recognizing mortgage fraud and the role of a title insurance agent

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.

query: how do underwriters find out about a pending lawsuit?

The most common place pending lawsuits are discovered is in the county prothonotary office.  Suits may also be discovered in the federal Pacer system.

These search results are usually given to an underwriter as part of a credit or title report.

mortgage fraud rears its ugly head once again in an unexpected place

We've been working on a refinance transaction for a number of weeks.  The file has been stuck in mortgage underwriting because we reported a pending lawsuit and the borrower didn't know how to handle creating a letter of explanation or why one was needed.

So, last week, finally, the borrower's attorney provided an explanation which I thought was terrific and if I had been the mortgage underwriter, I'd have approved the mortgage.

Imagine my shock yesterday when the mortgage underwriter requested that I amend my title insurance commitment so it showed no pending lawsuit.

She said they had a guideline that says they will not approve a mortgage if the borrower has a pending lawsuit.

HUH?  I know that sometimes mortgage underwriting rules defy logic but anyone could have a lawsuit filed against them without merit and was she telling me that these people cannot get mortgages?  I have to believe that this is a misinterpretation of the rule, however, IF that is the rule, then so be it.  This borrower has a pending lawsuit and if your guidelines say you cannot approve his mortgage, then deny the loan.  Don't ask me to scrub the title commitment to show no pending lawsuit because that is MORTGAGE FRAUD and I will not go there.

As I had this conversation with the underwriter through emails and on the phone, I did suggest that I did not think this was her intention but that she needed to realize that this is really what she is proposing.  I calmly asked that she review this with her supervisor and she said she would.  I am awaiting their response and do hope that this is a rogue underwriter who needs more training and not the beginning of yet another round of mortgage lending gone bad.

Fingers crossed.

query: how is wealth used in mortgage underwriting

If a mortgage borrower has a high net worth, the underwriter may be slightly more lenient because of having reserves upon which to fall back on if you get in trouble.  Otherwise, it doesn't play a role.  Wealthy people get into financial pickles as often as those with little.

Wow...that's so 1978! Didn't they know you have to ignore pregnancy?

The settlement agreement signed by Nashville, Tenn.-based Magna Bank requires the bank to pay one woman $14,085 for allegedly requiring her to return to work before her loan application was approved.

Irvine, Calif.-based Home Loan Center agreed to pay a Las Vegas woman $15,000 for denying her application to refinance her mortgage because she was on maternity leave.

Read more in HW.

query: what happens once a loan goes through the underwriters

Loan application files that have moved through the underwriting department come out with status marked, denied, approved with conditions, or suspended.

If your loan application has been denied, the lender must send you a notice called an ADVERSE ACTION.  You can appeal the decision by providing evidence that disputes the basis of the denial.  You won't get a chance to talk with the underwriter so if you are making an appeal, you must write clearly and concisely in a way that makes your case for approval logically and with reason.  Emotional appeals will not work.  The underwriter is interested in your ABILITY to repay, your WILLINGNESS to repay, and numerous other items such as the acceptability of the COLLATERAL, the house and land, and EQUITY AND RESERVES - are you investing savings in the transaction and do you have money to fall back on in hard times.

If your loan application is approved - it will always have conditions.  They may be simple conditions like getting a hazard insurance policy or there may be a long list of conditions that seem onerous.  There can be 20 items listed that you must provide prior to closing in order to meet current underwriting rules.  Don't panic and don't get mad.  Just deal with the reality that lenders are being very careful in this lending environment.  It's not about you.  It's about learning a new, more conservative way to lend.

If your loan application is suspended, that's not bad news.  It means they'd like to approve it but they don't have enough information.  Cooperate, stay calm, and give them as much as they ask for and more.  Help them approve your application.

Remember, the lending staff really wants to make the loan but they are under strict guidelines and can't bend, so stay calm and work together as a team.

Finally, no one, NO ONE, should assume they will be approved or that they will be approved within a controlled timeframe.  That means that YOU must remain flexible with moving plans.  In fact, until all of the ducks are in a row, all conditions cleared, I wouldn't make definite plans.  Stay flexible.

I spoke the other day with a woman whose job depended on her having access to highspeed internet service.  She had set up cancellation on the service to her home and also set up new service installation at the new house BEFORE final approval.  She was very angry that the date she had in mind wasn't likely to happen and she wanted everyone to change reality so that it would.  I calmly explained that we had her title file ready and as soon as the lender was ready, we would close.  She had applied for a state bond program and the lender has no control over the timely response of the state underwriters.  I suggested that she undo the cancellation of the internet service to her present home so that she would have a fall back position since it was unlikely that the deadline would be met.  She refused.  That's her decision, however, an adult must learn to go with the flow and not stand and stomp their feet and say they are unhappy.  For heavens sake, if my job depended on internet availability, I'd leave all options open, wouldn't you?

query: what do mortgage underwriters look at

The job of a mortgage underwriter is to assess risk, monitor compliance with standards, and make a lending decision. The mortgage underwriter is the guardian of the regulatory compliance gate and also the keeper of the saleability standards. So, with compliance lenses on their eyes and saleability standards sitting in their heads, they will look at the following items:

COLLATERAL: The mortgage underwriter will carefully review the appraisal. Setting aside, saleability rules, the purpose of reviewing the appraisal is to see if the property - in the worst case scenario of a foreclosure - has sufficient value to recoup the lender's security interest.

