According this morning’s edition of The Wall Street Journal, tensions are rising between federal and state authorities as the number of agencies–including the FBI, SEC, Justice Department, Office of Federal Housing Enterprise Oversight, and New York Attorney General Andrew Cuomo’s office–investigating mortgage fraud expands.

Cuomo, the Journal reports, “is in a tussle with the Office of Federal Housing Enterprise Oversight (OFHEO), the federal regulator that oversees mortgage giants Fannie Mae and Freddie Mac… Their dispute is over who should be the investigating allegations of fraudulent appraisals and mortgage fraud.”

From Kara Scannell at The Wall Street Journal:

The interaction of state and federal oversight has long been a political hot potato. Friction is expected to increase as rising number of participants — including the Justice Department and Securities and Exchange Commission — probe the mortgage area.

Mr. Cuomo’s office is precluded by law from investigating federally chartered banks, where federal oversight pre-empts state interest.

Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc.

When you apply for a loan, who takes your application? What role does that person play? Who does the person represent–you or the lender? What’s the difference between a mortgage broker, a loan officer, a loan originator, and a lender? For many consumers, the answers to these questions are a complete mystery.

First, let’s examine the title and the role that each of the various people play in providing mortgage loans:

• Lender: The lender is the person or institution that ultimately provides the money used to purchase the property. In the past, this was typically a bank, credit union, or savings and loan (S&L) that loaned out money that was deposited by its customers. Now, the term “lender” can also be applied to investors who purchase securities backed by mortgages.
• Mortgage broker: A mortgage broker is a person who acts as a middleman between the lender and the borrower. The mortgage broker typically has a selection of mortgages from a variety of lenders to offer to clients. The primary job of the mortgage broker is to match the borrower to a lender whose guidelines fit the borrower’s situation. The broker takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to a lender. If the borrower accepts the terms of the loan as offered by the lender, the borrower is then dealing through the mortgage broker with the lender. The mortgage broker is paid on commission that can come either from the borrower, the lender or both, but the broker is expected to help borrowers secure mortgage loans that best meet their needs and are affordable. Mortgage brokers are also called loan officers, although loan officers are not always brokers.
• Loan officer: A loan officer takes your loan application, gathers essential documents (such as tax returns and paycheck stubs), structures the loan, and then presents it to the lender that they work for. A loan officer is “usually” an employee of a bank, savings and loan, or other lending institution. The loan officer is also paid a commission that can come from either the borrower, their employer/lender, or both, the same as the mortgage broker.
• Loan originator: Anyone who takes your application and advises you on your mortgage loan is a loan originator, even if the institution for which the person works allows them to “broker” the loan to another lender and even if the person is a licensed mortgage broker. The term “loan originator” is a more generic term for mortgage broker and loan officer.

Note: Mortgage brokers, loan officers, loan originators, and all salespeople, for that matter, who achieve long-term success are dedicated to serving the needs of their clients. The people who cause problems are the ones who typically enter the industry for short-term gain.

Although loan originators may, in some circumstances, (this can vary by state) have a fiduciary responsibility to the lenders who supply the products (mortgages) they sell, to be successful, they need to provide their clients (the borrowers) with affordable mortgages that best meet their needs and qualifications. When they achieve this goal, everyone wins–the lender, the borrower, and the loan originator.

Borrowers often become confused, because well-intentioned “experts” provide them with the wrong advice. These “experts” often offer misleading suggestions such as the following:

• “Go to the loan officer not to the broker”
• “The broker can serve you better then the loan officer”
• “Go to your bank not the mortgage broker”

The fact is that titles matter very little. A mortgage broker who has access to a diversity of mortgage loans may be able to give you a much better deal than your local bank is offering. A highly qualified loan officer may be more knowledgeable than a particular broker. As a consumer, you need to pick the individual whom you trust and with whom you feel most comfortable. Ask friends, family members, and colleagues for recommendations. Interview at least three loan originators and check their references. Don’t worry so much about the person’s title.

Too often in our society we rely on a person’s title alone to indicate competence. This is not a useful approach with all professionals whose services you seek.

You also have the right to seek legal advice during the entire process and be represented by an attorney (whose competence you have verified, as well). You need not only take the word of the lender, loan officer, loan originator or mortgage broker. Caveat emptor! (Buyer beware!)

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To leave a comment for the author: Please click on the “Comments” link below to leave a comment for the author or to share your opinion.
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Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by W. Greg Sugg.
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Financing and refinancing the purchase of a home has become incredibly easy. Mortgage lenders eager for your business are just a phone call or Web visit away. Fewer than 40 years ago, however, mortgage loans were not nearly as accessible, especially if you were seeking a loan to cash out the equity in your home or to purchase a vacation home or income or rental property. Money and credit were tight.

