Everybody LOVES bank fraud!

Is it just me, or do loan orginators routinely encourage bank fraud? First, the background: There are a variety of federal and state laws that make it a VERY serious crime to mislead a lender for purposes of getting a mortgage. At the federal level, 18 USC sec 1014 makes it a crime to “knowingly make any false statement or report . . . for the purpose of influencing in any way the action of” a commercial lender. (Emphasis added). The penalty? A cool million dollar fine and/or 30 years in federal prison. Yup, not a misprint: 30 years in Club Fed. On the state level, RCW 19.44.080 makes it a crime to “knowingly make any misstatement, misrepresentation, or omission during the mortgage lending process knowing that it may be relied on by a mortgage lender.” (Emphasis added). The penalty? Its a class B felony, so 10 years in the joint and/or $20 grand.

As indicated by these laws, as a society we cherish honesty to lenders and believe very strongly that anyone who is dishonest AT ALL in order to secure a loan has committed a very serious crime. The problem, of course, appears to be that nobody in the RE industry agrees. Rather, it appears that the RE industry treats this type of bank fraud (misleading a lender in order to facilitate getting a loan) to be something akin to taking a second serving of dessert: bad form, sure, but if nobody knows…

You may be thinking: “What on earth is Craig talking about? Everyone I know is honest and abides by the law!” Well, think further, and in particular think about a buyer’s inspection contingency response. The NWMLS provides a Form 35R specifically for resolution of the inspection contingency. By its terms, the 35R and any other notices or addenda relating to any modifications or repairs becomes a part of the contract, and of course the lender has the right to receive (and buyer has the obligation to provide to the lender) the entire contract.

How many agents out there have used the Form 35R to request repairs and/or price reductions? And have you gotten any feedback from the loan originator once he or she receives a copy of the signed form? I have. The 35R had the fourth box checked (buyer proposes modifications) and the text below, “Sale price reduced to $440k.” About as simple as can be — but apparently still likely to arouse the suspicions of the underwriters, thus complicating the process. The loan originator’s request? “Toss” the 35R and instead use a Form 34 for a simple price reduction.

The problem? That clearly violates the state law above, and probably the federal law too (at least it will when the buyer signs at escrow a statement indicating that he has provided the lender with all requested information, including a complete copy of the PSA). In other words, even LENDERS encourage violation of the laws designed entirely to protect lenders.

And one wonders how we inflated the housing bubble…..

New Form to Prevent Mortgage Fraud

This morning I received an email from one of the major banks we work with recommending the use of a “FBI fraudOccupancy Cert”.   They are recommending the use of this form on any loans we sell to their bank, including owner occupied, investment or second homes.    The form, which must be acknowledged by the borrower, states:

“Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30  years in federal prison or $1,000,000 fine, or both.  It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.”

The borrower must then select the occupancy for the specific property that is being financed:

  • Primary Residence – Occupied by Borrower(s) within sixty (60) days of closing as stated in the Security Instrument I/we excuted.
  • Second Home – To be occupied by the Borrower(s) as a second home (vacation, etc) while maintaining principal residence elsewhere.
  • Investment Property – Not occupied by Borrower.   Purchased as an investment to be held or rented.

Directly above the signature line, the form states:

“I/we acknowledge it is illegal for a person(s) to make a false statement regarding occupancy of property being financed in a loan and credit application and that we are subject to prosecution under Section 1001, 1010 and 1014 under Title 18 of the United States Code”

This document seems to make it crystal clear what occupancy is and the potential risk of trying to finance an investment property as owner occupied or as a second home.   Can something so direct make a difference and curb mortgage fraud?

Is it possible we are at the bottom?

***Updated/Revised 4:30pm 02/08/2009 PST:  Here is the link to the “Memorandum” (.pdf document) showing how this mortgage broker, in his own words, fraudulently originated millions in loans and how the fallout will plague our economy.  Big thanks goes to blogger “Scotsman” for the getting the document to me.


This is how is it possible………..we may not be at the bottom.

Ardell, I share your hope.   My hope for change is that real estate and lending industry comes to grips with how out of control the core players were that led us to the crisis we are in.   If we all point incriminating fingers to other people in our industry from escrow people to mortgage brokers to agents to Wall Street, pretty soon there’s nobody else to point to.  It circles back to all the players who participated.  Too simple of an explanation of a complex problem?  Maybe.  But, it’s fix has got to start with people in the trenches who are transacting the sales and arranging the financing.

