Besides Del’s Lemonade, coffee syrup and Mayoral Marinara Sauce, Rhode Island can boast one more national treasure. We are numero uno in mortgage fraud in the country.
Since 2004, Rhode Island has been steadily on the rise. In that year, it ranked 41st, with a score of 16, meaning it had only about one-sixth its share of mortgage fraud cases. In 2005 and 2006, Rhode Island ranked 18th. And in 2007 it climbed to 5th.
Mortgage fraud is exactly what it sounds like; falsifying some rather important information on a mortgage application to obtain a mortgage one would not qualify for under the rules. I have to mention that this fraud does not always sit squarely on the shoulders of the lenders. Borrowers, too, have knowingly given false information to obtain these loans. Nationally 60% of mortgage fraud cases last year stemmed from falsified applications, while 28% came from tax returns or financial statements, and 22% came from appraisals.
In Rhode Island, however most of the fraud came from the appraisal/valuation portion of the mortgage process. Here an unbiased appraiser visits a property on behalf of the lender and determines if the property is worth the money that is being suggested to buy or refinance it.
Originators are often the origin of price inflation according to Sandy Nickol, a regional president with Republic Bancorp Inc.’s mortgage company in Farmington Hills, Mich.
“It starts with the originator trying to make the deal happen,” says Sandy Nickol. “Sometimes you can’t close the deal unless you can get the customer a mortgage of ‘X.’ If they’re trying to pull cash out to pay off three credit cards and it doesn’t make sense to refinance today unless they can do that, the whole deal is going to hinge on an appraisal that’s high enough to do that.”
Originators know this, so some will try to talk appraisers into modifying their estimates. Experts say that isn’t too tough because those estimates rely to some degree on an appraiser’s subjective evaluation of property and market conditions.
At first glance, the process might look harmless. After all, it helps borrowers get the loans they want. But in reality, overinflated appraisals trap consumers with too much debt and lock them out of the refinance market. They can also force people into default. Take a mortgage one shouldn’t have in the first place, combine that with a national recession, mix in the declining home values we have seen here in Rhode Island, and it’s a recipe for disaster.
Look for this activity to increase further as cash strapped people turn to refinacing homes to pay essential bills.