Until Fannie Mae (FNMA) and Freddie Mac (FHLMC) came along, local sources were pretty much solely responsible for providing money to buy homes. Once the local bank met its lending limit based on its deposit pool, it was closed for loans until either a loan was paid off or more deposits came in.

Over the course of a few short decades, all that has changed. The source for capital to finance mortgages has moved from Main Street to Wall Street. This revolutionary change in the mortgage lending industry has had its share of benefits and drawbacks. While it has made more money available for more people to purchase homes, it has also contributed significantly to the current mortgage meltdown and credit crunch.

The whole idea behind the creation of Fannie Mae and Freddie Mac was brilliant. Created and chartered as “quasi-government agencies” these companies could raise capital at more affordable rates than the private sector. Investors could purchase mortgage loans from local and national banks and other lenders, enabling lenders to get their money back to lend again and again.

The concept was very simple, but to make it run smoothly, guidelines needed to be established to define which loans the agencies would purchase. These guidelines would need to set standards for things like down payment, borrower income, credit, and appraised value. Creating standards for mortgage loans made the pooling of these common types of loans into batches or securities easier and enabled investors to have a clearer understanding of what they were buying.

To simplify the process even more, Fannie and Freddie became the purchaser, packager, and re-seller of mortgage loans from all over the country. This worked so well over the last several decades that pretty much anyone who knew the standards could sell loans to these agencies. The agencies would then, with the assistance of Wall Street bankers, bundle the loans and sell them as mortgage-backed securities (MBS) to investors.

Contrary to what many people assume, the investors who purchase mortgage-backed securities are not all Wall Street fat cats with tons of money. An investor could be you, your neighbor, or the widow down the street. Anyone with money invested in a savings plan, IRA, mutual fund, insurance annuity, or any other managed fund may be an investor in all sorts of things. In fact, if you read the “prospectus” or simply the list of what the fund manager has your money invested in, you likely will see a mention of mortgage-backed securities among other things like stocks and bonds.

These pooled loans traditionally have provided a safe stable rate of return with little risk and therefore have functioned as good investment choices to balance against other more volatile investments, such as stocks.

By enabling investors to indirectly finance the purchase of homes, the American dream of homeownership became much more accessible to many more people and enabled the mortgage banking and real estate industry to grow to the enormous size we see today. In fact, several trillions of dollars are lent annually by all types of lenders in an industry that employs hundreds of thousands of people.

Until recently, the system was very reliable, primarily because the standards that Fannie and Freddie set for mortgage loans were strict. Lenders simply wouldn’t approve a mortgage loan for borrowers unless they could put 20% down, had a good job with a couple years tenure, had an excellent credit history, and were purchasing in a solid neighborhood with appreciating values. Many borrowers could qualify under the more liberal FHA or VA guidelines, but those loans were insured by the federal government. If neither of those government agencies approved your loan and you couldn’t convince the seller to finance it for you, you were out of luck.

During the last major credit squeeze of the early 80’s when mortgage interest rates were in the upper teens, many people who wanted to purchase homes simply could not qualify for mortgage loans under the strict guidelines. As a result, Fannie, Freddie, Wall Street, and the lending community decided to do something to make credit more affordable and attainable. First came the creation of adjustable rate and graduated payment mortgages with starting rates less than the fixed rate programs. After those types of loans became common, the industry began to relax certain guidelines. For example, borrowers were allowed to make lower down payments as long as they purchased private mortgage insurance (PMI), or they could make a larger down payment, say 30%, to avoid having to provide employment verification. All of these changes were designed to make the process faster, more affordable, and more accessible to more people. In many cases it did, but it also opened the door to fraud.

We relaxed standards and created a host of products to make the American dream of homeownership more accessible to more people, to create a higher demand for our products, and to feed Wall Street’s insatiable appetite for mortgage-backed securities. In the process, we took our eye off the ball. In fact, this industry should have gone through a natural slow down when rates edged up in 2005, but instead, with much help from Wall Street and its big banking houses, we created products such as payment option arms (POI’s) that allowed anyone, and I mean anyone, the ability to purchase not only one home, but pretty much as many as they wanted on the “if come” that values would never fall because demand was so high. However, the demand was artificially created by allowing the pool of buyers and potential buyers to grow on the promise of cheap money and cash-out capital from endless appreciation.

The loosening of underwriting guidelines and cheap money compounded the problem by attracting people to the industry who were not fully qualified and committed to the health of the industry.

With rising property values and an influx of cash from Wall Street, money was abundant, greed soon followed, and close on its heels was fraud. The relaxation of the standards that made an industry grow began to undermine its very foundation. Our current “mortgage meltdown,” “credit crunch,” and “sub prime crisis” are all products of greed and fraud. Please don’t confuse this with “predatory lending” which is entirely another issue. Mortgage fraud occurs when a borrower knowingly engages in a transaction, usually with the assistance of one or more industry insiders (such as a loan officer, real estate agent, or appraiser), to fool a lender into approving a loan that the lender would not approve if it knew the truth. Usually, mortgage fraud is committed to gain profit or housing; either way, it is illegal.

