Chapter 1: Financial Crisis. Industry Insiders Collaboration Collusion Collaboration Collusion

Chapter 1: Financial CrisisChapter 1: Financial Crisis

Industry InsidersIndustry Insiders

Collaboration

Collusion

Collaboration

Collusion

U.S. Mortgage FraudU.S. Mortgage Fraud

Affects Real Estate Values

Rental Markets

Affects Real Estate Values

Rental Markets

State (2005 Data)

MARI Fraud Ranking

Subprime Loan Rank

Florida 1 1

Utah 2 2

Georgia 3 5

Colorado 4 6

Illinois 5 4

Missouri 6 3

Texas 7 7

Mortgage Fraud in the USMortgage Fraud in the US

Fraud

1974-1975

2000-2005

Fraud

1974-1975

2000-2005

Effects of ForeclosuresEffects of Foreclosures Boarded Up Homes

Negative Feelings

Difficult to Find Buyers

Lower Tax Appraisals

Eroded Tax Base

Fewer Community Services

Boarded Up Homes

Negative Feelings

Difficult to Find Buyers

Lower Tax Appraisals

Eroded Tax Base

Fewer Community Services

Effects of ForeclosuresEffects of Foreclosures

Foreclosed PropertyLowers for 1/8 Mile

.9% to 1.44%

Each Foreclosed PropertyReduces by 1.8%

There Goes the Neighborhood

Foreclosed PropertyLowers for 1/8 Mile

.9% to 1.44%

Each Foreclosed PropertyReduces by 1.8%

There Goes the Neighborhood

Factors Leading to Foreclosures

Factors Leading to Foreclosures

Personal Bankruptcy

Poor Loan Servicing

ARM Adjustments

Identity Theft

Mortgage Fraud & Illegal Flipping

Predatory Lending

Personal Bankruptcy

Poor Loan Servicing

ARM Adjustments

Identity Theft

Mortgage Fraud & Illegal Flipping

Predatory Lending

www.ftc.gov/idtheft

Roles of ProfessionalsRoles of Professionals

Loan OfficersRetail Loan Officer

Mortgage Broker

Loan Processors

Underwriters

Appraisers

Wholesale Lenders

Loan OfficersRetail Loan Officer

Mortgage Broker

Loan Processors

Underwriters

Appraisers

Wholesale Lenders

Regulation TrendsRegulation Trends

Licensing Mortgage Brokers

More Education

Licensing Mortgage Brokers

More Education

Chapter 2: Mortgage Basics for Real Estate Licensees

Chapter 2: Mortgage Basics for Real Estate Licensees

Impact of LiensImpact of Liens

Promissory/Mortgage Note

Mortgage/Deed of Trust

Promissory/Mortgage Note

Mortgage/Deed of Trust

Cost of Borrowing Money Factors

Cost of Borrowing Money Factors

Term of Loan

Time Value of Money

Assessing Borrower’s Borrowing History

Loan Amount

Term of Loan

Time Value of Money

Assessing Borrower’s Borrowing History

Loan Amount

ValueValue

TimeTime

Loan SourcesLoan Sources

Government-Assisted Programs

Private Sector Programs

Government-Assisted Programs

Private Sector Programs

Loan TypesLoan Types

Fixed-Rate Mortgage

(FRM)

Adjustable-Rate

Mortgage (ARM)

Fixed-Rate Mortgage

(FRM)

Adjustable-Rate

Mortgage (ARM)

