We are working on a transaction that demonstrates just how easily a consumer can be guided into a mortgage fraud scenario by real estate agents and lending personnel who haven't been trained to understand just what this kind of fraud is and does to a lender.
I'm talking about the kind of mortgage fraud that pushes a transaction to close by circumventing mortgage underwriting guidelines. This is the kind of mortgage fraud on which the mortgage credit crisis was built and why when the boom cycle went bust we had a more serious collapse than we would have had if lending guidelines had been enforced.
In this case, the guideline is a USDA rule that says you cannot use the program to purchase an income producing/investment property.
The property in question has a single family home and a mobile home on the land. The mobile home has a tenant and the prospective purchaser, USDA applicant, wants the income from the rental to help pay the mortgage. He qualifies without it but says it would be hard to manage his budget without the extra income.
The existence of the mobile home was discovered when the appraiser went to the property and reported it. The lender then asked the real estate agents and the buyer to move forward with the idea that the mobile home would be removed from the site. The buyer doesn't want to lose the income and so the real estate agents concocted a scenario in which the property would be subdivided so that the buyer would purchase the house on one lot using USDA funds and then post closing, the seller would convey the mobile home and its lot for $1.00.
They discussed this plan with the loan officer who took the approach that is was "outside of the transaction" and so she didn't consider it a problem.
As the title agent in the transaction, when I found out about the plan, I spoke with the real estate agents, the buyer, the loan officer, and the seller and advised all that since the negotiated price included the mobile home and 2nd lot, that it was NOT outside of the transaction and that what they intended was to engage in mortgage fraud. I said it in a nice way to as not to offend but I wanted to make absolutely sure that they understood.
We discussed alternatives including removing the mobile home, going for a different loan program that would allow the property as is, subdividing and the buyer only buying the house with its lot but for a reduced price and perhaps then buying the mobile home and its lot separately and without using USDA money.
The buyer and I had several detailed conversations and he said he did not want to commit a crime or engage in mortgage fraud but since his loan officer and the real estate agents and some fellow he called at the courthouse all thought this could be done, he wanted another opinion. He wanted to talk with the USDA but he couldn't get them on the phone.
We also discussed how mortgage fraud is discovered through random audits and also targeted audits in the event of default. I explained that he was at risk as was the mortgage lender who could be denied a claim if the loan went into foreclosure. He called his loan officer and asked if she could discuss it with the USDA.
The loan officer called a "contact" at the USDA who told her it was okay which she conveyed to me and to the other parties.
Since the mortgage lender gives their authority for decision making to their underwriter, I said that if the specific underwriter on this transaction was given the full set of facts, that the seller would be conveying the newly subdivided off mobile home and lot for $1.00 post closing and that this was part of the agreement, then I would close the transaction and insure title. If not, I would not insure and they were welcome to find another title agency.
Did I overreact? I don't think so. I have no desire to collude to defraud a mortgage lender by helping to withhold information from the underwriter. So long as the mortgage underwriter has the full picture, then the lender makes their decision with open eyes and it's their decision to make.
The fraud is in the withholding of information to circumvent an underwriting guideline. If the USDA does not allow their money to be used to purchase income producing property and the mortgage underwriter who has the authority to interpret these guidelines and bind the mortgage lender decides that a post closing transfer for $1.00 does not equate to using USDA funds, then so be it. I haven't committed a fraud. I have provided full disclosure.
It might be that the underwriter will be found at fault for a poor decision at some later date, but the parties in the transaction did not commit fraud if they provided full disclosure.
If, on the other hand, they hide the tandem "outside of the transaction" acquisition of income producing property and the underwriter approves the USDA loan without this knowledge, then you most definitely have a mortgage fraud case and all of those who colluded are at risk.
In this case, I see the role of the title insurance agent as a fiduciary for the lender and an educator to help others not to take the wrong path. When the transaction cannot be saved and made legal, the title insurance agent must be strong enough to walk away. This is how we protect ourselves and our industry.