The winners in fraudulent transactions are typically a select few. The losers are many. Lenders and investors lose money. Investors lose confidence in the market. Housing markets become unstable. Credit tightens making the American dream of homeownership less accessible. Home values crash, so homeowners cannot even refinance their way out of trouble. Foreclosures, as we have already begun to see, skyrocket, and neighborhoods begin to crumble. Local, state, national economies suffer. Even the global economy takes a hit.

The big story and likely the most costly tragedy impacts all the loans that currently are serviced and being paid by those of us that own a home and have a mortgage. One of the biggest financial crises yet to totally unfold as I write this, are the astronomical losses that banks and mortgage servicers are taking to adjust the values of the mortgages and mortgage-backed securities they hold and collect payments for. As the quality of the loans in default have become known and the numbers of them have increased, Wall Street and the rating agencies have downgraded their views on purchasing mortgage-backed securities and credit has dried up for all but the most ridiculously pristine borrowers.

Even though the vast majority of homeowners with mortgages are still paying on their loans, the value the mortgage banker carries it for on their books has to be reduced, resulting in large losses against current earnings. This further hurts the housing industry as those write downs take the capital that would normally be used to run the business and provide credit.

Experts have estimated that we will not be out of this housing mess until 2009 in most areas of the country. It is amazing to me what going too far to bend the rules and create demand has done. Interestingly enough, in the last five or so years Europe and other places throughout the world used the U.S. mortgage industry as a model for efficient flow of capital. They were fast followers and unfortunately, they too are feeling the sting of their own credit crunch. There is no doubt this cycle will end sometime, but when and at what permanent cost are still unanswered questions.

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Editor’s Note: The proceeding Guest Commentary was written exclusively for FlippingFrenzy.com by W. Greg Sugg. To leave a comment for Mr. Sugg, please click on the “Comments” link below.
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During the current mortgage meltdown, the press has turned its focus on the most obvious culprits–the irresponsible and often unethical loan officers, mortgage brokers, appraisers, Realtors, and even the borrowers. Those are the people I like to call the riggers–the people you usually think of when you picture someone taking out a loan or buying a home.

Working behind the scenes, however, are other culprits who facilitate and often encourage the riggers to commit fraud. These are the people I call the triggers. When the triggers and the riggers got together, they ignited the blaze that has engulfed the mortgage industry. The riggers spilled the gas, and the triggers dropped the match. Now homes, communities, cities, states, and the entire nation are ablaze.

Recently while talking to a senior underwriter for a major Wall Street bank, she shared with me that she had witnessed the sinister inner workings of the lending industry first hand. The underwriter’s job is to provide an unbiased assessment of the risk level of a particular loan. This particular underwriter has always taken great pride in protecting the lender/investor from approving overly risky loans and protecting the borrower from becoming saddled with debt that he or she cannot repay.

She and her colleagues did their best to identify bad loans and sound the alarms, but the bank’s managers and account executives prevented them from doing their jobs. The underwriters were expected to let the loans slide through the approval process despite the fact that many of these loans should never have be approved. The underwriters were told that they should be happy to have jobs.

Feeling the stress of being forced to act unethically, many of her colleagues resigned. This particular person felt that it was her responsibility to remain on the job and call attention to this problem from the inside, where she could witness this institutional fraud with her own eyes. Currently, I cannot disclose the identity of my source or the bank she works for.

SLC: Submit, Lock, and Close

What this senior underwriter and her colleagues have witnessed can be summed up in a single acronym: SLC (Submit, Lock, and Close). As soon as a loan application is submitted , they lock their focus on it and move it through closing. It’s like a sweat shop for the loan industry, an assembly line, no questions asked, where they approve and process as many loans as possible, so they can make money and stay in business.

As underwriters, they have called their managers’ attention to blatant signs of fraud–fraudulent income and assets, questionable transactions, and so on. The managers have told them to let it go. They call it a “business decision,” a “relationship building tool.” In fact, it’s fraud, plain and simple.

How It Works

In the good old days, lenders viewed underwriters as the good guys and gals, protecting lenders from approving bad loans. Most recently, however, brokers and account executives, driven by greed, have found ways to work directly with one another to bypass the underwriter.

