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The FBI, Justice Department, Secret Service and Postal Service will get a combined half a billion dollars to investigate and prosecute those who engage in mortgage fraud. President Obama signed the legislation May 20. Important to remember; Rhode Island leads the nation in mortgage fraud.
The targets range from people who lie about their incomes on home mortgage applications to highly organized roving networks of “foreclosure relief” scammers who bilk money out of homeowners seeking mortgage modifications. More on these gems of humanity in future posts.
Known as the Fraud Enforcement and Recovery Act of 2009, the legislation will fund new SWAT teams of fraud-busters and broaden federal legal powers to go after individuals and mortgage operations that currently get attention — if at all — only at the state or local levels.
The law also creates a Financial Crisis Inquiry Commission with broad powers to investigate who and what got us into the real estate mess, starting with the subprime boom, Wall Street hanky- panky and more recent bank failures.
How bad is mortgage fraud? The Treasury Department estimates it causes losses to consumers and the mortgage industry of anywhere from $15 billion to $25 billion a year. FBI Director Robert S. Mueller III told Congress his agency’s mortgage fraud caseload has tripled in the last three years.
Reports of potential fraud filed with the Financial Crimes Enforcement Network exceeded 65,000 in 2008 — up from about 25,000 in 2005 and just 5,400 in 2002. Officials say the recession and the end of the housing boom have actually stimulated more fraud rather than the reverse.
What do these frauds look like and where are they occurring? The Mortgage Asset Research Institute performs an annual study of the problem for the Mortgage Bankers Assn., and its 2009 report found:
* Roughly two-thirds of all frauds involve deceptions at the application stage. For example, some borrowers tell the lender they plan to occupy and use the property as their main residence, but they really plan to turn it into a rental unit. That ruse often gets the applicant a lower rate on the loan, but it’s a violation of federal law.
* About 28% of frauds last year involved deliberate misinformation about tax returns or financial statements. Fake IRS filings can be created with readily available software programs, and documentation of financial assets can be manipulated as well. Around 21% of fraudulent applications contained faked deposit verifications last year.
* Appraisal shenanigans rank high as well and were involved in about 22% of fraud cases in 2008. Appraisal fraud — typically inflated valuations intended to squeeze more mortgage money out of the lender — may well be more commonplace than the official statistics. That’s because many overvaluations are modest enough to avoid detection, but large enough to get the loan closed, thereby increasing subsequent risk of loss to the lender.
* Other widespread forms of home loan fraud include faked employment verifications, misinformation on closing or escrow documents, and credit reports or scores that have been manipulated in some way to get unqualified borrowers approved, or lower interest rates, or both.
Fannie & Freddie’s New Role
Jul 31
The new housing rescue bill signed Wednesday takes aim to bolster Fannie Mae and Freddie Mac. In a late additon to the bill, the law allows authority for the Treasury to lend a financial hand to Fannie Mae and Freddie Mac if it deems it necessary to help stabilize markets.
For starters, a more strict regulator will be assigned for Fannie Mae & Freddie Mac: The new regulator will have a greater say over how well funded the two government sponsored enterprises are -a major concern in the markets that has sent stocks in both companies plunging in the past two months. Concerns over whether Fannie Mae and Freddie Mac will have enough money to weather future losses in the housing market has sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade last Friday.
Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.
The law includes provisions that let Treasury offer Fannie and Freddie an unlimited line of credit and buy stock in the companies. The provisions expire in 18 months.
Both critics and supporters of the plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay. The potential cost of a rescue could be $25 billion.
What you must understand here is that the Treasury will NEVER let Fannie and Freddie fail. If these companies collapse, no one in this country will be able to get a mortgage. Maybe that’s an overstatement, but not by a lot. Fannie and Freddie back for the most part solid loans with their stipuations on ability to qualify, etc. They represent the prime loans rather than the riskier ones which is what caused all of this mortgage brouhaha.
The riskier loans (enter any synonym for sub-prime here) went to Wall Street for investors. And here’s where it hit the fan. Take a company like Countrywide who’se modus operandi was sell a loan at any cost with no regard for the client. (watch video here) Well, investors were well fed right up until many of the loans turned sour and they became less than a great investment – ask Bear Stearns how that worked out, and the money dried up.
So, if the sub-prime as we knew it is gonzo and Fannie and Freddie can’t write the prime loans…that doesn’t leave many mortgage options for most Americans. And if we think this current little “hiccup” has torched the economy, wait until that happens.
So, no, the Treasury will never let Fannie & Freddie fall, hence the unlimited lines of credit, etc.
