How many ways can a borrower get absolutely hit over the head with fees in the loan process? If you think about it, it is amazing how many fees are involved with the loan process. I mean you have fees such as the “document preparation fee;” the “email fee” (a fee some mortgage brokers will charge you to receive and print out an email); the oh-so-wonderful “admin fee;” the Yield Spread Premium (“YSP”); the Service Release Premium (“SRP”); and on and on and on. Unless you are highly sophisticated in the loan industry, it is virtually impossible to know what is customary, normal, or reasonable.

What’s worse is that these fees do not stop at the origination phase. The abusiveness of fees in the loan process can even continue well into the servicing of your loan. Specifically, borrowers can get price-gouged in their impound accounts. In simple terms, an impound account is a trust account established by the lender to hold the borrower’s money to pay for real estate taxes, and insurance premiums. These accounts are a measure that lenders take to mitigate the chance that a borrower will default on his loan. For instance, impound accounts assure the lender that the borrower’s property taxes are timely paid (to avoid liens) and that the borrower’s insurance is paid on time (to avoid uninsured loss.) Borrower’s are taught to view impound accounts as a good thing because the borrower does not have to worry about paying taxes or insurance himself because the lender “takes care of it.”

There’s the background, and here’s the rub. What the lender fails to mention when they purchase insurance on a borrower’s behalf via an impound account, is that they will opt to purchase an exorbitantly high priced insurance. In fact, as I have recently discovered (because it happened to me), the “lender-placed” insurance that the lender will purchase is about 3 times (3 times!) as expensive as the insurance the borrower can procure for himself! To make matters worse, unless the borrower is savvy concerning his real estate costs, he will never know that he is paying too much for his insurance. Unfortunately, the lender can make this excessive purchase without any forewarning and/or explanation to the unsuspecting borrower.

Certainly, every borrower would want to know if he is being assessed a fee more than three times the normal cost. Personally, I cannot think of the situation where I would willingly pay over a 300% markup to have someone purchase something for me. As a real estate attorney, I consider myself sophisticated concerning real estate issues. However, up and until last week, I had no idea how the lender-placed insurance system (or gimmick) works. When I caught on, I personally called my lender to inquire about this practice. I spoke with three representatives, including a supervisor, and was met with the typical “I don’t know” response. Interestingly, all representatives did openly admit to the fact that if the lender purchases the insurance on behalf of the borrower it will be about 3 times as much the price the borrower would pay if the borrower pays for it on his own.

I wonder how many teetering borrowers have been pushed into default as a result of this practice? Only the lenders would be able to tell us. As a legal practitioner, I view this lender-placed insurance practice as posing a huge risk to loan servicers for a nationwide class action. Maybe it will take a class action lawsuit to expose and stop this practice in the future. The bottom line is that this practice needs to stop. Not only is it highly unfair to the unsuspecting borrowers in the national mortgage marketplace, it exposes lenders and servicers to substantial liability.

- fhaloanpros.com April 1, 2008

According to the FBI, mortgage fraud has rapidly increased over the last five to six years. In September of 2002, the FBI had 436 mortgage fraud investigations. As of March 2007, the FBI reported that it had more than 1,036 and that the number was rapidly increasing - an increase of 237 percent (and rising) in less than five years.

Over the past year and a half, the FBI and other federal agencies and departments such as the CIA, the US Attorney General, and even the IRS have become increasingly involved in investigating and prosecuting mortgage related fraud. (See FBI.gov). In fact, the US Attorney General’s office recently created the Mortgage Fraud Task Forces in high-fraud regions such as, for example, Western Pennsylvania. Additionally, State Attorney Generals are beginning to take more proactive measures to punish mortgage fraud criminals and deter would-be mortgage fraud criminals.

By way of illustration, since the former (and now defamed) New York State Attorney General Eliot Spitzer began filing civil suits against real estate agents, mortgage brokers, mortgage bankers and appraisers in 2006, other State Attorney Generals have apparently ramped-up their efforts to prosecute mortgage fraud criminals. According to NBC’s Los Angeles affiliate, in March, 2008, the California Attorney General’s office shut down a half-dozen lending companies who had allegedly pushed homeowners into “illegal and unconscionable loans.” The banks alleged of the mortgage fraud, bait and switch practices, forgery, and material misrepresentations had their bank accounts frozen and were enjoined from such illegal sales practices. According to California’s Attorney General, Jerry Brown, “As the mortgage crisis worsens, a growing number of fly-by-night companies are employing utterly brazen tactics to push homeowners into illegal and unconscionable loans.”

By most accounts, the government efforts appear to be resulting in successful prosecutions at both the civil and criminal level. But, will these increased efforts by the government provide the lasting deterrent against mortgage fraud that is so desperately needed? The answer is likely no. As California Attorney General Brown suggests, while the real estate market continues its spiraling descent, many brokers, appraisers, and other real estate professionals will continue to feel increasing pressure to do whatever it takes to get loans consummated in this down market. There simply isn’t as much volume as there was two years ago. In other words, in the short term, we should expect mortgage fraud to continue to rise, despite the increased efforts by government agencies, simply because of the market conditions.

So, will there be a decrease in mortgage fraud once the market corrects and then begins to rise again? No. According to the FBI’s 2006 Mortgage Fraud report, during boom periods, high mortgage loan volume impacts expedited quality control efforts which often focus on production. Therefore, perpetrators may submit loans based on fraudulent information anticipating that the bogus information will be overlooked.

However, during a boom market, we should also expect the reporting and prosecuting of mortgage fraud to decrease. Why? Well, during a rising real estate market, home values are increasing and the chances of borrowers or lenders getting seriously burned (similar to the way many are being burned in the current market) significantly decreases; as does the probability that borrowers or lenders will report mortgage fraud. Although more fraud may be occurring during a “boom” market, there will be less reporting of it and therefore fewer prosecutions as a result of it.

Although it appears we are currently in a lose-lose situation, private industry leaders and the government will have the opportunity to determine how to develop more sophisticated models for preventing mortgage fraud before it occurs in the real estate market cycles ahead of us. Hopefully, there will soon be more effective measures in place, so we do not undergo such an industry-wide travesty again.

Has your mortgage broker ever provided you with a loan at one rate only to persuade you to refinance 6 to 12 months later? If so you may be among the many people in this country that have fallen victim to what some government officials are calling the refinance bate and switch.  It works like this: The broker will gets his client into a loan that the broker knows does not have the best interest rate that his client could qualify for. Then, six month’s later, that same broker will call his client informing the client that he can get them into an even better loan with an even lower interest rate than the one they just signed. Why would any broker do this? The answer is that all mortgage brokers get paid a commission each time they sell a loan. If a broker can sell two loans to the same borrower in a given year, that broker will earn two commissions, often at his client’s expense. Additionally, when the broker gets a client into a loan that has a higher interest rate than that which his client could qualify for, the broker will often get paid a commission from the lender (this is referred to as a yield spread premium).  So, have you ever been the victim of refinance bate and switch? Want to add to this Blog? Here’s how.

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Has a lender failed to disclose prepayment penalties or terms that would limit your ability to refinance? Many people are unaware of the hidden penalties written into their loan. At MAA, when we review your loan, we will uncover every possible penalty and clearly explain it to you, in big BOLD print, so you are aware of it BEFORE signing that loan.

Do you have a similar experience, where penalties kept you from refinancing, or paying off the loan in order to retain a more affordable one. Are you at risk of losing your home because these terms were not clearly communicated to you by your lender? We’d like to hear about it.