Beware- HUD Isn’t Messing Around!

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

As a person in the Mortgage Industry who works in a position that involves business and credit analysis and writing credit policies to protect the interests of the company, one particular article got my attention this week when it crossed my desk. It was an article released in Market Watch, part of the Wall Street Journal digital network. The article stated that HUD issued subpoenas to 15 mortgage companies on Tuesday in regards to higher-than-average default rates on FHA loans and an overabundance of mortgage insurance claims.

When I took a looked through the list I immediately recognized a number of pretty big players; mortgage brokers we have all likely dealt with at some point in our mortgage careers for one reason or another. But I can’t say I’m surprised to see a couple of them. I clearly recall that they were accepting what I considered “bottom of the barrel” FHA borrowers back in 2006 and 2007 before the market started its downward spiral due to foreclosures and market declines. In fact, I see two of them that I know flat out drug their feet implementing minimum credit score requirements in order to corner the market while other FHA lenders starting cracking down on their own qualifying requirements in anticipation of what was to come.

What always bothers me most when I see these things is the lack or moral judgment and integrity that was used by all of those involved. The unfortunate result of so many bad decisions made by bad companies is that the good companies are now subject to the consequences of the bad. One of our originators made a statement this week I found humorous though very valid. He said “I feel like things have gotten so out of control we can’t even get loans done anymore. I mean, what more documentation can I request from my borrowers short of them providing a sample of their DNA?” It’s unfortunate that so many of us have begun to feel this way.

I am still outraged that those responsible for the sub-prime market crisis aren’t rotting in prison somewhere. It still blows my mind to think that anyone in their right mind could sleep at night knowing they’d just agreed to grant a $200000 mortgage to borrowers with credit scores in the 400s, unstable employment and no verified history of housing expense. And it’s not just the lending part that concerns me but more importantly, the burden of knowing you’d put such borrowers in that position having to realize full well that they were headed toward disaster. They were guaranteed to fail but somebody lent them the money anyway. It doesn’t get more wrong than that.

So, what kinds of things can we all do to make sure our companies don’t end up being investigated for higher-than-average default rates? It’s really as simple as diverting back to the days of full loan documentation requirements in partnership with utilization of modern tools and technologies.

Even if your lenders aren’t requiring tax transcripts for underwriting, most companies are pulling them pre-purchase or post purchase so you may as well simply obtain them for all of your loan files and make sure qualifying income is tight and right from the beginning. Transcripts can be used as a great resource for more than just income verification. They can also be used to validate identity, occupancy and marital status. Transcripts validate most importantly that the person listed on your loan application filed taxes under the social security number and residence address listed on the loan application.

They also verify whether or not the returns were filed on time. Transcripts also confirm whether each borrower filed individually or jointly and will confirm the number of dependents so you can compare with loan application data. In addition, transcripts may verify undisclosed businesses potentially uncovering business losses that can negatively affect future financial stability and the borrower’s ability to make timely mortgage payments. In my opinion, any company that hasn’t incorporated transcript requirements into originating and underwriting procedures is a “sitting duck” for potential fraud and early defaults.

Transcripts have become much less expensive in recent months also. A year ago we may have been paying $20 and more for two years but with the IRS lowering their processing fee by $4 effective October 1, 2009, many companies became more cost-friendly. Now obtaining two years transcripts can cost as little as $15 and even lower for those companies that have the luxury of offering volume discount rates.

Other tools to be taken advantage of in today’s market are the fraud detection tools and services offered by credit bureaus and third party vendors like First American CoreLogic and Interthinx. Most credit vendors now have the ability to offer a full suite of fraud detection and risk analysis options that are available right as you pull your standard credit reports. These services have the ability to analyze a minimum data set in order to render risk scoring based on data combinations and public record searches. Vendors like CoreLogic and Interthinx take risk analysis even further by evaluation all of the loan parties as well as the property in order to render a full report that analyzes the overall loan risk by category to give red flags of potential loan fraud. Tools like this are invaluable in today’s world.

When researching vendor options for things like transcripts and fraud detection services, be sure to ask questions about volume discounts, support resources, systems integration and training abilities.

The sooner you implement tools and resources like those I’ve mentioned above, the less likely your company will be to end up subpoenaed by HUD for excessive defaults and claims like these lenders did:

- First Tennessee Bank N.A., Memphis, Tenn.
- Alethes LLC, Lakeway, Texas
- Security Atlantic Mortgage Co., Edison, N.J.
- Pine State Mortgage Corporation, Atlanta.
- Birmingham Bancorp Mortgage Corporation, West Bloomfield, Mich.
- Alacrity Financial Services, LLC, Southlake, Texas
- Assurity Financial Services, LLC, Englewood, Colo.
- D and R Mortgage Corporation, Farmington, Mich.
- Webster Bank, Cheshire, Conn.
- Mac-Clair Mortgage Corporation, Flint, Mich.
- Americare Investment Group, Inc., Arlington, Texas
- 1st Advantage Mortgage, Lombard, Ill.
- American Sterling Bank, Independence, Mo.
- Sterling National Mortgage Company Inc., Great Neck, N.Y.
- Dell Franklin Financial LLC, Columbia, Md.

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)