Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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The credit crisis is no longer just a subprime mortgage problem

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.


The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.


Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.


“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s


Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.


“Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”


The bursting of that bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.


The running turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 per cent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.


That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 per cent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.


An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.


Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.


“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”


The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.


Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges. The recent reductions in short term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable loans.


Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.


The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.


And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody’s and Equifax, the credit bureau.


About 7.1 per cent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.


On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.


Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.


Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms.


In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”


“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”


Home prices in the North Las Vegas neighborhood of Brenda Harris, a technology analyst at a casino company, have fallen 20 percent to 30 percent. The builder who sold her a new three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is now listing similar properties for $314,000. A larger house a block down from Ms. Harris was recently listed online for $310,000.


But Ms. Harris does not want to leave her home. She estimates that she has spent close to $40,000 on her property, about half for a down payment and much of the rest on a deck and landscaping.

“I’m not behind in my payments, but I’m trying to prevent getting behind,” Ms. Harris said. “I don’t want to ruin my credit.”


In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.


But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.


She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home. At the time, she asked for a loan that could be refinanced after one year without penalty. She said her broker had told her a week before the closing that the penalty would extend until May 2009 and that she reluctantly agreed because she had already started moving.


A nonprofit community group, Acorn Housing, is trying to broker a modification of Ms. Harris’s loan. In a statement Friday, Countrywide said the company had been in touch with Ms. Harris and would work with her.


Credit counselors say many borrowers like Ms. Harris were cajoled or pushed into risky mortgages that they never had the ability to repay.


Others disregarded warnings about complex loans because they wanted to be a part of the housing boom, which like the technology stock bubble lured people in with seemingly instant and risk-free profits, said Mory Brenner, vice president of Financial Firebird Corporation, a company based in Pittsfield, Mass., that publishes consumer debt information and refers borrowers to credit counselors.


“I’d say, Let me tell you something, this is crazy,” Mr. Brenner said. “You cannot afford this house, even if nothing happens and rates stay as low as they are today. And the response would be: I don’t care.”


Lenders extended credit to people without verifying their incomes and allowing them to make little or no down payments. But borrowers like Mr. Doyle, the engineer in Northern California, say they are victims of their circumstances — housing prices collapsed and lending standards tightened just as they needed to sell or refinance.


In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.


The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. “My goal was clear: I wanted to help my daughter go through college,” he said. “It wasn’t like it was for us.”


Vikas Bajaj has covered housing and financial markets for the business desk of The New York Times since June 2006. Mr. Bajaj graduated from Michigan State University in 1998 and joined the Times in 2005, having previously worked at The Dallas Morning News. He was born in Bombay and grew up there and in Bangkok, Thailand. He now lives in New York.

© 2007   
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Hell, most all of knew it was never about "Sub Prime" its been about "Fraud" of all levels for credit!  Its just we don't have over 20 million in PR money to say it as they have for the past 7 years. Its over 3 trillion now and still counting!
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I for one was glad to read this since they kept trying to put us down and saying we had bad credit, and we were living above our means. No, they mess our credit up and the same will happen to the ones that have prime loans Homeowners.

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Hi Smurf,  I haven`t seen you here in a while and was wondering what happened to you.   Glad to see you posting again.  I ahve been busy and haven`t been able to read everything so maybe I can get caught up.

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Hi srsd  Just been busy with my own mortgage problem taking care of thing.

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Originally Posted By GARY WAIT
Hell, most all of knew it was never about "Sub Prime" its been about "Fraud" of all levels for credit!

No, Gary.  The NEXT wave of foreclosures and epic losses is NOT primarily going to be due to either origination or even mortgage servicing fraud.

What is COMING is the natural consequnces of the deflation of the speculative bubble that was inflated with global capital furnished through securitization.

Housing prices nationally had appreciated to totally UNSUSTAINABLE LEVELS.  It was the UNREALITY of these excessively priced houses that contributed to ever more tenuously crafted loans with provisions to facilitate the affordability of the unaffordable. 

These prices are now in a FREE FALL.  The market has NOT found a bottom and the decline has a LONG, LONG way to go!

This message board is about MS Fraud.  So there hasn't been a great deal of focus on basic mortgage finance economics.  Neither has there been a great deal of attention to the actuarial realities of mortgage default risk and foreclosure economics.

Permit me to acquaint you with a little basic of the basic math.  What I am about to relate was WELL KNOWN two decades ago, but seems to have been FORGOTTEN by mortgage lender's risk management departments, primary mortgage insurers, ratings agencies, and bond insurers.

The FACT of the matter is that those factors commonly associated with borrower distress -- unemployment, consumer debt problems, medical expenses, disability, death of a breadwinner, and family breakup -- are actually NOT highly predictive of either mortgage foreclosure, mortgage loss frequency or mortgage loss severity.  Each affect borrower delinquncy.  And each might be a precipitating factor in foreclosure.

But what REALLY MATTERS as to foreclosure, mortgage investor (or insurer) loss frequency or mortgage loss severity is net borrower equity.