Here’s how the relationship typically develops:

1. A prospective borrower visits a mortgage broker to take out a loan.
2. The loan officer (working on behalf of the broker) has the borrower complete the loan application and then collects all the documentation, packages it up, and sends it to the lender/investor for approval.
3. All files go to underwriting.
4. A senior underwriter examines the documentation and discovers a problem; for example, a fraudulent pay stub. He reports the problem to his manager. The good news is that the senior underwriter has done his job to protect the lender/investor.
5. The loan officer is informed that the loan application he has submitted has been rejected.
6. The loan officer reports the problem to the manager of the mortgage company.
7. The manager of the mortgage company contacts the account executive for the lender/investor and threatens to pull his 20 closings a month, which would negatively affect the income of the account manager.
8. The account executive approaches the manager of the underwriting department and reminds him that they both get paid on volume and that this loan needs to be approved in order to preserve future business.
9. The underwriting manager instructs the senior underwriter to approve the loan and simply document any concerns that she may have in order to protect herself. The manager justifies approving the loan as a business decision that is beyond the senior underwriter’s pay scale.

As you can see, the system in place is designed to protect the lender/investor, and it would work well if the underwriters were allowed to do their jobs. The trouble is that, in this case, greed has turned the system upside down, exposing the lender/investor to loans that are likely to have high default rates.

In the process, the mortgage broker/loan officer loses all respect for the underwriter’s decisions and calls the account executive on every file. The account executive calls the manager who rubber stamps every file, overriding the underwriters, who have no power to stop it. According to my source, “The managers would overturn every decision to deny a loan, every request for complete documents, bank statements, or pay stubs. Everything we questioned in our capacity as underwriters was overridden.”

The Hype

The underwriters were reminded daily of all the companies like theirs that were shutting down as a result of the mortgage meltdown and that their company was one of the few survivors. They were told to keep closing loans. With all of those other companies going out of business, they now had a golden opportunity to increase market share and become the lender of choice. They were told that management was aware and that they were over staffed, but because they were doing so much business, nobody would have to be laid off. They didn’t have to worry about having a job as long as they continued to close loans. “It’s a bad time to be looking for a job in this industry, so we all need to work together.”

From my perspective, this is just one of the pieces that contributed to the mortgage meltdown and why it will continue until the underwriters are allowed to do their jobs. As I have always stated, it takes more then one to hold a “fraud party.” Most people would never imagine that the lending industry functions as a good ol’ boys network, with favors being traded to the detriment of consumers, the industry, and the entire economy, but that’s exactly what’s going on, and it continues even with all the bad press swirling around.

This situation has been turned into the authorities, and FBI interviews have begun. To the credit of this lender/investor, once they were presented with the information, they acted quickly and have already released one of the offenders from employment. There is more that needs fixing, however, than simply removing a few bad apples. This case demonstrates several problems:

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• Lenders being pressured to approve more loans to feed Wall Street’s insatiable appetite for mortgage-backed securities
• Lowering the FICO score to allow more borrowers to qualify for mortgage loans
• Risky products, including adjustable-rate mortgages, being pushed on unsophisticated borrowers
• A system of checks and balances that was designed to curb irresponsible lending but that was all too easy to circumvent
• Greed, pure and simple

On the heels of news from the Mortgage Bankers Associations that the the delinquency rate for mortgage loans now sits at its highest since 1986, President Bush today announced what the White House is spinning as a major initiative to “limit the rise in foreclosures that would have negative consequences for our economy” (said differently, the President’s plan targets the estimated 1.2 million American homeowners who can afford their mortgages at the current rate, but not at the higher interest rate that their adjustable-rate loans are about to reset to).

First up on the President’s plan: “FHA Secure.” A program that gives the FHA greater flexibility to offset refinancing to homeowners — to offer refinancing to homeowners who have good credit histories but cannot afford their current payments. In just three months, according to the President, the FHA has helped more than 35,000 people refinance. And in the coming year, the FHA expects this program to help more than 300,000 families.

Next up: “HOPE NOW Alliance.” in August, President Bush asked members of his Cabinet to work with trade associations, lenders, loan servicers, mortgage counselors and investors (including American Financial Services Association, American Securitization Forum, Assurant, Inc., Bank of America, CCCS Atlanta, Inc., Citigroup Inc., Consumer Bankers Association, Consumer Mortgage Coalition, Countrywide Financial Corporation, Fannie Mae, The Financial Services Roundtable, First Horizon National Corporation, Freddie Mac, GMAC ResCap, Homeownership Preservation Foundation, Housing Partnership Network, The Housing Policy Council, HSBC North America Holdings, Inc., JPMorgan Chase & Co, National City, NeighborWorks America, Mortgage Bankers Association, Option One Mortgage, PMI Mortgage Insurance Co., Securities Industry and Financial Markets Association, State Farm Insurance Companies, SunTrust Mortgage, Inc., Washington Mutual, Inc., Wells Fargo & Company.) on an initiative to help struggling homeowners find a way to refinance. HOPE NOW, according to the President, is an example of government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies and without government mandates.