But my hope and Country fight an uphill battle because of people such as Christopher Warren, the mortgage fraudster who wrote the above missive, “how is it possible”. Christopher Warren skipped out of the country on a private plane this past Monday.

See his incredibly clear picture of what is facing our markets by his “memorandum.” (.pdf document).

If one man’s expose of what went on in lending by one person does not make you pale, then I don’t know what will.

An excerpt from Christopher Warren’s  “how it is possible:”

  • That CITI Mortgage didn’t catch correspondents Mortgage Bank of California and Bondcorp Realty Services over-financing over $30,000,000 in bad mortgages with cash-back purchases for straw buyer groups?   How many of these loans are already now owned by our government, tax-payer subsidized, FNMA and Freddie Mac?
  • That GMAC Mortgage LLC., bought over $3,000,000 in mortgages secured in the Orlando Academy Cay Club aka “The Greens

When to sue for an undisclosed defect

This post is not legal advice. For legal advice, consult an attorney, not a blog.

You just bought a house! 🙂 Congratulations! You just discovered that foundation is cracked, although the seller said the foundation was fine… 🙁 My condolences…

The next logical question: can you get some recovery from the seller given his failure to disclose and/or concealment of this defect? The absolute first step in answering that question is to determine the amount of money it will cost to fix the problem. There is only one certainty in litigation: it’s expensive. Where the cost to fix the problem is less than the amount you would expect to incur in attorney’s fees and costs, it may very well be in your best interest to bite the bullet and pay for the repair without seeking compensation.

Let’s assume your cracked foundation will cost $50k to repair. That is more than enough to seriously consider threatening and possibly proceeding with a lawsuit. The next step would be to consult an attorney who could analyze your facts and render an informed opinion as to the likelihood of your prevailing. If you’ve got “good facts” (e.g., seller affirmatively represented condition of foundation, crack appeared to have been purposefully concealed, you performed your own inspection that did not identify the crack), then it may be time to take the very serious step of suing the seller (assuming he refuses to compensate you voluntarily).

But what about those attorney fees? They will still eat up most, if not all, of what you seek to recover. (In the case of Stieneke v. Russi, which I discussed in my last post, the cost of repair was $72k, but the attorney fees and costs through appeal were $175k.) Will you be able to recover those from the seller too?

The answer to that question is a very definite “probably” — hardly the assurance you are looking for. Some courts (particularly those in Eastern WA) have determined that this type of claim (fraud) is unrelated to the contract for sale, so that even though the contract contains an attorney’s fees clause (which allows for an award to the prevailing party), no fees are available. Other courts (particularly those in Western WA) have determined that, because the contract is central to the dispute, the attorney’s fees provision would apply. Given this degree of uncertainty in the law, there is a chance that you may win but still end up losing money given your legal costs.

One final note: the attorney’s fees clause in the contract, if it applies, cuts both ways. So, if you sue and lose, you very well may be liable for the seller’s legal fees and costs, in addition to your own. In that case, your total cost for the unsuccessful suit could approach $100k, even if you don’t appeal. Accordingly, it is essential to get good legal advice about the merits of your case and the likelihood of prevailing before filing suit.

CNN Money.com: Appraiser sues WaMu

The intersection of ethics and real estate meet again

As if WaMu didn’t have enough on its public relations plate, CNN Money reports:

Jeniffer Wertz, who is seeking unspecified damages, says WaMu stopped accepting her appraisals in mid-2007 a month after she reported that her local housing market in California was “declining.”

Evidently, Wertz claims that Washington Mutual wanted her to change her forecast to “stable.”

And on the other side of the coin

Bloomberg reporting that inflated appraisals causing significant losses to lenders.

`You started to see more and more loan products that would keep payments low, and I see that as correlating with appraisal pressure because those products only work in a rising market.”

(and, which loan products might those be I wonder tongue in cheek?)

Former guest at Inman Connect, Jonathon Miller, a sought-after New York appraisal and real estate consultant remarked:

“Lenders and mortgage brokers routinely pressured appraisers to boost values, said Jonathan Miller, a New York property appraiser for more than two decades who writes a blog about the problem.”

And more from the Bloomberg article….First American and WaMu working together?

