Avoiding the New RestrictionsBy David F. Carr | Posted 2005-09-09 Email Print
No mortgage loan gets made without a processor; and no processor makes a loan without running the applicant's personal and financial background through software that canin theory, if not in practicereject those borrowers who can't legitimately
But some salespeople discovered that they could avoid the delay by making the change in Empower rather than SNAP, according to the former Rhode Island loan officer.
Arthur Prieston, a mortgage lawyer who offers lenders insurance against fraud-related losses through his Prieston Group in Novato, Calif., doubts that there is a technological solution to mortgage fraud.
Software products can flag suspect loans, but ferreting out fraud still requires a large dose of human understanding and investigation, says Prieston, who co-authored the book Mortgage Fraud: The Impact of Mortgage Fraud on Your Company's Bottom Line for the Mortgage Bankers Association.
"Those tools, although effective to some extent, have their limitations," he says. "We estimate they can reduce less than 20% of the fraud experienced."
Ameriquest and the rest of the mortgage industry are now at the front lines of what many economists call the greatest threat to the U.S. economy since the technology stock implosion.
"In my mind, it probably doesn't take a rocket scientist or Warren Buffett to figure out how serious this problem has become," says an analyst at JP Morgan Chase & Co. in New York.
In July, Federal Reserve Chairman Alan Greenspan repeated warnings about the increase in exotic mortgagesespecially interest-only lendingand referred to the "speculative fervor" that has driven up prices in some markets.
One month later, on Aug. 9, the Federal Reserve Board raised its benchmark overnight lending rate to 3.5 percent, the tenth increase in the past 14 months. In June 2004, the overnight lending rate had been 1 percent, a 46-year low.
Whether Greenspan's moves prick this bubble or whether surging oil prices push the economy into recession, the risk is this: Those sub-prime borrowers may run out of rope. If times get tough and they have to sell their homes, they could lose them if they can't sell. And if they don't want to sell, they still may lose them, if they can't make the payments.
"There are lots of people out there who have stretched themselves to their credit limit," LoanPerformance's Harmon says. "Those are the people who are at the greatest risk."
In fact, the amount of lending to sub-prime borrowers has more than quintupled in the last 10 years, from $91 billion in 1995 to an estimated $516 billion last year, according to SMR Research Corp., a Hackettstown, N.J.-based market research firm. SMR studies show that sub-prime lending accounted for more than 22 percent of all mortgage lending in 2004, up from just 9.4 percent in 1995.
The stretch can be seen this way: the U.S. Department of Housing and Urban Development recommends homeowners spend no more than 30% of their annual income on paying off mortgages.
A study by the Joint Center for Housing Studies at Harvard University, however, shows nearly one in three American households now spends more than 30 percent, and one in eight spends nearly 50 percent. In California, one in five households spends more than half its income on housing, according to the Public Policy Institute in that state.
And borrowers are increasingly being encouraged to take on as much debt as they possibly can to live in a home. According to the National Association of Realtors, 42 percent of all first-time buyers and 25 percent of all buyers made no down payment on their home purchases last year.
But it's one thing for people to stretch themselves to their credit limit. It's another for them to be misled into debt they can't afford.
Gartner analyst Richard DeLotto, who studies banking industry technologies, says the most serious problems of the mortgage sector are based on self-deception, both by mortgage lenders and by consumers.
"It's not a technology problem, it's a business case problem," DeLotto says. "Businesses have been willing to price in the risk of loans going bad based on the idea that property values always go up and no matter how bad their loans are, equity is going to increase faster than their risk."
While the mortgage industry likes to talk about problems of quality control rather than fraud, DeLotto says the errors "tend to be skewed toward anything that makes the loan happen."