Written By: Stacey Sprain, Op-Ed Writer
A significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, as initial mortgage products are repackaged and sold on secondary markets, the sale of the mortgages, in many cases conceal or distort the fraud, causing it not to be reported. Therefore, the true level of Mortgage Fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. However, based on various industry reports and FBI analysis, Mortgage Fraud is pervasive and growing.
The potential impact of mortgage fraud on financial institutions in the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to continue, it will ultimately place more financial institutions at risk and have adverse effects on the stock market. Investors will lose faith and require higher returns from mortgage-backed securities, which will result in higher interest rates and fees paid by borrowers, limiting the amount of investment funds available for mortgage loans.
Often mortgage loans sold in secondary markets are used by financial institutions as collateral for other investments. Repurchase agreements are utilized by investors for their protection against mortgage fraud. When loans sold in the secondary market default and have fraudulent or material misrepresentation, loans are repurchased by the lending financial institution based on a repurchase agreement. As a result, these loans become a nonperforming asset, and in extreme fraud cases, the mortgage-backed security is worthless. Mortgage fraud losses adversely affect loan loss reserves, profits, liquidity levels and capitalization ratios, ultimately affecting the soundness of the financial institution itself.
The direct results of mortgage fraud create an atomosphere of uncertainty within the financial institutions. Budgets become strained because the banks and mortgage companies suddenly find the need to expand their legal and training departments and have to spend time and energy creating and writing company policies to specifically address the topic of fraud and how to handle it within the institution. Those additional expenses in other areas can have a direct affect on the pay rates and benefits made available to the institution's processors. As has been seen in recent years, some financial institutions no longer employ processors on their payrolls but rather require their originators to outsource their file processing. This allows the institutions to save on payroll budgets, benefit budgets and on internal office supply budgets in order to make more funds available to acquire legal help and insurances that come at much higher prices.
In part 3 of this continuing series, we will address what processors do to help combat against mortgage fraud on a consistent basis.
About The Author
Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution.