Be Mindful of Mortgage Fraud
A booming and competitive real estate industry in 2021 has fueled a seller’s market and created a demand for housing. Unfortunately, this boom also creates an environment that is ripe for fraud and shady practices. In this article, we will take a look at one of the least understood supporting actors in the real estate industry: The mortgage broker. What does a mortgage broker do? Their job is to help the customer find the right kind of loan for their specific financial need. For example, if you are a first-time home buyer, mortgage brokers should have information on what types of loans are best suited for first-time homeowners. Other services provided by the broker include taking the borrower’s application and performing a financial and credit evaluation. So in other words, a broker is basically a middleman between the customer and the lender. As a potential homebuyer, you need to be careful.
A Background on Brokers
According to the FBI, there was massive fraud among mortgage brokers before the 2008 crash. Mortgage fraud is nothing new. Before new regulations were passed after 2008, many mortgage brokers were engaged in unscrupulous practices to increase commissions, such as inflating a borrower’s income, overstating housing values, and steering customers to lenders that paid the highest fee to the broker. Brokers would earn their money through what was known as a Yield Spread Premium (YSP). The YSP was the compensation paid to the mortgage broker from the lender if the borrower exchanged a higher interest rate for reduced closing costs. The higher the interest rate, the higher the fee. The normal upfront closing costs of the loan are then spread out over the many years that the loan is in effect.
Many brokers also wrote “stated income loans,” known more accurately as “liar loans.” During the 2001-2006 real estate boom, homebuyers required little to no documentation or verification to be approved for a mortgage. Brokers would often look the other way to earn a larger commission even though the mortgage was more than the customer could afford.
Lured by easy money from an overheated housing market as well as little to no regulation, mortgage brokers multiplied. Many who had zero background in finance or real estate, such as pizza delivery drivers and bartenders became mortgage brokers seemingly overnight. I had a (late) relative in California who was engaged in this unethical line of business for several years. After the market collapsed, she was forced to return to her original profession–playing music.
Disturbingly, many new brokers were convicted of financial crimes and now had access to customers’ credit cards, bank accounts, and Social Security numbers. According to a 2008 report in the Miami Herald, since the beginning of the boom, over 4,000 mortgage broker licenses in Florida alone were issued to individuals who had been convicted of crimes such as fraud, extortion, racketeering, and bank robbery.
Post-2008 Meltdown
Today, brokers get paid by commission. Oftentimes this is thorough an origination fee. That fee is based upon what is known as “points.” Each one point equals one percent of the entire loan amount. If you have an agreement to pay one point of an origination fee, you are paying the broker one percent on a $100,000 loan to find the loan. Mortgage brokers profit from repeat customers. They will often contact previous customers to tell them about an offer that would reduce their monthly payment from, for example, $1,000 to $900.00. If the customer also receives a lower interest rate, it may sound like a good deal. What they do not tell you about refinancing is misleading. When the customer refinances a 30-year mortgage for another 30-year mortgage, it resets the clock. In the first few years of the loan, the lender is profiting from the loan. About a few years into the loan, the customer is gradually starting to pay off the principal of the loan. Refinancing resets the progress and puts the customer back to square one. Discussion about interest should focus on the interest amount the customer will end up paying over the life of the loan, not the interest rate.
In 2010, the Federal Reserve issued new regulations in an attempt to prevent brokers from ripping off unsuspecting borrowers with all of the hidden fees. The customer should still be aware of administrative, processing, and other “junk” fees. The best approach to avoid being ripped off is through disclosure. As the customer, you are encouraged to ask questions, seek out competent, reputable realtors, and do your research.
Jon Kremser, Ph.D.
Forensic Security & Protection, LLC
A Background on Brokers
According to the FBI, there was massive fraud among mortgage brokers before the 2008 crash. Mortgage fraud is nothing new. Before new regulations were passed after 2008, many mortgage brokers were engaged in unscrupulous practices to increase commissions, such as inflating a borrower’s income, overstating housing values, and steering customers to lenders that paid the highest fee to the broker. Brokers would earn their money through what was known as a Yield Spread Premium (YSP). The YSP was the compensation paid to the mortgage broker from the lender if the borrower exchanged a higher interest rate for reduced closing costs. The higher the interest rate, the higher the fee. The normal upfront closing costs of the loan are then spread out over the many years that the loan is in effect.
Many brokers also wrote “stated income loans,” known more accurately as “liar loans.” During the 2001-2006 real estate boom, homebuyers required little to no documentation or verification to be approved for a mortgage. Brokers would often look the other way to earn a larger commission even though the mortgage was more than the customer could afford.
Lured by easy money from an overheated housing market as well as little to no regulation, mortgage brokers multiplied. Many who had zero background in finance or real estate, such as pizza delivery drivers and bartenders became mortgage brokers seemingly overnight. I had a (late) relative in California who was engaged in this unethical line of business for several years. After the market collapsed, she was forced to return to her original profession–playing music.
Disturbingly, many new brokers were convicted of financial crimes and now had access to customers’ credit cards, bank accounts, and Social Security numbers. According to a 2008 report in the Miami Herald, since the beginning of the boom, over 4,000 mortgage broker licenses in Florida alone were issued to individuals who had been convicted of crimes such as fraud, extortion, racketeering, and bank robbery.
Post-2008 Meltdown
Today, brokers get paid by commission. Oftentimes this is thorough an origination fee. That fee is based upon what is known as “points.” Each one point equals one percent of the entire loan amount. If you have an agreement to pay one point of an origination fee, you are paying the broker one percent on a $100,000 loan to find the loan. Mortgage brokers profit from repeat customers. They will often contact previous customers to tell them about an offer that would reduce their monthly payment from, for example, $1,000 to $900.00. If the customer also receives a lower interest rate, it may sound like a good deal. What they do not tell you about refinancing is misleading. When the customer refinances a 30-year mortgage for another 30-year mortgage, it resets the clock. In the first few years of the loan, the lender is profiting from the loan. About a few years into the loan, the customer is gradually starting to pay off the principal of the loan. Refinancing resets the progress and puts the customer back to square one. Discussion about interest should focus on the interest amount the customer will end up paying over the life of the loan, not the interest rate.
In 2010, the Federal Reserve issued new regulations in an attempt to prevent brokers from ripping off unsuspecting borrowers with all of the hidden fees. The customer should still be aware of administrative, processing, and other “junk” fees. The best approach to avoid being ripped off is through disclosure. As the customer, you are encouraged to ask questions, seek out competent, reputable realtors, and do your research.
Jon Kremser, Ph.D.
Forensic Security & Protection, LLC