Exotic LoansExotic Loans

Interest-Only (IO) Loans

Pay-Option ARMs

Negative Outcomes

Interest-Only (IO) Loans

Pay-Option ARMs

Negative Outcomes

Underwriting CriteriaUnderwriting Criteria

Income

Credit

Assets/Down Payment

Occupancy

Income

Credit

Assets/Down Payment

OccupancyPayment History

35%

Amounts Owed30%

Types of Credit10%

New Credit10%

Length of Credit History

15%

Alternatives to Traditional Requirements

Alternatives to Traditional Requirements

Full Documentation Loan

Lite Doc/Alt Doc Loan

No Doc Loan

Stated Income Loan

Seller Carryback Loan

Combinations

Full Documentation Loan

Lite Doc/Alt Doc Loan

No Doc Loan

Stated Income Loan

Seller Carryback Loan

Combinations

Role of Secondary MarketRole of Secondary Market

Primary Market

Secondary MarketSecuritization

Tighter Standards

More Losses

Primary Market

Secondary MarketSecuritization

Tighter Standards

More Losses

Manage Buyer Expectations

Manage Buyer Expectations

Lenders Who SpecializeMeet Buyers’ Needs

Use Reputable Lenders

Avoid Unrealistic Expectations

Lenders Who SpecializeMeet Buyers’ Needs

Use Reputable Lenders

Avoid Unrealistic Expectations

Chapter 3 Mortgage Fraud

Chapter 3 Mortgage Fraud

Tracking Suspected FraudTracking Suspected Fraud

Financial Crimes Enforcement Network (FinCEN)

Financial Institution Fraud Unit (FIFU)

Suspicious Activities Reports (SARs)

Suspicious Mortgage Activity Report (SMARt Form)

Financial Crimes Enforcement Network (FinCEN)

Financial Institution Fraud Unit (FIFU)

Suspicious Activities Reports (SARs)

Suspicious Mortgage Activity Report (SMARt Form)

Mortgage FraudMortgage Fraud

Define

Deception, False Facts

Collusion, False Premises

Lying

Types

Fraud for Housing

Fraud for Profit (& Business)

Define

Deception, False Facts

Collusion, False Premises

Lying

Types

Fraud for Housing

Fraud for Profit (& Business)

Penalties for FraudPenalties for Fraud

Conspiracy

One Time

Looking the Other Way

Examples

Lying on Loan Application

Lying about Purchase Price

Conspiracy

One Time

Looking the Other Way

Examples

Lying on Loan Application

Lying about Purchase Price

Red FlagsPossible Mortgage Fraud

Red FlagsPossible Mortgage Fraud

Shady Practices

Dual Contracts

Hidden Addenda

Silent Mortgage

Shady Practices

Dual Contracts

Hidden Addenda

Silent Mortgage

Red FlagsPossible Mortgage Fraud

Red FlagsPossible Mortgage Fraud

Inflated Appraisals

False Information on Applications

Rebates to Borrowers

Creative Financing

Inflated Appraisals

False Information on Applications

Rebates to Borrowers

Creative Financing

Fiction or Fact?Fiction or Fact?

Hypothetical Situation

Real-Life ExampleCasey Serin

Lived on Cash Back

Foreclosures

Fudge on Intent to Live

Etc.

Hypothetical Situation

Real-Life ExampleCasey Serin

Lived on Cash Back

Foreclosures

Fudge on Intent to Live

Etc.

Chapter 4Predatory Lending

Chapter 4Predatory Lending

Dilemma for Low Income& Poor Credit

Dilemma for Low Income& Poor Credit

Federal Housing Administration (FHA) Loans

Not Kept Pace

Lost Market Share

Growth of Subprime Market

Concentration of Credit Problems

Little or No Credit History

Federal Housing Administration (FHA) Loans

Not Kept Pace

Lost Market Share

Growth of Subprime Market

Concentration of Credit Problems

Little or No Credit History

Signs of Predatory LendingSigns of Predatory Lending

Subprime Not Always

Predatory

Legal Interests Not in Best

Interest of Borrower

Lack of Competition from

Prime Lenders

Subprime Not Always

Predatory

Legal Interests Not in Best

Interest of Borrower

Lack of Competition from

Prime Lenders

Subprime Lending Practices

Subprime Lending Practices

Higher Interest Rates Adjustable Rate Mortgages (ARMs)

Excessive Origination & Closing Fees

Prepayment Penalty Fees Binding Mandatory Arbitration (BMA)

Yield Spread Premiums (YSPs) as Kickbacks

Higher Interest Rates Adjustable Rate Mortgages (ARMs)

Excessive Origination & Closing Fees

Prepayment Penalty Fees Binding Mandatory Arbitration (BMA)