CREDIT: The credit report provides two important components of a mortgage credit decision. The borrower's debt service is verified, giving the underwriter real numbers for debt to income ratio calculations, and the repayment history of obligations sets up a credit decision based upon a willingness to repay. Let me repeat that phrase, WILLINGNESS TO REPAY. I don't care if a borrower has the ability to repay if they demonstrate a lack of willingness to repay.

INCOME: Verification of income provides the mortgage underwriter with real figures for debt to income calculations plus the likelihood of the continuance of the income. Capability to repay combined with the stability of the income stream are key.

DEPOSITS: Ability to save demonstrates a responsible attitude and capability to live within one's means. Verification of the source of cash to close - if a borrower has hard earned savings at risk, they are less likely to allow a foreclosure. Are there cash reserves to fall back on in time of need? Deposit review is all about stability.

So, presuming the documentation is compliant and meets saleability standards, the underwriter will decide if the borrower is ABLE to repay, WILLING to repay, and if the worst case scenario happens, foreclosure, whether or not the lender buffered from a loss of market value.

query: how do mortgage underwriters take

I'm taking a good guess here because I used to be a mortgage underwriter back in the ole days when FICO wasn't king and underwriting involved the human brain. I gauge my reply on the return of manual underwriting and the likelihood that we have plenty of newbies looking at files who are now learning from their aged underwriting teachers just how to make these credit and saleability judgments.

The underwriter will take about an hour with your file once the file gets onto their desk - give or take 20 minutes or so. The issue really is how long it takes to get your file onto that desk.

We are living in the aftermath of a credit hurricane that trundled mortgage processing and underwriting staff and blew up all the rulebooks that the remaining staff had come to know and love. The business of mortgage banking is short staffed with folks who are having to re-learn their craft one file at a time.

This is good because it's a restoration of quality in decision making. This is hard on borrowers and loan originators and real estate agents because the greater real estate community and consumers have come to expect instantaneous decision making.

The rule is patience. I am hearing that it takes a file roughly two weeks to make it through the underwriting process.

Trust me, this will get better. Eventually you should expect manual aka human underwriting to stabilize at roughly 48 hours, give or take a day or so as volume swings.

In the meantime, don't totally freak if your mortgage lender calls you for more documentation because your loan application has been suspended. That simply means that you aren't rejected but you aren't approved. The mortgage lender thinks there may be merit in your loan approval but needs you to help them support a positive decision with truthful documentation. Cooperate and help your lender help you. Sometimes a good attitude is the tipping point in a manual credit decision. A mortgage underwriter is assessing your ABILITY to repay and your WILLINGNESS to repay. Willingness is all about attitude.

query: seller assist versus credit

Most mortgage loan programs prohibit direct credits of cash from the seller to the buyer.

Most mortgage loan programs will allow the seller to assist the buyer with all or part of the closing costs.

Money is money, agreed, but in the world of mortgage loan underwriting they have to account for all sources and the buyer may only use their own cash for a down payment and so you have the restriction.

Most seller credits are for repairs. We suggest that you simply have the work done prior to closing.

query: motivation letter to underwriter for loan

Not a title insurance issue but it takes me back to my underwriting days of yore so I'm gonna help.

A real mortgage underwriter- one not swayed by kickbacks, gifts, or conflicts of interest - is weighing risk. Part of the risk assessment is your willingness and ability to repay the debt. It's those two items you must address in your letter.

I presume the normal documentation for loan approval has the underwriter on the fence so your letter is a chance to spin the argument in your favor and perhaps gain loan approval.

Remember, mortgage loan underwriters have heard a million sob stories. Sobbing and "oh, woe is me" stories won't cut it unless you have some kind of unusual and overwhelming circumstance beyond your control AND you can demonstrate that you recovered from the obstacle sufficiently to perform under the repayment terms of the loan. Talk about how the situation has been rectified so that moving forward, you'll be responsible.

Willingness to repay is little more tricky. Willingness is self-evident when the borrower has a reliable credit record combined with sufficient income. I presume you are weak in one of those areas. Your job in the letter to is demonstrate an overwhelming motivation to preserve and protect the project for which you are borrowing. Does something really important to you fully depend on the loan? Circumstances are always unique but if you can clearly help the underwriter understand that this is a case of NEED and not just WANT and that you are fully committed and highly unlikely to walk away, you have a marginal chance of a positive response.

A good underwriter makes their decision based upon the facts. A good underwriter knows it's not safe to rely on motivational letters from prospective borrowers, SO the odds are against you. BUT, it never hurts to try. Good luck!