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Special Reports
Mortgage Fraud: Protecting
The Investment
Ky. RE Commission Reports Increase in Fraud Cases
You can't legislate morality.'
By Jennifer Harmon
LOUISVILLE, KY -- The Kentucky Real Estate Commission has been dealing with more
cases of mortgage fraud during the past couple of years. According to Lee Harris, general counsel for KREC, too
often mortgage brokers ask buyers to sign separate contracts reflecting a much higher purchase price than what
was originally agreed upon with the client.
The problem, as she sees it, relates to buyers who enter into a second mortgage
agreement who don't qualify for the amount they are trying to borrow. Brokers usually know how much their client
can afford, she observes.
"Maybe they have bad credit," she said. "Brokers monkey around
with the numbers to get them a loan they really wouldn't qualify for, one that might not be the best for this particular
consumer. They act like it's not a 100% loan when it is," she said.
There is more creative financing out there, she says, which could contribute to
the problem.
"Consumers are putting less money down to buy a home. You used to have to
save 20%, now you don't," Ms. Harris said.
"Since there are so many banks and mortgage companies out there offering
financing, there is a little more room to fudge the numbers. A certain percentage turn out to be defaulted, but
it's not a big problem for the larger companies."
Over 80% of buyers end up being foreclosed upon, Ms. Harris said, because they
can't afford the home and once the monthly payments become due, they can't pay them.
Because of dual contracting, the client may not see the purchase price listed
on the second agreement. And after the second contract is submitted to the underwriter, Ms. Harris says the property
is appraised at an inflated price, which is later listed on the property deed, all of which comes down to committing
a felony.
"We are trying to educate real estate licensees, agents, consumers and mortgage
brokers about mortgage fraud. It's important to have all of us, all of the different agencies, talk about the issues
of what's legal so we can combat the problem," she said.
Cases such as this give all brokers in the mortgage industry a bad name, according
to Jon McCain, executive director of the Kentucky Mortgage Brokers Association. Mr. McCain says fraud is not an
issue particular to any one state, but is an ongoing problem across the country.
"Fraud is detrimental to everybody involved. Wherever you go in the financial
industry, you're going to find crime, fraud. Crooks gravitate toward the industry," he said.
While it won't be cleaned up overnight, the state legislature has taken solid
steps to pass laws that require brokers and loan officers to complete continuing education courses.
License registration, background checks and fingerprinting sent to the FBI are
further indications that the industry means business.
"The FBI sends the agency back a card that says whether the employee was
ever convicted of fraud. Once the person is registered with the state, we know exactly who each person is and where
he works," Mr. McCain said.
When it comes to the word "predatory lending," Mr. McCain cringes, especially
when it pertains to high-cost home loans. "As soon as the word is laid on you, you're in trouble. But it doesn't
necessarily mean you did something wrong."
Lenders live under a different set of rules for high-cost home loans, Mr. McCain
said, and borrowers participate in them for a variety of legitimate reasons.
"If a candidate always pays his bills on time, he is likely to be offered
a 5.5% interest rate. If a person has a terrible credit score, it reflects that they don't pay bills on time, if
ever. Who is going to give them a 5.5% interest rate? If a senior citizen with good credit, who doesn't know the
law from up and down, receives a high-cost loan, now that's wrong," he said.
"You can make a lot of laws, but you can't legislate morality," he said.
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