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Chapter 1: Financial Crisis

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

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

Chapter 1: Financial CrisisChapter 1: Financial Crisis

Page 2: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Industry InsidersIndustry Insiders

Collaboration

Collusion

Collaboration

Collusion

Page 3: Chapter 1: Financial Crisis. Industry 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

Page 4: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Mortgage Fraud in the USMortgage Fraud in the US

Fraud

1974-1975

2000-2005

Fraud

1974-1975

2000-2005

Page 5: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 6: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 7: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 8: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 9: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Regulation TrendsRegulation Trends

Licensing Mortgage Brokers

More Education

Licensing Mortgage Brokers

More Education

Page 10: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Chapter 2: Mortgage Basics for Real Estate Licensees

Chapter 2: Mortgage Basics for Real Estate Licensees

Page 11: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Impact of LiensImpact of Liens

Promissory/Mortgage Note

Mortgage/Deed of Trust

Promissory/Mortgage Note

Mortgage/Deed of Trust

Page 12: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 13: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Loan SourcesLoan Sources

Government-Assisted Programs

Private Sector Programs

Government-Assisted Programs

Private Sector Programs

Page 14: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Loan TypesLoan Types

Fixed-Rate Mortgage

(FRM)

Adjustable-Rate

Mortgage (ARM)

Fixed-Rate Mortgage

(FRM)

Adjustable-Rate

Mortgage (ARM)

Page 15: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Exotic LoansExotic Loans

Interest-Only (IO) Loans

Pay-Option ARMs

Negative Outcomes

Interest-Only (IO) Loans

Pay-Option ARMs

Negative Outcomes

Page 16: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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%

Page 17: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 18: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Role of Secondary MarketRole of Secondary Market

Primary Market

Secondary MarketSecuritization

Tighter Standards

More Losses

Primary Market

Secondary MarketSecuritization

Tighter Standards

More Losses

Page 19: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 20: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Chapter 3 Mortgage Fraud

Chapter 3 Mortgage Fraud

Page 21: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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)

Page 22: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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)

Page 23: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 24: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Red FlagsPossible Mortgage Fraud

Red FlagsPossible Mortgage Fraud

Shady Practices

Dual Contracts

Hidden Addenda

Silent Mortgage

Shady Practices

Dual Contracts

Hidden Addenda

Silent Mortgage

Page 25: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 26: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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.

Page 27: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Chapter 4Predatory Lending

Chapter 4Predatory Lending

Page 28: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 29: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 30: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 31: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 32: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 33: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

HUD Borrower’s Bill of Rights

HUD Borrower’s Bill of Rights

Page 34: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Chapter 5Illegal

Flipping

Chapter 5Illegal

Flipping

Page 35: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 36: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 37: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 38: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 39: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 40: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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)

Page 41: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 42: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 43: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 44: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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)

Page 45: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

Educate Buyer BorrowersEducate Buyer Borrowers

HUD Web Site

HUD PamphletEnglish

Spanish

HUD Web Site

HUD PamphletEnglish

Spanish

Page 46: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 47: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 48: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 49: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

RESPA EnforcementRESPA Enforcement

Injunctive Relief

File a Complaint with HUD

In Writing

Confidentiality

Injunctive Relief

File a Complaint with HUD

In Writing

Confidentiality

Page 50: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 51: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 52: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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?

Page 53: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 54: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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

Page 55: Chapter 1: Financial Crisis. Industry Insiders  Collaboration  Collusion  Collaboration  Collusion

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)