“In New York, Attorney General Andrew Cuomo subpoenaed Fannie Mae and Freddie Mac, the two biggest buyers of U.S. mortgages. He also sued First American Corp.’s eAppraiseIT LLC for allegedly caving to pressure from Washington Mutual Inc., its biggest customer and the largest U.S. thrift, to inflate values.”

Ethics in real estate: oxymoron?

Major Proposed Changes for Residential Closings in 2008

Alternative sexier titles to this post are: “Your Escrow Officer is a NARC” or “No More Quicky Closings” or how about “The Escrow Hills have [photopress:detctive_1.jpg,thumb,alignright]Eyes”. There are some major changes brewing with how escrow will be practicing their business in 2008. Escrow companies may become “undercover

The (legal) importance of a home inspection

(This post is not legal advice.  For legal advice, consult a lawyer about your particular situation.)

First, my apologies to the RCG community.  I recently took a lengthy vacation and have been quite busy since my return.  Moreover, I now need to hire additional staff and thus move to a larger office space.  So, please forgive my less-than-frequent contributions until things return to “normal.”

Recently, Russ authored a post discussing the recent Supreme Court case of Alejandre v. Bull (beating me to the punch, in the process).  This is indeed an important case for several reasons, one of which Russ and the subsequent comments touch upon: the importance of a thorough home inspection.

Initially, the home inspection (if performed competently) provides the buyer with information regarding the condition of the house.  Obviously, the buyer is best served having full knowledge of any existing defects and able to make an informed decision about whether to complete the purchase. 

In light of the Bull case, however, the inspection also has legal significance.  In that case, the Court (in paragraphs 32 and 33) noted that a buyer of real property may still have a claim of fraudulent concealment and/or fraud where the seller fails to disclose a known defect (notwithstanding the fact that the buyer does not have a claim for negligent misrepresentation due to the economic loss rule, as discussed by Russ).  To prevail on a claim of fraudulent concealment, the buyer must show that the defect at issue “would not be disclosed by a careful, reasonable inspection by the purchaser.”  To prevail on a fraud claim, the buyer must show that he had a right to rely on the alleged misrepresentation of the defect at issue.  This “right to rely” is “intrinsically linked” (using the Court’s words) to a buyer’s duty to exercise diligence with regard to the representations at issue.  

Accordingly, an inspection is critical to retaining the ability to make a claim of fraud or fraudulent concealment against a seller.  If a buyer skips the inspection, the buyer will have great difficulty showing that the defect would not have been revealed by an inspection.  The reverse is true as well: by getting an inspection that fails to uncover the defect, the buyer will have a very good argument that the defect would not be (and indeed was not) revealed by an inspection.  Similarly, absent an inspection, the buyer will almost certainly have failed to exercise the necessary diligence to identify the defect, regardless of seller’s representation.

An inspection has an immediate, practical benefit.  However, it also has a legal benefit.  If you forego the inspection, you essentially waive any claim against the seller for failing to disclose a known defect.

Too Close to Home

Ardell’s recent blog, Agent FIRED! Lender Fraud, reminded me of one of my first transactions almost seven years ago. I can’t remember how I came across this client or how he was referred to me because I have deleted him from my database. I don’t ever want to provide a mortgage for him or anyone he’s associated with.

This person had contacted me wanting a mortgage for a home just a few doors down from his current residence. He had told me it was for his family members and that it should not receive a non-owner occupied rate. I informed him that currently, there are no special rates and programs for family members (it would be great if…but there’s not) and therefore, the loan is considered a non-owner occupied. He, of course, really wanted the lower rate that an owner occupied home would feature. A week or so later into the transaction, he asked me “What if I move out of my home and into the new home. My family can move into my home.

Agent FIRED! – Lender Fraud

[photopress:fired.jpg,full,alignright]Has Lender Fraud become the standard?

Very sad, but very true story. I received an email from a Rain City Guide reader yesterday. The reader happens to be a local agent who was fired, because of her efforts to both accommodate her Buyer Client, without committing Lender Fraud.

The buyer fired her for not wholeheartedly complying with their WANTS, and for even considering for a moment, the Lender fraud implications of their WANTS.


Suffice it to say, what they WANTED was cash back at closing under the table.

Apparently this has become so commonplace, that it is now the standard to which she was held. Money “off the sheet”. I can name more examples of commonplace Lender Fraud…but that is not the question here.

Sadly many told her she was being “a goody two shoes” about it. Very sad indeed.