According to the President, representatives of the HOPE NOW Alliance plan to help homeowners who will not be able to make the higher payments on their sub-prime loan once the interest rates goes up — but only those who can at least afford the current, starter rate. HOPE NOW members have agreed on a set of industry-wide standards to provide relief to these borrowers in one of three ways:

1. By refinancing an existing loan into a new private mortgage
2. By moving them into an FHA Secure loan
3. Or by freezing their current interest rate for five years

Lenders, President Bush says, are already refinancing and modifying mortgages on a case-by-case basis. With this systematic approach, HOPE NOW says it will be able to help large groups of homeowners all at once. This will bring relief to more homeowners more quickly, says President Bush. The HOPE NOW Alliance estimates there are up to 1.2 million American homeowners who could be eligible for their assistance.

Finally, according to the President, the federal government is taking several regulatory actions to make the mortgage industry more transparent, reliable and fair (sorry, no catchy name for this program). President Bush says later this month, the Federal Reserve intends to announce stronger lending standards that will help protect borrowers. At the same time, HUD and federal banking regulators said to be taking steps to improve disclosure requirements — so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages.

As the federal government take these steps, President Bush indicated that the Department of Justice will continue to pursue fraud in the banking and housing industries — so we can help ensure that those who defraud American consumers face justice.

So there you have it. This is how President Bush and members of his Cabinet intend to stop foreclosure-related bleeding in the housing market and save our current economy. While homeowners with good credit scores are going to be able to refinance their loans (with some lenders reportedly ready to waive prepayment penalties), the millions upon millions of Americans with poor credit — regardless of why the have a low credit score — and many of those American’s already facing foreclosure, are most likely going to be bounced to the curb.

While response to the President’s plan is sure to be swift, you yourself may be wondering how all of this impacts you (that is, if you are currently facing foreclosure or rent a property that is facing the same). For more on that, I am going to quote an often reliable source, BusinessWeek:

Can you get your mortgage payments lowered because of the bailout?

It depends. If you’ve got an adjustable-rate mortgage, you may qualify under certain conditions. If you’ve got a standard mortgage with a fixed interest rate, you’re not affected.

Which adjustable-rate mortgage holders are affected?

Only a small group. To qualify, you need to have received your loan sometime between Jan. 1, 2005 and July 31, 2007, and you need to be facing a reset of your interest rate sometime between Jan. 1, 2008 and July 31, 2010. If you’re within this range, you may be eligible to have your interest rate frozen, so you can keep your current, lower rate for five years.

Who qualifies within that range?

The bailout is really designed for homeowners who could run into trouble if their mortgage payments are raised sharply and face the prospect of losing their homes. If you’re well enough off that you can afford the higher mortgage payments after a reset, you won’t qualify. And if you’re in bad enough shape that you can’t handle the current low interest rate, you won’t qualify. For example, if you’ve already fallen behind on your mortgage payments, you’re not eligible for the rate freeze.

Do you need to live in your home to qualify?

Yes. The plan excludes people who don’t live in the homes for which they have mortgages so that speculators can’t benefit.

Why is there going to be a bailout?

Bush, Paulson, and the Administration are concerned about the fallout from the housing slump. If many people fall behind on their mortgages and have to give up their houses, there will be a series of negative repercussions. First, tens of thousands of Americans could be forced to leave their homes. They would lose whatever equity they had. Consumer spending more broadly would likely slow, hurting the economy overall. In addition, home prices could fall even more quickly than they are now. That could hurt consumer confidence well beyond those people directly affected.

Is the bailout going to be enough?

It depends on your definition of enough. The deal will add some stability to the housing market, but it won’t stop all the problems in the troubled sector. The same day Bush unveiled his plan, the Mortgage Bankers Assn. said that foreclosures had reached a record high in the third quarter. The share of mortgages that have entered foreclosure hit 0.78% in the quarter, up from the previous high of 0.65% set in the previous quarter. At the same time, delinquencies for all mortgages rose to 5.59%, from 5.12%, in the second quarter. None of the people who are delinquent or facing foreclosure will be helped by the plan.

Questions, comments, concerns? Please click on the “Comments” link below and let’s get some dialogue started on this one. We have a lot of experts that read and comment on a daily basis, as well as a lot of homeowners in need of help!

I received a press release the other day announcing that The U.S. Conference of Mayors would be holding a special meeting in Detroit tomorrow to address the “growing foreclosure crisis and its impact on American families, property values, neighborhood blight and crime.”

Outstanding, glad to here it… may I attend?

Nope… it’s a closed door meeting for a “select group of mayors” and leading non-profit counseling agencies, mortgage providers, and financial institutions to discuss crisis intervention strategies, loan modification and rescue programs and the maintenance and management of foreclosed properties to mitigate their negative effects on neighborhoods.

How interesting… why are Realtors not invited? (Sorry, I was told when I called; that is just the way it is.)

The press release goes on to say:

During the meeting, mayors will also release a report highlighting the economic ripple impact of the foreclosure crisis on U.S. cities/metros — specifically cities in Arizona, California, Michigan, Nevada and Ohio where the effects of the crisis are most prominent.

