If you are facing foreclosure because you cannot afford the high payments, speak to an experienced West Jordan Utah foreclosure lawyer. You may be a victim of mortgage fraud.

According to the FBI, “mortgage fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.” Mortgage fraud has been traditionally viewed by researchers, government authorities, and industry organizations as either fraud for property or fraud for profit.

Between the two forms of mortgage fraud, fraud for profit schemes “is of most concern to law enforcement and the mortgage industry” (ibid). These schemes are usually made up of fraudsters who are mortgage professionals and have extensive knowledge or experience in the mortgage/real estate industry. The problem, according to the FBI, was that fraud for profit schemes could be so damaging as to have devastating implications for the entire U.S. economy. There are various types of mortgage fraud, that include overinflated appraisals, fictitious financial statements, schemes that involve straw buyers, and foreclosure prevention fraud.

Predatory Lending vs. Mortgage Fraud

The thin line between predatory lending and criminal fraud can be very difficult to distinguish. Various acts of predatory lending can easily cross the line into outright criminal conduct and as a result, it is an important part of our analysis. With regard to mortgage fraud, “a lending institution is deliberately deceived by an actor in the real estate purchase or mortgage origination process”—such as a borrower, broker, appraiser or one of its own employees—into funding a mortgage it would not otherwise have funded, had all the facts been known Predatory lending on the other hand, according to the Mortgage Bankers Association (MBA), refers to unethical and detrimental lending practices to borrowers, “including equity stripping and lending based solely on the foreclosure value of the property. Some of these practices can be fraudulent, but defining an exact set of predatory lending practices has been difficult” A joint study by the South Carolina Appleseed Legal Justice Center and the Center for Responsible Lending (2003) found that, while predatory lending was not considered illegal in many states, the practice could be extremely harmful to the borrower since predatory lenders rarely ever considered the ability of their client to repay the loan. Predatory lending practices can be financially or racially motivated and can be very costly to an unsuspecting borrower. For example, borrowers may unknowingly be steered into a subprime mortgage when they qualify for a prime mortgage. Mortgage lenders, for example, may convince borrowers to obtain mortgages with attractive introductory terms and conditions under the guise that such conditions are fixed throughout the term of the loan.

Predatory lending also involves deliberate deception by mortgage professionals. In general, predatory lending includes charging excessive fees, steering borrowers into bad loans, which net higher profits, and abusing yield-spread premiums.

While predatory lending is harmful and widespread, it is mostly legal. Yet, under certain circumstances, the commission of predatory lending practices may easily cross the legal threshold and become criminal conduct. A mortgage broker who steers his client into a higher cost mortgage loan may at the time same time intentionally overstate financial information in order to qualify the client.

The majority of mortgage loans are originated by third party brokers and financial lenders. Once mortgages are originated and funded, financial lenders quickly package the mortgages and sell them to the secondary mortgage market where they are turned into securities and sold worldwide. The old days of a single bank owning, originating, funding, and serving a mortgage are long gone. The process of a obtaining a mortgage, which starts with the application of the loan and ends with the funding of the loan, has thus become much more complicated and involves many different agents and agencies. Breaking down the major actors, components, and stages of the loan origination process allows for a more precise understanding of the complicated and convoluted nature of the mortgage industry. The process of qualifying a borrower to obtain and complete a mortgage transaction involves many different stages.

What is Subprime Lending/Subprime Loans?

There are major differences between subprime and prime lending and understanding the concept and practice of subprime lending is an important aspect of this study. The practice of providing credit to borrowers with less than par or lower than average credit worthiness is known as subprime lending. Subprime lending involves various forms of credit including credit cards, auto loans, and mortgages. Several defining factors delineate a prime loan versus a subprime loan. The first is the credit risk of the borrower. Borrowers of subprime loans tend to have a higher risk of default.

The high credit risks posed by borrowers of subprime loans usually translate into higher fees and interest rates charged by the lender, which is the second delineating factor between prime and subprime loans. The fees and interest rates charged by the lender usually equate to higher monthly payments and upfront costs. Since the 1990s, interest rates on subprime loans have been approximately 2 percent higher than the average prime rate. Despite the higher costs associated with obtaining a subprime loan, borrowers usually have no other option.

Compared to the prime mortgage industry, subprime lending is characterized as having low standards of underwriting. The unprecedented growth of the subprime lending industry since the 1990s and the intense competition that ensued resulted in mortgage products for which anyone could qualify. If the borrower had a bankruptcy, a judgment, a foreclosure, or bad credit history, there would be a subprime loan available. The costs the borrower would have to pay for the mortgage, however, would be much higher in terms of fees and interest related charges. As the number of new financial lenders grew, so did the level of competition; banks were offering more non-traditional and exotic loans to subprime borrowers.

There was a general push by the federal government, private organizations, and the banking industry to increase the homeownership rate among minority families. Coupled with low interest rates and the introduction of new alternative mortgage products that contained attractive introductory incentives, the housing industry experienced tremendous growth, especially among the subprime lending sector.

