April 1st, 2010 12:04 PM by Richard T. Cirelli
How Do Lenders Prevent Fraud?
Income and Employment:
It was lenders lack of documentation that got us into this mess a few years ago. Now that "stated Income" loans are gone there are ways that the lender can protect themselves from fraudulent documentation.
IRS Form 4506-T. All Borrowers are required to sign this form as one of the up-front loan Disclosures at the time of application. This form enables the Lender to obtain a summary of an individual's tax information to verify the income stated and documented in the loan application. To the best of my knowledge, all lenders are verifying the income with the IRS on all borrowers - whether employed or self employed. With the IRS validation it's virtually impossible to submit fraudulent paystubs, W-2's and Tax Returns.
It should be noted that it takes the IRS 6-8 weeks after tax returns are filed to make the data available to lenders. Therefore, newly filed tax return transcripts may be unavailable. In these cases the lender will use the two previous year's tax transcripts and ignore the most current year. This could be to the detriment of a self-employed borrower that has had an increase in income during the most recent year.
In addition to obtaining the Tax Transcripts directly from the IRS, lenders also perform a Verbal Verification of Employment prior to the loan closing to make sure the Borrower is still employed. For self-employed borrowers they verify the existence of their business through an independent source - websites, phone books, etc.
Appraisals:Even though HVCC (Home Valuation Code of Conduct) has taken away the loan originators ability to select the appraiser, lenders are still taking it a step further by ordering what is called an AVM - Automated Valuation Model. Lenders subscribe to online AVM services to obtain a quick range of value to compare against the appraisers value. These AVM's also provide comparable sales for the lender to compare against the comps chosen by the appraiser. Lenders may then ask the appraiser to comment on why they omitted certain comps.
The standard method of documenting a Borrowers down payment or cash need to close a transaction is with the two most recent bank statements. It is not uncommon for a lender to ask for one more recent statement before closing. Large Deposits must be explained and documented to make sure the down payment isn't borrower on a purchase transaction.
As with everything else in this business, it is imperative to work with an experienced mortgage broker that knows the lenders requirements, anticipates the documentation that will be required and has multiple lenders to choose from. Direct Lenders just don't have the flexibility to pick and chose the right source for their borrower's files.
Other Checks and Balances:
There are numerous other methods that lenders use to prevent fraud. Most common are the Occupancy Certification. All lenders require this form to be executed and it warns that not occupying a property that was applied for as a Primary residence constitutes mortgage fraud and can be investigated by the FBI. Occupancy Fraud was the most common type of fraud before the use of this form about a year ago. Interest rates on non-owner occupied are always higher than they are for owner-occupied or Primary Residences. New credit reports just prior to funding are sometimes used as a double-check.
When in doubt as to whether you or your clients will qualify, just give me a call.
New California Homebuyer Tax Credit
The State of California has allocated $200 million for homebuyer tax credits. This bill comes just as the Federal Government's First-Time Homebuyer Tax Credit Stimulus Program expires at the end of April. The bill allocates $100 million for qualified first time home buyers of existing homes and $100 million for purchasers of new, or previously unoccupied, homes. The eligible taxpayer who closes escrow on a qualified principal residence between May 1, 2010 and December, 31, 2010, or who closes escrow on a qualified principal residence on and after December 31, 2010 and before August 1, 2011, pursuant to an enforceable contract executed on or before December 31, 2010, will be able to take the allowed tax credit. This credit is equal to the lesser of 5% of the purchase price or $10,000, taken in equal installments o ver three consecutive years. Purchasers will be required to live in the home as their principal residence for at least two years or forfeit the credit (i.e. repay it to the state).
Mortgage Rate Update:
Rates have continued to edge higher again this week. The Government's stimulus program of buying Mortgage-Backed Securities (MBS's) came to an end on March 31st. During the past 15 months, the U.S. has purchased $1.25Trillion MBS's issued by Fannie Mae, Freddie Mac and Ginnie Mae - the 3 Government-owned enterprises that are responsible for nearly 100% of the mortgage market. The MBS purchase program kept mortgage rates around 5% for the past year for the benchmark 30-year fixed rate loans up to $417,000.By the way, our Government was responsible for about 80% of all Mortgage-Backed Securities purchased from these entities. Now that that biggest buy has exited the market, it will be left to other institutional and foreign governmental entities to pick up the slack. These other potential buyers will want a higher yield than the 4.5% - 5.00% that our Government has received. And, at some point our government will need to start selling their MBS's which in turn increases supply which will create a new problem as these MBS's compete with U.S issued Treasury Securities for the investors dollar. Fortunately, the U.S. doesn't intend to flood the market with their MBS's anytime soon.
In the meantime, I've observed a rather large increase in intra-day volatility meaning that there are large swings in both directions in mortgage pricing each day now that the Government is out of the picture. Therefore, timing is everything. I subscribe to a few services that alert me to pending changes in mortgage pricing during the day which helps me to lock in my clients' loans at the most opportune time. I'm happy to say that I have my entire pipeline of loans locked in ahead of the recent rise in rates.