So in addition to discussing strategy, The U.S. Conference of Mayors is going to release a report telling us what RealtyTrac tells us in mind-blowing detail each and every quarter… namely, that the foreclosure crisis is worsening and is getting really, really bad in states like Arizona, California, Michigan, Nevada and Ohio? Well, thank God, because the cavalry is about to arrive… The U.S. Conference of Mayors is about to tell us how the bad the problem is, and better yet, how to fix it, boys and girls!

Here is a suggestion for the U.S. Conference of Mayors:

Update your precious Mayors 10-Point Plan: Strong Cities, Strong Families for a Strong America to include something–anything–related to protecting homeowners facing foreclosure.> The fact that your widely publicized and circulated plan contains not one single word related to the mortgage meltdown, foreclosure crisis, and Real Estate and Mortgage Fraud just goes to show how significant out of touch you really are!

How on Earth could these so called “leaders” have developed and released a 10-point legislative agenda on issues impacting cities and families back at the beginning of 2007 and not made any plans whatsoever to address foreclosure, the impact of mortgage payment reset, or Real Estate and Mortgage Fraud? For years now the FBI has been telling us that the fastest-growing white-collar crime in the United States is Real Estate and Mortgage Fraud, yet the much-heralded U.S. Conference of Mayors completely ignored the trend and chose instead to promote the following in its 10-point plan:

1. Energy and Environment Block Grant

2. Federal-Local Partnership on Crime Prevention (violent crime, not white-collar, in case you were wondering)
3. Community Development Block Grants
4. Affordable Housing Fund
5. Public Housing
6. Infrastructure Tax Incentive and Bonds
7. Competitive Workforce
8. Children and Youth (children’s health insurance, and summer and after-school youth programs)
9. Homeland Security
10. Unfunded Mandates/Preemptions

“The fastest-growing white collar crime in the United States.”

I’m not making that up–that statement comes directly from the FBI and has been repeated in 2006 and 2007, and yet the U.S. Conferences of Mayors doesn’t think to include boo about it in its 2007 10-point legislative agenda on issues impacting cities and families. Unreal. Simply jaw-dropping.

Here is another suggestion for The U.S. Conference of Mayors:

Rather than grandstand and issue hollow statements about how bad the problem is and that you’re now on the scene taking care of business, do something tangible:

• Start by doing what California recently did… negotiate with leading loan servicing companies–like Countrywide, GMAC, Litton, and HomEq–to streamline “fast-track” procedures that result in helping keep more sub-prime borrowers in their homes.
• Spur loan servicers to publicly commit to modifying loans in a streamlined and scalable manner.
• Bring Realtors to the table. Do not ignore us–we are a part of this mess too, and if you are sincere about moving forward with an educated base of homeowners, you must involve us.
• Commit to funding public awareness campaigns aimed at educating the masses on their rights, how to avoid foreclosure, and the warning signs associated with Real Estate and Mortgage Fraud.

Yes, this is a rant but an extremely timely and relevant one. When an organization as powerful and representative as The U.S. Conference of Mayors holds a meeting to discuss the growing foreclosure crisis and its impact on our families, property values, and crime, and fails to include Realtors as a part of the discussion, well, they should be called out and told what to do about it!

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Editor’s note: From time to time, Flipping Frenzy readers contact us offline to request that they be allowed to ‘guest blog’ an entry or two on a topic related to Real Estate and Mortgage Fraud. One such reader is Clearwater Beach, Florida-based Larry Rubinoff, who serves a branch manager for Mortgage Lending Direct, a dba of MLD Mortgage, Inc. To paraphrase, Larry says that much of the dialogue surrounding the current mortgage meltdown overlooks and ignores the dramatic impact the crisis is having on honest, hard working mortgage professionals like himself.

In his own words…

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The Real Face of the Meltdown
By Larry Rubinoff

There are millions of stories on what this mortgage meltdown has done to our population and to our economy. While we cannot address or recognize all of them, I will attempt to put a “face” on some of them through a series of guest blog entries, as the story cannot be told in just one.

To date, most of what we hear about are the millions of victims (the homeowners) and the hardships many of them are now facing. There are other victims as well who are also facing hardships due to the “meltdown.” One such group are the professional who work in the mortgage industry. The underwriters, the account executives, the loan originators, the processors, the clerks and staff of the hundreds of companies that have gone out of business not necessarily due to their actions or fraudulent deals, but just due to the shrinking of the real estate and mortgage markets. While this shakeout is getting a lot of bad apples out of the business, it is similarly forcing many good people out as well. My business, as well as the business of many of my friends, has shrunk to almost nothing but this does not even address the thousands of employees at the nearly 190 and counting companies that have gone out of business or those who have had to layoff staff just to survive the mess.

