This week Bruce is joined by David Kittle. David began his mortgage banking business in 1978. In 1994 he founded Associates Mortgage Group, and owned it until 2006. He is a past chairman of the Mortgage Bankers Association, and is currently senior director for IMARC.
IMARC is a fraud investigation company for the mortgage industry. IMARK works with mortgage insurance companies, Fannie Mae, Freddie Mac, and HUD. IMARC’s job is to look at defaulted loans and determine whether or not an insurance claim should be made. Lenders do not work with IMARC. To determine whether fraud has been committed, IMARK talks to the buyer, seller and builder about information regarding the loan.
Fraud can be simply defined as a misrepresentation of the truth. Sometimes loan officers encourage borrowers to do this. In 2006, loan officers were encouraging borrowers to misrepresent their income in order to receive a loan. Some estimate mortgage fraud is up 400 percent from 2 years ago.
Bruce wonders how much mortgage fraud was hidden during the real estate boom due to price appreciation. David believes there probably was some undetected fraud due to price appreciation, because nobody had a problem with it. As unemployment rose, values decreased, and delinquencies increased, then the fraud became more evident. Now investment banks like BofA are wanting to determine whether fraud has been committed on a loan, so that they can deny claims.
There are loans being analyzed for fraud 4 years after the creation of it. Investors can determine whether or not they want to recreate the file based on whether or not fraud was committed multiple years before.
David has heard that up to 80 percent of delinquent stated income loans had some sort of fraud committed on them. David heard examples of gardeners making $1,5000 a month who were encouraged to claim an income of $15,000 a month to get a home loan. After they bought the home, they would flip it in a few months and receive $10,000 of the profit.
Borrowers can commit fraud without the lender knowing. There are companies set up to falsify verifications of employment. About 1.5 years ago, David gathered information on a street gang that discovered they could make more money committing fraud on loans than they could selling drugs. This gang had over 150 loans, and 75 of them had already gone delinquent. That is how easy it was to commit fraud in 2006, 2007 and 2008. Sometimes a group of people will collude to set up an escrow which appears real with somebody who actually qualifies. That sort of scenario is difficult for the lender to detect.
David believes that the mortgage industry needs to make the effort to detect fraud before it occurs. Fraud can be detected by having a call go directly to the buyer to determine whether or not the claimed borrower is actually wanting to buy property x with x amount of dollars. This would prevent a lot of identity theft borrowing, which is prevalent in Arizona, Nevada, Florida and California.
When a broker is involved in fraud it is usually not an isolated case. Brokers will assemble a team of people he knows when committing fraud. David just had a case in which a builder and a real estate company falsified documents with borrowers. In these cases, you often have the appraiser and title company involved in the fraud.
David recently discovered a website which falsifies your career online. This online company will provide documents for your false company, so that you can commit fraud. Technology is making it more difficult to detect fraud, because it makes it possible to convincingly reproduce identity cards and other information.
A mortgage reform bill was very recently passed by both republicans and democrats in the House. David believes we are going to see a lot of mortgage reform. David has testified before Congress on the issue of mortgage fraud. Congress should not be making problematic reforms which make it difficult for good borrowers to buy property. Right now, investment property is difficult to get a loan for. The market for jumbo loans is beginning to come back, but it has been dried up for two years. David hopes that congress will not over-reform the mortgage industry, and do a better job of enforcing the rules they have.
When David lobbies before Congress from a mortgage lender’s point of view, there is always someone lobbying from another point of view. All lobbyists are hoping to educate the representative of their opinion, so that the representative will be encouraged to vote for one side. However, there is no way for an elected official to understand David’s business as well as he does. David feels that the MBA has done a good job of educating congress on mortgage related legislation.
The Federal government has allowed many aspects of mortgage legislation to be decided within states. This has caused problems for companies that do business between states, because they have to hire someone who is familiar with the laws of each state. This extra cost is passed onto the consumer.
When someone participates in fraud, as time passes, they probably come to believe that they will never have to worry about it. There are thousands of loans still out there which have fraud committed on them in many ways. The FBI works with IMARK on identifying fraud. Fraud is increasing the cost of getting a loan.
The FBI divides fraud into two categories. One of these categories is “fraud for ownership”. The FBI didn’t consider these people to be as big of a problem, because those people were only committing fraud to own a home. The other category is “fraud for profit”, and people who commit this type of fraud are considered more harmful. However, this is not how David’s company works. Everyone gets in trouble regardless of why they committed fraud. The FBI usually prefers to attack people with more money, because it is more profitable, but all people involved in fraud are damaged to some extent.
From 2004 to 2006, stated income loans were openly considered to be inaccurate, and that risk was usually passed onto mortgage backed securities. It seems as if there was some sort of agreement to allow fraud to occur. David was once on a panel for Congress in which he was the only person who claimed that the CRA was partially responsible for the mortgage meltdown. Congress thought he was crazy for claiming this to be true. David then explained that “when the democratic congress told the free market that it needed to reach certain goals, it will go there. To reach those goals, we developed loans with no asset verification and stated income claims. Those programs were only made for specific types of people, and it was good for those people, but we allowed those programs to be used on anyone interested in getting a loan. When those loans were pooled with other good fixed rate loans, the rating agencies did not do their job. Those rating agencies then sold to Europe and China. Unfortunately, Congress spends most of its time pointing fingers when people come to testify on these issues, rather than taking the time to listen and find solutions. This accomplishes little to nothing.
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