Freddie are discovering the phys ed teacher in Peoria may not have made $105,000 as it says on the application which qualified him to get a $350,000 mortgage on his home to go with his $450 car payment, $375 boat payment and $1200 a month in credit card bills.  Shocking isn't it?

Why are these reports being made now?  Here is a time line of a hypothetical mortgage in default today that was originated and funded in 2006:

• Mortgage application taken March 2006, applicant tells mortgage originator how much he makes, how much he has in the bank and either what the value of his home is (refinance) or what the purchase price is
• Mortgage originator uploads application information into Fannie Mae's Desktop Underwriter (DU) system
• DU approval requests verbal verification applicant is working, funds to be brought to closing and no appraisal necessary
• Mortgage is funded by lender with documentation only as required by the Fannie Mae DU approval
• Mortgage is packaged with other similarly approved and funded mortgages in April 2006 and sold to Fannie Mae
• Fannie Mae packages the lenders mortgages into a large pool of mortgages funded and purchased by Fannie Mae and sold as a Mortgage Backed Security (MBS) in May 2006
• Borrower defaults on mortgage in March 2010 
• Fannie Mae gets notice of default on mortgage and investigates file, notices school teacher in Peoria, Ill is making $105,000 a year.  Contacts school district and determines even the superintendent of schools does not make that much.
• Fannie Mae sends the mortgage back to lender and requires the lender to buy-back the file based on fraudulent income information in file
• Lender investigates file and concurs with Fannie's assessment that income was overstated.  Files report of "suspicious activity" with Treasury Department

Multiply by 70,000 and that is yesterday's report from the Treasury Department.

As foreclosures continue to increase through the year, and increase again after short term rates begin to rise in the future, we can expect the number of "suspicious activity reports" to rise as well. 

To end on a happier note, the incidence of fraud in mortgage applications has gone down considerably with the tightening of underwriting criteria and required documentation.  While many complain that the underwriting is too tight, the quality of mortgages being approved and funded are the highest since the Fannie and Freddie allowed lenders to rely on the AUS findings for file documentation.  Once the current cycle of foreclosures and defaults for mortgages made prior to 2008 or 2009 is over we will see the reports of suspicious activity drop dramatically.

Mortgage rates continue to remain low for the time being.  Call or email Dennis today to determine your purchasing power for a new home loan or monthly savings from a refinance.  Direct dial 562-472-1118