Almost 28,000 people per month are losing their jobs in the mortgage industry. Little is said or reported about them. Many of them are not counted in the unemployment rolls nor do they qualify for unemployment insurance. These people, though faceless, are homeowners themselves, and they too are losing their homes to foreclosure. Like many other people nowadays, they are heads of households with kids to support, car payments to make, and bills to pay (which in many cases they cannot, and like others, their credit is being destroyed). I would say that the majority of these newly unemployed were not the fraudsters, just the everyday hard working people putting in their 8 hours plus per day to feed and support their families.

Many of these people have been in the industry for 10 to 20 years and longer. They are now faced with the challenge of finding new careers and job-related training. In each case, this is becoming a difficult task. Many employers (in ads that I have actually seen) will not even entertain an applicant that has been in the mortgage industry. The belief, as has been constantly reported over the past year, is that anyone with mortgage industry experience is a bad apple; and when you stop to think about it, why would anyone want to hire a media-tried and convicted criminal. A Harvard law professor in an article in the Boston Globe even went as far as to say that all mortgage brokers were “crooks” who took Yield Spread Premium (YSP) from lenders which she called “bribes.” The fact is, the overwhelming majority of YSP are just ordinary mark-ups on a product to produce profit much like the can of the corn we typically find on a grocers shelf (which is marked up from their cost to cover overhead and produce a profit).

I know an underwriter who truly is one of the most knowledgeable people I know; someone who worked for one particular company for over 10 years yet was given only 30 minutes notice that her company was closing and she was terminated. I know and am friends with many brokers who are honest and knowledgeable and who always worked for the best interest of their clients — yet they too are now out of work and are faced with the prospect of having to end their careers. My own stepdaughter is even a casualty in all of this. I brought her into the business nearly eight years ago as an administrator and processor, and she ultimately became my director of branch relations. When I relocated my business and she was unable to move with us, she went to work for a former associate of ours. He is one of the good guys who at the end of this month will be closing his doors after over 20 years in the business. While he will be ok, my stepdaughter may not be. She has applied for over 100 jobs, makes at least five new contacts a day, and has not had one response as of yet. She is a single mother of two children, and is extremely well qualified in operations, accounting and administration.

While what is happening to homeowners is truly tragic, we do not hear nearly enough about the professionals who have been similarly impacted (they number well over 100,000 and growing). Sadly, all of us are victims, which is even more reason for all of us–homeowners and professionals alike–to educate ourselves and police our motives and actions.

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Strongly recommended reading from a very well respected colleague… Ann Fulmer of Interthinx (courtesy of National Mortgage News Online):

What Goes Around…

By Ann Fulmer, VP of Industry Relations, Interthinx

The mortgage lending landscape has changed dramatically in the past few months. Dozens of lenders have gone out of business, tens of thousands of workers have lost their jobs and tighter underwriting guidelines are reducing origination volume. Under these circumstances, someone might conclude that mortgage fraud would also be declining.

That would be completely wrong.

The majority of fraudsters are industry insiders who leverage their knowledge to take advantage of weaknesses in lenders’ processes and defenses. Thus mortgage fraud does not disappear during the “down” portion of the mortgage cycle, it just morphs to take advantage of current market conditions. If your company is still in business and originating mortgage loans, it is a target. The question is will your staff recognize a fraudulent application if it sees one?

I ask that question because a friend, who recently took over as the underwriting manager at a community bank, told me that she was teaching her staff to examine disbursements from the seller’s proceeds when one of the employees asked her why they should bother since the money belonged to the seller. My friend explained that mortgage fraudsters use bogus claims and liens against the seller as a way to extract loan proceeds. The employee retorted that their department had never, ever, been hit by fraud. What is much more likely is that these employees simply didn’t recognize fraud because their institution had not been a primary target during the expansion phase of the real estate/credit bubble.

This lack of fraud recognition is not limited to employees of smaller lending institutions. It also plagues some so-called financial experts. For example, last year, I was driving down the road listening to the radio show of a nationally syndicated consumer advocate. A caller told the advocate that his house was for sale, that someone had offered him $100,000 more than the asking price, and could the advocate please tell him how he should respond? The expert said, “I have no earthly idea why someone would offer you more than your asking price.” I nearly drove off the road because I was screaming at the top of my lungs, “I do! It’s mortgage fraud!”

But I digress.

With lenders returning to more old-fashioned underwriting standards and requiring full documentation, W-2s, higher FICO scores and higher downpayments, “old” frauds are on the rise. So, it’s not surprising that Interthinx investigators and clients are reporting an increase in “silent seconds” and self-employed borrowers. The Interthinx F.R.A.U.D. Report shows that income and employment misrepresentations in new applications doubled between the first and second quarters of this year, and that there are still significant rates of misrepresentation regarding collateral value even in this declining market.

