Regulators Say They Are Concerned About Reverse Mortgage Fraud

Recently, Origination News conducted a roundtable with several members of the American Association of Residential Mortgage Regulators’ board of directors at the group’s annual conference in Savannah, Ga. In the following excerpt, ON’s Lew Sichelman has a conversation with immediate past president David Bleicken (deputy secretary for banking in Pennsylvania) and new president Mark Pearce (deputy commissioner of banks in North Carolina) about reverse mortgages and fraud.

LEW: David, you mentioned reverse mortgages as an area of possible fraud. The reverse mortgage lenders trade group (The National Association of Reverse Mortgage Lenders) has said they’ve heard these complaints, but they added they’ve gone out and searched the records and can’t find any or hardly any instances of fraud being committed. What do you guys say?

DAVID: The fraud is related to the cross selling of the product. You get a bundle of money and people swoop in and sell them securities products they shouldn’t have. But also, there are also straw buyer types of schemes out there to grab the money and run. In Pennsylvania, depending you slice the pie, we are one of the oldest states (that is having an older population) in the country, second only to Florida as a percentage of population. And we’re exceptionally concerned about, not only the current fraud that is out there but also the potential for that fraud to develop.

MARK: I would add to that, that it is too early to see a lot of enforcement actions related to fraud in the reverse mortgage area. The reverse mortgage area has really boomed, as the subprime area collapsed. There is a lag time between the boom in that industry and regulatory or law enforcement scrutiny and then the investigation of that activity to bring an effective prosecution. We are at the early of that, but I know of a number of regulators who are currently investigating issues related to reverse mortgages.

Digging Yourself Out of a Mortgage Mess

By JANE J. KIM AND M.P. MCQUEEN

Homeowners struggling to save their houses could inadvertently trash their credit scores.

This year, the Obama administration began pushing so-called loan modifications as a way to keep millions of Americans in their homes as real-estate values plunged and unemployment soared. Under the government’s Home Affordable Modification Program, or HAMP, the lender agrees to adjust the terms of the loan, in most cases by temporarily lowering the interest rate or extending the period in which the loan must be repaid, both of which serve to lower the monthly payment. Mortgage companies also have their own programs for borrowers who don’t qualify for the government program.
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* Fixing Troubled Mortgages for the Elderly

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Generally, loan mods are designed for homeowners who are currently experiencing financial distress or are at imminent risk of default. You don’t have to be behind on your payments in order to qualify, although many are. Borrowers who enter the program could, for example, be in an adjustable-rate mortgage or an interest-only mortgage and may struggle to keep current on payments when their rates reset.

Yet many homeowners report difficulties modifying a loan because of conflicting advice from front-line employees at the mortgage companies, processing delays and lost paperwork, among other things. Even worse, lenders may report the modifications to credit bureaus in ways that can hurt a good credit history—and make it more difficult to repair a damaged one. A damaged credit history can mar borrowers’ ability to qualify for new credit or may prompt current lenders to cut existing credit lines.

Consumers looking to dig themselves out of a mortgage mess can take steps to minimize the potential fallout from loan modifications, and even from the more-serious consequences of so-called short sales.

Question: How badly will a loan modification hurt my credit?

Answer: That depends on what else is in your credit files, whether you were already delinquent on your payments and how the lender reports the modification to the credit bureaus.

Your score probably won’t fall by much if your credit has already taken a beating. But if you’re someone with pristine credit, getting a modification could cause your score to take a steep dive.

If you are opting for a modification under HAMP—in which mortgage payments are lowered to 31% of a homeowner’s gross monthly income—you will likely have to go through a three-month trial period when you are paying a reduced amount before lenders approve the modification. If you were behind on your payments before starting the trial period, lenders are supposed to continue reporting you as delinquent, which can hurt your score. (The loan modification could extend delinquency during the trial period. And once you’re approved, the lender may continue to report the modification as “partial payment”—which generally hurts your score.)

If you’re current, lenders are supposed to report you as current, but some lenders may also report the modifications as a “partial payment” of your mortgage, which is often considered a negative.