The competitive environment of the subprime lending industry also led to the decline in qualification standards. Loans were handed out like candy on Halloween. When a financial lender offered a new promotional loan product primarily based on no proof of income required, a competitive lender would immediately introduce a loan that was easier to qualify, such as a no proof of income and employment history required. In order to stay competitive, lenders had to offer more attractive financial products for that were easier to qualify for. A popular mortgage product, for example, was the combo loan, which allowed borrowers to avoid purchasing mortgage insurance. The combo loan product offered the borrower two mortgages that combined, was 100 percent of the home’s value. Borrowers could purchase a home without putting a penny as down payment.

Subprime lending is a very recent phenomenon. Three decades ago, individuals with poor credit histories would have been denied credit but a several major federal deregulatory moves, beginning in the 1980s, changed all of this and set the stage for what we now know as subprime lending. At the same time, these deregulatory moves also opened the door to creative financing and intense competition in the lending industry, which altogether, created ripe conditions for irresponsible lending and outright fraud.

The process of financial deregulation that loosened banking and commerce restrictions and regulations began in the early 1980s. The deregulation fervor of the early Reagan administration was contagious and “gained widespread political acceptance as a solution to the rapidly escalating savings and loan crisis”. However, the financial legislation that was to follow would completely dismantle the regulatory infrastructure that kept the thrift industry under control for four decades prior. With several strokes of a pen, the financial industry completely changed. New and innovative products and lending practices grew from increased market competition and the desire to increase profits. Deregulation was seen by the Reagan administration and by many economists as the panacea to large government.

The Depository Institutions Deregulatory and Monetary Control Act (DIDMCA) profoundly altered the rules of the banking industry. One of the major changes included the creation of the Depository Institutions Deregulation Committee. The primary task of this committee was to phase out all usury controls, or caps on interest rates. Prior to that time, individuals with poor credit would have been denied credit but the DIDMCA “eliminated all interest rate caps on first-lien mortgage rates, permitting lenders to charge higher interest rates to borrowers who pose elevated credit risks, including those with weaker or less certain credit histories”. This deregulatory move also invited loosely regulated or unregulated institutions into the loan industry, which targeted borrowers who had credit problems. Subprime borrowers became unfortunate victims of the unregulated free enterprise system and became the prey of financial institutions who charged exorbitant fees and interest rates for basic loans. Similar to the Community and Reinvestment Act (CRA), the passage of the DIDMCA involved political motives, which subsequently resulted in disastrous consequences.

The 1982 Garn-St. Germain Depository Institutions Act, passed by Congress, was considered by many to be a primary cause of the savings and loans crisis. This legislation further loosened lending restrictions by preempting state law that restricted financial institutions from lending only conventional loans. It gave banks the authority to lend non-conventional mortgages, which greatly altered the landscape of the lending industry. Title VIII of the Garn-St Germain Act, cited as The Alternative Mortgage Transactions Parity Act of 1982 (AMPTA), provided authority to lending institutions to offer exotic mortgages that included:

• Interest-only mortgages
• Balloon-payment mortgages
• Negative-Amortization mortgage
• No documentation/low documentation or “stated” mortgages
• No down payment/100 percent financing mortgages

The Garn-St Germain Depository Institutions Act also gave banks the ability to charge their borrowers adjustable interest rates. Bank sanctioned ARM’s were intended to address the problem of asset-liability mismatches, a financial problem banks encountered when their liabilities did not correspond with profits earned from long term, low-interest rate mortgages. This major piece of deregulation was intended to strengthen the financial industry by reducing its susceptibility to changes in the financial market. The purpose of the act was “to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans”.

Other instrumental legislation included the 1977 Community and Reinvestment Act (CRA), which was signed into law by President Jimmy Carter. The CRA was intended to address a growing concern regarding the deterioration of urban cities, particularly low-income and minority cities in the U.S. Prior to the passage of the CRA, minority communities were often denied access to credit based on discriminatory practices such as redlining and steering. The passage of the act was intended to reduce discrimination in the credit and housing industry by giving financial institutions incentives to “make loans to lowand moderate-income borrowers or areas, an unknown but possibly significant portion of which were subprime loans”. The purpose of this legislation was to ensure that banks and thrifts would expand credit opportunities to a wider population, including homeownership and business opportunities to non-wealthy populations from lower income communities. The CRA was a product of a grassroots effort to provide affordable housing to minority communities.

The law has been modified twice in order to meet the increased monitoring requirements and needs of communities. It is important to note that the CRA set in motion the practice of subprime lending, but only among financial institutions that are federally regulated. The subprime mortgage lending industry that later emerged from the financial deregulations that took place during the 1980s (DIDMCA and the Garn-St Germain Depository Institutions Act) was not subject to the regulations of the CRA.
While these legislative plans set the stage for subprime lending, it was not until 1986 that real estate became widely viewed as a great investment. The demand for mortgage debt greatly increased after the passage of the Tax Reform Act of 1986 (100 Stat. 2085, 26 U.S.C.A. §§ 47, 1042), which prohibited tax deductions of interest on consumer loans, but allowed interest deductions on mortgages for primary residences as well as one additional home. The passage of this law gave consumers an incentive to obtain real estate to borrow against rather than using consumer credit. The combination of low interest rates in the mid 1990s and rising home values led to record rates of equity borrowing – subprime mortgage cash-out refinances were a popular loan product and a common method homeowners used to access the cash from their home equity.

Proving mortgage fraud in a court of law is complex. However you could use it to fight foreclosure. Speak to an experienced West Jordan Utah foreclosure lawyer today to know how you can save your home from foreclosure.

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