Just as the use of utility and phone records for no-file or thin-file borrowers won’t ensure credit worthiness, requiring full documentation will not stop fraud. In both cases, the required documents are easily forged.

In addition to training staff in the use of automated fraud detection technology to spot “silent seconds,” false collateral values, identity theft and occupancy issues, underwriters must also be able to recognize forgeries and credit profiles that don’t match the borrower’s income, especially when the borrower represents self-employment.

Unfortunately, the old adage, “What goes around, comes around” is all too true. If the industry is content to ignore certain types of mortgage fraud or take a less than aggressive approach to training and automated detection designed to prevent mortgage fraud in the pre-funding stage, then the financial fallout that is sure to follow will bring even more job losses and company closures.

The decision rests with each of us. The time to act is NOW.

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EDITOR’S NOTE (12/27/07): Because of the intense and often off-topic nature of many of the comments left for this blog entry, commenting has been turned off, and all unrelated comments have been deleted
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Every spring and summer, you are sure to spot stories in the press about shark attacks off the cost of Florida, Long Island, and California. You rarely see a story, however, about the loan sharks attacking homeowners all across the United States.

Many people believe that the current mortgage meltdown has been caused primarily, if not exclusively, by homeowners whose appetite for credit far exceeds their ability to repay their debts. This is far from the truth. Mortgage originators acting more like street toughs than representatives of lending institutions have contributed far more to the current crisis. Instead of acting as professionals, they have led homeowners out into the water and essentially bitten off their arms and legs.

Read this comment, which was left here on Flipping Frenzy just yesterday afternoon by Lisa Ashton, from Saunderstown, Rhode Island:

“I am a single mom of two kids–one in college, one in high school. I have raised my kids alone in my home for all this time. I have owned my home for 21 years, actually built it with my ex husband. I hold down three jobs currently to try and make ends meet. I am a registered nurse in a school system.”

“I refinanced my mortgage in April of 2006 with Aegis Lending Corporation. They did a ‘no doc’ loan and lied about how much I made to make a high mortgage amount work. I was trying to take out $25,000 to finance my daughter’s college needs at the time. They said I made enough to cover a $493,000 mortgage! In reality I earn only about $55,000. I now have house payments that eat up about 98 percent of my monthly income.”

“They also hired an appraisal company (Macloud Appraisers in Narragansett, RI ) who somehow agreed to appraise my home for $560,000 when the town only values my property at $320,000, and it would probably sell for about $400,000 on the market today.”

“To bring my interest rate down to 6.5 percent, Aegis charged me $30,893 in discount points at closing. That would have meant that their standard interest rate was 14 percent! What sort of ARM starts out at 14%?”

“Now you may wonder why I would agree to such an arrangement. Well, Aegis advised me to stop paying my mortgage while they were refinancing me, because it would screw up the payoff amount they received. Admittedly, I was naive in following their advice–I stopped paying my mortgage. After all, they had already approved my loan.”

“Aegis failed to provide me with a closing packet prior to the closing date to review. They didn’t even tell me what to expect in terms of a monthly payment. I discovered all of this on closing day, when I was already two payments behind on my existing mortgage. I realized that if I refused to sign for the new mortgage, I would be in big trouble with my previous mortgage company, so I signed the papers.”

“Aegis told me not to worry. Within six months, I could refinance with them again and lower my payment to $2918 per month. (I currently earn about $3600 take home.)”

“Instead of refinancing my loan, Aegis sold it within a week after closing to GMAC Mortgage company and then filed for Chapter 11 Bankruptcy. Now I was really stuck.”

“I have gone through all of my retirement ($30,000) and all of my savings ($15,000) and maxed out every credit card to stay current with my mortgage for this past year or so. No one will refinance me, and now since I’m so maxed out on credit cards, I’ve watched my credit scores plummet well over 100 points in the past four months.”

“GMAC has told me they will NOT work with me to help me out. I have called them for the past three months asking about some way to help me, so I don’t end up in foreclosure. They have told me that they rather have my home.”

“September 2007 was the first time in 21 years I’ve ever missed a payment on my home, and I’m just sick about it. I did receive something from the court stating I could file a claim against Aegis Mortgage–a ‘proof of claim’ form–but who knows how long that will take to work through the system. By that time, my children and I will have been evicted from our home.”

“So that’s my story. I can’t lose this home. I’ve worked so hard to keep it. It’s my children’s safety net. This is all they’ve known, and I can’t take it away from them. I won’t. But I don’t know what to do.”

This is just one story, but it is representative of what has been happening in every state in the Union–lenders preying on homeowners who have been duped into trusting the system and the professionals who run it. It is the equivalent of going into a doctor’s office and intentionally been diagnosed as having cancer. The “doctor” prescribes a host of expensive tests, medications, treatments, and therapies just to jack up your fees, and then flies out of the country when you’re money runs out.

When you se