Q: Why would something endorsed by the government trash my credit score?

Many lenders and those in the credit-reporting industry have struggled to keep up with the dramatic housing remedies that Washington has devised.

Shortly after the government rolled out its modification program earlier this year, the Consumer Data Industry Association, which represents credit bureaus, advised lenders to classify such modifications as a “partial payment,” a preexisting code that generally hurts your score. Under the widely used FICO model, for example, “partial payment plans” are considered comparable to a missed payment or some other type of derogatory or collection item on their file, says Tom Quinn, vice president of global scoring solutions at FICO.

But there’s a temporary fix on the horizon. Starting in November, lenders will be able to use a new code that specifies whether a mortgage was modified under the government’s plan. That code will reduce the hit to the credit files of people who work with the government to modify their loan; those who work directly with their own lender for more lenient terms could still see a significant hit if the lender reports their own modifications as a partial payment to the credit bureaus.

But while the new November status codes will have no impact on your score for now, that could change once the industry has had a chance to determine whether someone who modifies a loan is an elevated credit risk, says John Ulzheimer of Credit.com.

Q: Are loan modifications only for people who are seriously behind on their payments?

Not necessarily. Joanne Gregory of Fresno, Calif., for example, had never missed a payment but turned to the Making Home Affordable program to modify her two mortgages with Citigroup Inc.’s CitiMortgage because she was feeling the financial pinch of the recession. But because of delays in processing her applications, missing paperwork and conflicting information from representatives on when she needed to make payments, CitiMortgage began reporting her as delinquent to the credit bureaus earlier this year.

The 62-year-old retired teacher says she only became aware that something was wrong when her credit-card issuers began closing her accounts and slashing her credit lines this summer. “I thought I was getting involved in something that would be of temporary assistance until the economy turned around,” says Ms. Gregory, who runs a small consulting practice and gets income from rental properties. “If they would have told me this would be a negative, I would not have done it.”

A Citigroup spokesman declined to comment on Ms. Gregory’s account, citing privacy restrictions, but noted in an e-mailed statement that the bank regrets any “misunderstanding.”

Q: Am I better off avoiding a loan modification and simply going through a foreclosure?

No. Foreclosures are generally more damaging to your credit, and stay in your record for up to seven years. Many lenders, for example, will automatically deny credit applications if they see a foreclosure in your credit files, said Evan Hendricks author of “Credit Scores and Credit Reports.”

The answer is less clear-cut for short sales. In a short sale, a bank agrees to accept less than the full balance of a mortgage as a settlement on the loan. Much depends on how that sale is reported to the credit bureaus by the lender, and whether the lender enters a so-called deficiency judgment for the sale—a court judgment ordering the borrower to pay the remaining balance, which would be especially damaging to one’s credit score. (However, some states don’t allow deficiency judgments.)

Q: What can I do to save my credit?

Consumers can negotiate with their lenders to report loan modifications and short sales in ways that are less damaging to their credit histories, says Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center, which audits mortgages for attorneys and consumer groups.

Randy Wilburn, a real-estate broker and mortgage counselor in Boston who has helped negotiate loan modifications and short sales, says he has had some success in getting lenders to report a short sale to the credit bureaus as “paid as agreed”—which is less damaging to a person’s score. “It is all in the language as to how it is reported to the credit bureau,” he says.

Q: How quickly will my credit recover?

A bankruptcy can hurt your credit for up to 10 years, a foreclosure and other serious delinquencies for up to seven years. FICO, for example, classifies bankruptcies and foreclosures as negative items and treats them in a similar manner. Loan modifications and short sales can also be negatively classified, although that ultimately depends on how those items are reported on a credit profile, says FICO’s Mr. Quinn. Under the VantageScore—an emerging competitor to FICO developed by the three major credit bureaus—scores can fall by as much as 140 points in a short sale or foreclosure and can plummet by as much as 350 in a bankruptcy, says Sarah Davies, head of analytics and product development at VantageScore Solutions LLC.

