The vast majority of us in real estate are honest and ethical. We take our profession seriously. We're in this business to help sincere, hard-working, law-abiding citizens obtain housing in a fair market for a mortgage that works for them.
In the current weak market, don't blame the subprime lenders. Blame those few-and-far-between loan officers, real estate agents and brokers, escrow officers, appraisers, and others who committed mortgage fraud, and the powers that be who failed to nip it in the bud when brought to their attention.
The FBI has stated that about 80 percent of mortgage fraud is done by insiders of the industry. Fraud rings operating around the country involve the loan officer, real estate agent, escrow officer, the appraiser and the homeowner as a victim.
Once a white-collar criminal gets away with mortgage fraud, the process quickly becomes addictive.
Success breeds more success, and before long such crafters of fraudulent mortgage loans clearly begin feeling that not only are they above the law but, in fact, they aren't doing anything wrong in the first place.
The fraudster loan officer believes it's OK to muscle the appraiser into "hitting the numbers" in valuing a property to make that deal on the threat of getting the appraiser blackballed by every real estate agent in town. Or the loan officers shop the appraisal until they find an appraiser who will provide the value wanted.
The fraudster real estate agent believes it's OK to muscle the loan officer into doing their client's purchase with a second-home loan even while the real estate agent is running an ad in the local paper to rent out the property.
The fraudster processor believes it's OK to muscle the appraiser to not check the "declining market" box on the appraisal.
The fraudster borrower believes it's OK to buy three properties three months in a row from the same lender all in the same town all with a second-home rider to the deed of trust, and then rent them out.
The fraudster escrow officer believes it's OK not to tell the lender that homes clearly will be used as investments even though the escrow officer notarized second-home riders that preclude the properties from use as rentals. These fraudsters either don't care or have forgotten the requirement to conduct agency relationships with the all of the responsibilities that come with being a fiduciary.
In the face of this housing downturn, subprime lenders are being made out to be the bad guys.
The subprime lenders that have gone out of business have failed as the result of forced buybacks. The forced buybacks are because of mortgage fraud, not because of a few greedy borrowers here and there. They went down because of a very small percentage of corrupt mortgage brokers, dishonest loan officers, unethical real estate agents, their brokers who knew, appraisers who can be bribed, and title personnel who see the mortgage fraud but do nothing about it.
All who are involved with mortgage fraud either by commission or omission played to their own greed as well as the borrower's greed. These fraudsters value production over quality and integrity.
Subprime lenders are not seeing losses because the nature of the business is bad. Subprime lenders filled a very much-needed niche and provided the ability to buy a home to many homeowners who otherwise wouldn't qualify for a loan.
The subprime lenders are seeing losses because of mortgage fraud. Some borrowers qualified for loans only because they lied on their loan applications. About 15 percent of all mortgage loans are in the subprime category. Of that small piece of the mortgage market, 90 percent of borrowers are paying their mortgages. The fact that a few lenders have generated so many buybacks for first-payment default and fraud tells me this is not a systemic problem; it's an isolated problem associated directly with the originators of those loans.
The fraudsters are now paying the price, along with their borrowers, clients, and in some cases, their lenders and their brokers. The mortgage fraud should have been nipped in the bud as soon as discovered and reported. Unfortunately, there are many innocent victims with mortgage fraud, and all of us will pay the price.
J. Morgan Alexandra is a veteran real estate investor, a fulltime loan officer with First Horizon Home Loans and teaches real estate classes at Truckee Meadow Community College. The opinions expressed herein are solely those of the author and, are not in any way, to be attributed to the employees or management of First Horizon Home Loan or their affiliates, or Truckee Meadows Community College. Contact the author at malexandra@tmcc.edu.
