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.

Some experts estimate that we are currently only 40% through the worst of the mortgage misconduct meltdown. In other words, according to many experts, the past couple of years have revealed only 40% of all of the defaults and foreclosures that we can expect to see as a result of the subprime and mortgage misconduct meltdown.

Most experts blame the meltdown on unscrupulous mortgage brokers, hasty borrowers, and lenders who offered risky products while turning a blind eye to the transactions the mortgage brokers were orchestrating. 60 Minutes recently investigated the mortgage misconduct crises in an attempt to make sense of it all. You can see the entire story by 60 Minutes by clicking on the link below.

http://www.cbsnews.com/sections/i_video/main500251.shtml?id=3756665n

As most real estate-conscious people are aware, on August 31, 2007, President Bush announced the creation of FHASecure in an effort to prevent the foreclosure of tens of thousands of homes in the US. But will this plan work? Or will it go to far? On the other hand, will it not go far enough?

Backed by the government, FHASecure is enabling homeowners who have a history of on-time mortgage payments under their original interest rates, but missed payments after their rates reset, to refinance into FHA’s mortgage insurance program. Families with high-cost mortgages and mortgages that are due to reset, but are still current on their loan, also continue to refinance through FHASecure. This is a more viable option because FHA-backed loans are less likely to result in foreclosure.

But some skeptics caution that this plan goes to far. They argue that FHA Secure will result in the loss of millions of dollars of revenue by US banks that would have otherwise been collecting monthly mortgage checks from borrowers who might not have actually faced foreclosure. Without FHA Secure, many borrowers might have been able to reassess their financial expenditures or negotiate with their bank in order to take themselves off of the foreclosure path while remaining on the same loan, with the same bank. However, since FHA Secure is an option, many borrowers will opt to leave their current bank and refinance through FHA, leaving many banks with fewer and fewer borrowers, especially in a time when so many borrowers have become nervous to borrow. Additionally, some propose that we may even see borrowers intentionally miss payments after their interest rate rises, so that they can qualify for FHA Secure. The result of all of this, the argument goes, is a continued decline in the markets tied to the financial prowess of the banks in this country.

On the other hand, some claim that the FHA Secure initiative does not go far enough. They claim that it omits certain borrowers who are in desperate need of mortgage salvation but do not qualify for FHA Secure because they missed some mortgage payments right before their loan reset or because their loan reset too soon. In other words, FHA Secure will not save all of those that need and perhaps deserve salvation from foreclosure.

So will FHA Secure work or not? Time will tell. According to HUD Secretary Alphonso Jackson, more than 33,000 borrowers have already refinanced their subprime home loans with FHASecure. An additional 20,000 are in the pipeline for approval this month, bringing the total to more than 53,000 in a four month period. Tell us what you think about the FHA Secure initiative.