Borrowers with short sales and loan modifications should see their credit recover more rapidly if they keep making their payments on time, keep balances low and refrain from applying from new credit, said FICO’s Mr. Quinn.

Write to Jane J. Kim at Jane.Kim@wsj.com and M.P. McQueen at M.P.McQueen@wsj.com

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H.R. 3126. SIGNALS END TO HVCC

An amendment to a bill just out of the House Financial Services committee will effectively eliminate the negative effects of HVCC. H.R. 3126. must be passed by both the Senate and House of Representatives but there has been much discussion among real estate professionals and Congress in favor of just such an action. The NAMB (National Association of Mortgage Brokers) President Jim Perry “This is exciting news…within 60 days after this goes into law…mortgage originators and brokers will be able to order appraisals”.
Many experts in the real estate industry feel that this is a major step toward recovery in the housing market and will stimulate sales and mortgage refinancing.

Claims for the $8,000 First Time Homebuyer Tax Credit have resulted in approximately 15 billion dollars of funding by the Federal Government.  Threatening the existence of this very successful tax rebate, which is due to end on November 30, 2009, is the revelation from the Internal Revenue Service (IRS) that the program has been hit with over 100,000 fraudulent claims, totaling about 8 Billion dollars. While fraud is nothing new to the financial industry especially regarding real estate transactions, the scope and magnitude of the fraudulent claims is disturbing to those who would like to see Congress extend the deadline and continue the program which has resulted in many sales that would not have occurred otherwise. These include the National Association of Realtors, the National Association of Mortgage Brokers, the National Association of Home Builders and many other related lobby groups.  The FBI has been investigating “suspicious” write offs on tax returns that have been flagged by the IRS and 167 prosecutions have taken place so far.  After November 30, 2009 only veterans returning from active duty will be able to make a claim on their tax return for a first time home purchse unless Congress acts to continue the program which is as much a “victim of it’s own success” as was Cash for Clunkers.  The massive fraudulent activity now associated with the FTHBC will likely not endear Congressi0nal approval which needs to justify the expense to Government watchdogs already concerned about an already large deficit budget.

October 22, 2009

The sale of low- to medium priced homes – aided by the $8,000 first time homebuyer tax credit – is helping to improve the nation’s economic outlook, according to the Federal Reserve’s new Beige Book report. The Fed says improvements in both residential real estate and manufacturing “continued a pattern of improvement” that emerged this summer. However, the report cautions that one of the weakest sectors of the economy is commercial real estate with the Fed’s business contacts describing conditions as “weak or deteriorating.” Also, the residential construction sector is still suffering, it says. Even though the Fed sees some improvement in housing, it cautions that sales are not booming anywhere. In the Boston and Cleveland Fed districts Realtors fear a downturn once the tax credit expires in late November. It notes that new and existing home sales were flat in the Philadelphia area and in St. Louis residential sales actually fell.

CHANGES TO FHA APPRAISAL RULES

By Brian Collins

10-21-09 WASHINGTON-Appraisal management companies have attracted a lot of attention – and a similar volume of complaints – since Fannie Mae and Freddie Mac first implemented the Home Valuation Code of Conduct in May.

Designed to shield appraisers from pressure and undue influence from loan officers and mortgage brokers, the code has increased the cost of originating loans while raising questions about the quality of the appraisals being performed.

“It’s a good idea to separate the ordering of the appraisal from the loan officer,” said Scott Stern, chief executive of Lenders One, a mortgage banking cooperative with 130 member firms.

However, Mr. Stern believes appraisal management companies are hiring appraisers based on price – appraisers who have little knowledge of local market conditions. “I don’t think it’s fair that AMCs are hiring the cheapest appraisers,” he said.

Lenders One, the National Association of Realtors and appraiser groups are hoping new appraisal policies recently adopted by the Federal Housing Administration will correct some of the problems associated with HVCC and AMCs.

While it is likely to lead to higher appraisal costs, FHA’s approach allows appraisers to disclose their fee. Currently, the appraisal and AMC fees are combined and disclosed as a lump sum.