Yield Spread Premiums (YSPs) as Kickbacks

Steering & TargetingSteering & Targeting

Elderly

Racial Profiling

Immigrants

Those with Low Credit Scores

Flipping Loans

Unnecessary Products

Misleading or No Information about Loans

Elderly

Racial Profiling

Immigrants

Those with Low Credit Scores

Flipping Loans

Unnecessary Products

Misleading or No Information about Loans

Changing the ClimateChanging the Climate

Automated Underwriting Systems

More Regulation

Prohibit Appraisal Fraud

Consumer Education

Automated Underwriting Systems

More Regulation

Prohibit Appraisal Fraud

Consumer Education

HUD Borrower’s Bill of Rights

HUD Borrower’s Bill of Rights

Chapter 5Illegal

Flipping

Chapter 5Illegal

Flipping

Real Estate FlipsReal Estate Flips

Positive EffectsGentrification

Construction Jobs

Increase Tax Base

Negative EffectsLocals Forced Out

Tenants Displaced

Positive EffectsGentrification

Construction Jobs

Increase Tax Base

Negative EffectsLocals Forced Out

Tenants Displaced

Real Estate FlipsReal Estate Flips

Equitable TitleBeneficiary

Developer

Foreclosed Property Purchaser

Vendee in Installment Sale

Back-to-Back Closings

Equitable TitleBeneficiary

Developer

Foreclosed Property Purchaser

Vendee in Installment Sale

Back-to-Back Closings

Illegal FlippingIllegal Flipping

SchemesUse of Kickbacks

Fake Documents

Straw Buyers

False Identities

Real-Life Examples

SchemesUse of Kickbacks

Fake Documents

Straw Buyers

False Identities

Real-Life Examples

Signs of Illegal FlippingSigns of Illegal Flipping

Lender Fraud

Possible ActivitiesDeed Not in Seller’s Name

& Lender Unaware

Owned for Short Period

Seller Orders Appraisal

Rapid Increase in Value

Unusual Payments

Lender Fraud

Possible ActivitiesDeed Not in Seller’s Name

& Lender Unaware

Owned for Short Period

Seller Orders Appraisal

Rapid Increase in Value

Unusual Payments

Magnitude of FraudMagnitude of Fraud

All Parts of Country

Real-Life ExamplesConnecticut

Southern California

Twin Cities, MN

All Parts of Country

Real-Life ExamplesConnecticut

Southern California

Twin Cities, MN

Results of Illegal FlippingResults of Illegal Flipping

Neighborhood Responses

Housing & Urban Development (HUD)

Illinois Efforts

Neighborhood Housing Services of America (NHSA)

Georgia Real Estate Fraud Prevention & Awareness (GREFPAC)

Neighborhood Responses

Housing & Urban Development (HUD)

Illinois Efforts

Neighborhood Housing Services of America (NHSA)

Georgia Real Estate Fraud Prevention & Awareness (GREFPAC)

Federal & State Involvement

Federal & State Involvement

Financial Institution Fraud Unit (FIFU)

States w/ Most Reported FraudFloridaColorado & Illinois

Greatest ImprovementGeorgiaSouth Carolina

Financial Institution Fraud Unit (FIFU)

States w/ Most Reported FraudFloridaColorado & Illinois

Greatest ImprovementGeorgiaSouth Carolina

Fraud vs. Subprime Loan Rates

Fraud vs. Subprime Loan Rates

State (2005 Data)

MARI Fraud Ranking

Subprime Loan Rank

Florida 1 1

Utah 2 2

Georgia 3 5

Colorado 4 6

Illinois 5 4

Missouri 6 3

Texas 7 7

Protect Against Illegal Flipping

Protect Against Illegal Flipping

Know Market Use Competitive Market Analysis

(CMA)

Thoroughly Inspect

Know Extent of Repairs

Meticulous Documentation

Know Market Use Competitive Market Analysis

(CMA)

Thoroughly Inspect

Know Extent of Repairs

Meticulous Documentation

Chapter 6: Federal Protections

Chapter 6: Federal Protections

Fair Housing Act Equal Credit Opportunity Act (ECOA)

Home Mortgage Disclosure Act (HMDA)

Community Reinvestment Act (CRA)

Real Estate Settlement Procedures Act (RESPA)

Truth –in-Lending Act (TILA)

Fair Housing Act Equal Credit Opportunity Act (ECOA)

Home Mortgage Disclosure Act (HMDA)