Net borrower equity is the difference between the realizable market value of the property and the outstanding mortgage balance.

When a borrower owes $50,000 on a property worth $100,000, the borrower usually finds some means to overcome the financial adversity.  When a borrower owes $100,000 on a property worth $50,000, when faced with adversity, the borrower STOPS PAYING and ultimately gives the keys back!

This is TRUE whether the borrower had AAA credit or serious credit problems.  Self-interest is a powerful motivator.

Consider then what happens when a highly leveraged borrower faces a period of DECLINING HOME PRICES.  For example, suppose that we consider a borrower who borrows $95,000 to purchase a property costing $100,000.

The APPRAISAL is supposed to protect the borrower and the lender from the buyer OVERPAYING for a property, but we have seen some very insightful discussion on this message board about how the appraisal process really works.  The bottom line is that some homebuyers DO sometimes overpay for properties and overpayments by 10% to 20% are not (or WERE NOT) altogether uncommon.

Suppose then that our example homeowner paid $100,000 for a property that is really only worth $90,000.

AS LONG AS THERE IS A NICE BRISK PRICE INFLATION, INFLATION BAILS OUT THESE MISPRICED TRANSACTIONS.  Two years later, the market price has rise to the price paid and the homebuyer can emerge with relatively little economic damage.

But suppose housing prices are FLAT.  In such a case, a borrower who owns a home even for five years knocks only about 2.5% of his or her mortgage balance (with a fully amortizing 30-year fixed rate mortgage).

Faced with finanical adversity, the math looks something like this. 

Market Value = $90,000
Sales Commission = $5,400
Transfer Taxes (varies) = 0.5% = $450
Amout Realized at Market = $84,150

Mortgage Balance (after 5 years) = ~ $92,625

Net Equity = $8,475

In other words, the homebuyer has to cough up and fork over $8,475 in order to SELL AT MARKET.

When this homeowner is faced with financial adversity, the borrower might miss a payment and then be saddled with a late payment fee, various other servicer trash fees.  Subprime borrowers usually also face a pre-payment penalty of ~3% to 5% ($2,780 to $4,630) of the outstanding balance.

The person in financial distress cannot deliberately market teh property and wait for a market price.  The distress seller will have to DISCOUNT.  In a distress situation, the seller might need to DISCOUNT a property at least 10% ($9,000) to get it to move quickly.

The borrower who went into the property putting 5% down (at a 95% nominal LTV) and overpaying by 10% might very well have to find $20,000 in capital to extricate himself or herself from a bad bargain when faced with serious financial adversity.

Now, consider what happens when prices are FALLING.  A 10% drop in real estate prices has the same EFFECT for homeowners who paid market value for their homes.  And for those who overpaid, the overall loss in a distress situation may very well be 25% to 41% of the original price of the home (10% overpayment, 10% price drop, 10% distress sale discount, 6% brokerage commission, 3% to 5% mortgage prepayment penalty, etc.)


Note that NOTHING in this analysis presupposes EITHER poor borrower credit OR fraud.  Frankly, buyers and appraisers CAN just make MISTAKES.

The bottom line is that a DEPRESSION scenario for most actuarial models of mortgage delinquency and mortgage default involves only a 15% national decline in home values.  Admittedly, we are FAR from a 15% national decline.  But prices have ALREADY declined 15% in MANY markets.

Consumers do NOT make decisions based upon national averages.  The homeowner will make the decision to struggle to keep paying or to turn in the keys based upon HIS OWN home's value with some consideration to values within his or her neighborhood or community.

So the depression foreclosure scenario has ALREADY BEEN REALIZED in may communities.  And prices continue to fall with the inventory of unsold homes GROWING and the price declines ACCELERATING.

Nor is the bottom in sight.  The DAMAGE to financial institutions from the past excesses in the speculative bubble assure that there cannot be mortgage liquidity to check the fall.  Nor SHOULD buyers rush into the market at these prices.  When prices are FALLING, smart buyers will WAIT and buy when prices have fully corrected.  Why buy on the way down?  Why FINANCE on the way down?

So Gary, what you are NOW seeing is NOT the result of pervasive mortgage market fraud.  You are seeing something FAR WORSE and far more serious.  You are observing a major market correction that is going to sweep through the financial markets like a tsunamo washing away well established and monolithic financial institutions!

The total size of the U.S. mortgage market is about $10 TRILLION.  I would EXPECT that the losses will exceed $1 TRILLION.  That is going to WIPE OUT THE CAPITAL of all of the primary mortgage insurers, all of the bond insurers, and most of the money center banks, with a few major insurance companies thrown in.  Nor will smaller banks be spared.  THEY LEND MONEY ON AN OVERNIGHT AND UNINSURED BASIS TO THE LARGE MONEY CENTER BANKS!  When the big banks go under, they will pull a LOT of other financial institutions under with them, even institutions that didn't ever even own any of the toxic mortgage debt!

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