FHA also addressed the portability issue that allows a lender to transfer an appraisal to another lender. (Fannie and Freddie have not addressed this issue.)

“It seems like FHA is trying to eliminate some of the problems [associated] with the implementation of HVCC,” said Mr. Stern.

Starting Jan. 1, FHA appraisers can record their fee on the appraisal report.

A source close to the issue noted that a consumer, for instance, might see that an appraiser was paid $200 by the AMC but that the consumer was charged $350, a markup of $150. “It will hold the AMCs’ feet to the fire,” he said.

Appraisers contend that FHA’s current policy essentially caps their fee and allows AMCs to fund their operations on the backs of appraisers. “Our members have reported widespread and consistent cramdowns of their fees,” said Bill Garber, director of government and external relations at the Appraisal Institute.

FHA’s new policy allows the appraiser’s fee and the management company’s fee to float separately at market rates. The Appraisal Institute is hoping Fannie and Freddie adopt a similar policy, Mr. Garber said.

Patrick McEvoy, vice president of First National Appraisal Management, said some AMCs are cramming down fees. “They broadcast to the lowest bidders and they have systems to detect the lowest price,” he said.

Mr. McEvoy started First National Appraisal Management two and a half years ago with a fellow certified appraiser. The Hicksville, N.Y.-based AMC pays on a “higher scale,” Mr. McEvoy said, which ensures a “little bit of loyalty” from the independent fee appraisers. “We want a good product to give our clients.”

He expects consumers will be “confused” by FHA’s new policy when they see the appraiser’s fee on the report and a different number on the HUD-1 settlement sheet.

The AMC executive noted the appraisal fee on a FHA transaction is generally higher than a conventional Fannie/Freddie mortgage appraisal because it takes more work. But he said he didn’t know if the new FHA policies will increase the price. “Appraisals on conventional loans have gone up at least $100 to $150 since the HVCC went into effect,” Mr. McEvoy said.

Donald Blanchard, chief compliance officer for Lender Processing Services, which owns LSI, said the fees his AMC pays appraisers “have been relatively stable for five years.”

He noted LSI is the oldest appraisal management company and works with 20,000 fee appraisers. “The average tenure on our appraiser panel is 13 years. There are thousands of appraisers that understand the value added that AMCs bring,” Mr. Blanchard said.

AMCs and their trade group have a lot of questions about FHA’s new appraisal policies and will be seeking clarifications, especially with regard to the fees AMCs can charge. “There is no clear direction yet on how the fees are going to be disclosed on the HUD-1,” Mr. Blanchard said.

Nevertheless, the LSI senior vice president expects FHA’s policies will lead to higher fees for appraisals and more appraisers will be willing to work with LSI. “If this will satisfy those appraisers that argue about the fees AMCs pay – that’s a good thing,” he said. But he noted that lenders will have to pass the costs onto consumers. “I am not sure that the consumer is going to want to pay more,” Mr. Blanchard said.

The National Association of Realtors has been highly critical of the Home Valuation Code of Conduct and the use of inexperienced appraisers.

But the Realtors like FHA’s approach. “FHA comes right out and says you don’t have to use an appraisal management company,” NAR’s chief spokesman Lucien Salvant said.

Federal Housing Administration lenders (like Fannie/Freddie funders) can move the ordering of appraisals into a separate department, away from their loan officers and other commissioned staff, as an alternative to hiring an AMC. But for compliance reasons, a lot of lenders choose Appraisal management companies.

NAR also likes the FHA approach because of the new fee disclosure and the ground rules for transferring appraisals to another lender. The Realtors want FHA and the GSEs to issue joint question-and-answer guidance, bringing their appraisal policies closer together.

The Lenders One CEO also wants better coordination. “FHA, Fannie and Freddie have a vested interest in ensuring that AMCs or other independent third parties hire experienced in-market appraisers. Otherwise, HVCC will continue to negatively impact home sale transactions,” he sai