Community Reinvestment Act (CRA)

Real Estate Settlement Procedures Act (RESPA)

Truth –in-Lending Act (TILA)

Educate Buyer BorrowersEducate Buyer Borrowers

HUD Web Site

HUD PamphletEnglish

Spanish

HUD Web Site

HUD PamphletEnglish

Spanish

Real Estate Settlement Procedures Act (RESPA)

Real Estate Settlement Procedures Act (RESPA)

Federally-Related Residential Loans

Disclosures at Time of Application Information BookletGood-Faith Estimate (GFE)

Affiliated Business Arrangement (AfBA)

Seller Cannot Require Certain Title Insurance Company

Federally-Related Residential Loans

Disclosures at Time of Application Information BookletGood-Faith Estimate (GFE)

Affiliated Business Arrangement (AfBA)

Seller Cannot Require Certain Title Insurance Company

RESPA (continued)RESPA (continued)

Prohibits Kickbacks

Disclosures at Settlement/Closing

Disclosure After Settlement/ClosingEscrow Account

Rules

Servicing Transfer Statement

Prohibits Kickbacks

Disclosures at Settlement/Closing

Disclosure After Settlement/ClosingEscrow Account

Rules

Servicing Transfer Statement

www.realtor.org

RESPA EnforcementRESPA Enforcement

Section 6: Servicing of Loans

Section 8: Anti-kickbacks & Unearned Referral Fees

Section 9: No Specific Title Insurance Company

Section 10: Limits on Escrow Accounts

Section 6: Servicing of Loans

Section 8: Anti-kickbacks & Unearned Referral Fees

Section 9: No Specific Title Insurance Company

Section 10: Limits on Escrow Accounts

RESPA EnforcementRESPA Enforcement

Injunctive Relief

File a Complaint with HUD

In Writing

Confidentiality

Injunctive Relief

File a Complaint with HUD

In Writing

Confidentiality

Truth-in-Lending Act (TILA)Truth-in-Lending Act (TILA)

Implemented by Regulation Z

No CoverageBusiness, Commercial, Agricultural,

Organizational Loans

More than $25,000 Loan

Student Loan Programs

Implemented by Regulation Z

No CoverageBusiness, Commercial, Agricultural,

Organizational Loans

More than $25,000 Loan

Student Loan Programs

Truth-in-Lending Act (TILA)Truth-in-Lending Act (TILA)

Right of Rescission

Trigger Items

PenaltiesFines

Imprisonment

Missing Information from Disclosure

Right of Rescission

Trigger Items

PenaltiesFines

Imprisonment

Missing Information from Disclosure

Home Mortgage Disclosure Act (HMDA)

Home Mortgage Disclosure Act (HMDA)

Implemented by Reg C

Monitors Reporting of Loan DataServing Community Needs?

Investments Attracting Private Investments?

Possible Discriminatory Lending Patterns?

Implemented by Reg C

Monitors Reporting of Loan DataServing Community Needs?

Investments Attracting Private Investments?

Possible Discriminatory Lending Patterns?

Community Reinvestment Act

( CRA )

Community Reinvestment Act

( CRA ) Regulations 12 CFR

Meet Credit Needs of Community

Loan Applicants AskedEthnicity, Race, & Color

Applicants Should Answer Honestly

Used to Monitor Compliance

Regulations 12 CFR

Meet Credit Needs of Community

Loan Applicants AskedEthnicity, Race, & Color

Applicants Should Answer Honestly

Used to Monitor Compliance

Tips for Real Estate Licensees

Tips for Real Estate Licensees

Know the Laws

Find Buyers EarlierHelp Find Appropriate

Lender

Manage Expectations

Know the Laws

Find Buyers EarlierHelp Find Appropriate

Lender

Manage Expectations

Reporting Appraisal & Mortgage Fraud

Reporting Appraisal & Mortgage Fraud

Federal Bureau of Investigation (FBI)

Federal Trade Commission (FTC)

Dept of Housing and Urban Development (HUD)

Department of Justice (DOJ)

Federal Bureau of Investigation (FBI)

Federal Trade Commission (FTC)

Dept of Housing and Urban Development (HUD)

Department of Justice (DOJ)