Date Archives: July 2010

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July
30

Don't be duped by mortgage fraud. Here are a few common scams and the red flags you should look for in a transaction.

By Melissa Dittmann Tracey 

Mortgage fraud is pervasive: An estimated $4 billion to $6 billion in annual losses result from mortgage fraud, according to FBI reports. "An entire community can be damaged by mortgage fraud," says Rachel Dollar, a lawyer from Santa Rosa, Calif., and editor of the Mortgage Fraud Blog. Mortgage fraud can lead to a spike in foreclosures, home values plummeting, and lenders raising their rates and fees to recover losses.

 The crimes are often complex, involving several parties and occurring over multiple transactions. To protect you and your clients, educate yourself about mortgage fraud and be on guard for any warning signs in a transaction. You can start by reviewing these five scams, and then test your knowledge by taking our Mortgage Fraud Quiz.

 1. The Foreclosure Rescue Scheme

 The Scam: "Rescuers" promise cash-strapped home owners that they can save their home from foreclosure. The rescue, which involves paying upfront fees, can take multiple forms, such as the perpetrator obtaining a new loan on behalf of the owner or by having the owner sign over the home's deed and then rent the home until they can repurchase it. Eventually, the home owner loses the home, either to foreclosure or the fictitious rescue company.

 Red Flags: With foreclosure rescue programs, borrowers are often advised to sign over the title of their house to a third party, become renters of their home, not contact their lender, or send mortgage payments to a third party, according to Fannie Mae, which provides fact sheets on mortgage fraud.

 2. Loan Documentation Fraud

 The Scam: This fraud involves numerous schemes in which a borrower provides inaccurate financial information - such as about their income, assets, and liabilities - or employment status in order to qualify for a loan with lower rates and more favorable terms. Occupancy fraud is one growing area: Borrowers say they plan to live in the property when they actually intend to rent it.

Red Flags: Documentation may raise suspicion if the employer's address is shown as a post office box, accumulation of assets compared to the person's income appears too high or low, the new house is too small to accommodate occupants, the person has no credit history, or the application is unsigned or undated, according to Fannie Mae.

 

 3. Appraisal Fraud

The Scam: A faulty appraisal - saying a property is worth more than what it really is - is connected to many types of mortgage fraud. It entails manipulating or overstating comparables, market values, or property characteristics in order to obtain a higher appraisal. The higher property appraisal, which generates false equity, is done by falsifying an appraisal document or using an appraiser accomplice to obtain the higher value.

 Red Flags: Be skeptical of appraisals that are dated prior to the sales contract, list comparable sales that do not contain similarities to the property or are outside the neighborhood, the owner is not the seller listed on the contract or the title, or a third party participating in the transaction orders the appraisal, Freddie Mac warns.

 4. Illegal Property Flipping

 The Scam: This entails purchasing properties and reselling them at inflated prices. These scams usually involve faulty appraisals and inaccurate loan documents. The property is then refinanced or resold immediately after purchase for an inflated value. The home is purchased at a higher price, often by straw buyers working with the "flipper," and eventually falls into foreclosure. 

 Red Flags: Some key things to look for are rapid refinancing of a property; the seller recently having acquired the title or acquiring the title concurrent with the transaction; an appraisal that comes in too high; a property that was recently in foreclosure being purchased at a much lower price than its sales price; or the owner listed on the appraisal and title not matching the seller on the sales contract, according to Fannie Mae.

 5. Short Sales Schemes

 The Scam: Borrowers owe more than the current value of their home so they fake financial hardship and no longer make their mortgage payments. An accomplice of the borrower then submits a low offer to purchase the property in a short sale agreement. The lender agrees to the short sale, unaware that it was premeditated. The property, after being purchased at the reduced price, is then often resold at the home's actual value for profit.

 Red Flags: The borrower suddenly defaults on the mortgage with no workout discussions with the lender, an immediate offer is made to a lender at a short sale price, the short sale offer is less than current market value, or a cash back is offered at closing to the delinquent borrower (disguised as "repairs" or other payouts, for example) and is not disclosed to the lender, according to Fannie Mae.

 You can report instances of suspected mortgage fraud to Stopfraud.gov.

July
29

July
7

By: Barbara Eisner Bayer

Although they've been much maligned, adjustable-rate mortgages make sense in a variety of circumstances.  Although they can be riskier, ARMs may help you save money in the early years of a mortgage. 

Adjustable-rate mortgages (ARMs) get bad press. The poster child for irresponsible borrowing, they're the mortgage industry's bad boys. But ARMs can be excellent loans for thrifty borrowers.

How ARMs work

An ARM begins with a low introductory rate that remains fixed for a specified period. Upon expiration, the interest rate periodically adjusts based on an underlying index, which goes up or down. This contrasts sharply with a fixed-rate mortgage (FRM), where the monthly payment remains consistent.
The chief advantage of an ARM is that it allows you to save money in the early years. However, it can become dangerous because historically, declining rates don't last more than approximately five years. Therefore, payments on a 15- or 30-year ARM will generally increase over time. A plan to refinance when the introductory period ends is a terrific idea-if you can pull it off. But if you can't, and are unable to make increased monthly payments, you may lose your home.
This unpredictability makes an ARM inherently riskier than its fixed-rate counterpart. With mortgage rates at 7.5% or less for 185 of the past 210 years, it's a reasonable risk-except if you're living through a period like the late 1970s and early 1980s, when interest rates hit 17%.  

Is an ARM right for you today?

An ARM may be right if:
1. You plan to refinance or sell within five to seven years.
Since an ARM's introductory interest rate is lower than its fixed-rate counterpart, you'll save money during the loan's first few years. The most common ARMs are 3/1, 5/1, and 7/1. The first digit indicates the number of years the introductory rate remains fixed; the second, the frequency of rate adjustments. (A 3/1 ARM has a fixed rate for three years, then adjusts annually.) If you pay off your loan, refinance, or sell before the introductory rate expires, an ARM makes sense.
Example: You borrow $300,000 to buy an investment property that you'll fix up and resell within two years. Your options are either a 3/1 ARM that opens at 3.5% or an FRM that's locked in at 5.5%. The ARM's monthly payment during the first three years: $1,347.13; the FRM's payment: $1,703.37. During the ARM's introductory period, you'd save $356.24 monthly (about $4,275 annually). During the first two years, the aggregate savings would be about $8,550-a sizeable sum. 2. You want to pay as little as possible.
Money saved on a mortgage payment is money in your pocket. If you don't want to pay any more than is absolutely necessary in the early years, you're a good ARM candidate. You'll generally save money over a 30-year fixed loan for the first seven or eight years.
3. You want to aggressively pay down your mortgage.
According to Dave Donhoff, a financial advisor at Leverage Planners in Kirkland, Wash., "An immediate ARM is good for a borrower who wants to get rid of his mortgage as quickly as possible. It's risky because rates can change monthly, but since you'd be paying significantly less than with a fixed-rate loan, you could accumulate home equity faster by aggressively paying down your mortgage."
Example: You have a 30-year FRM of $100,000 at 6%; the monthly payment is $500. An immediate ARM might be around 3%, or $200 per month, which is a 60% savings over the FRM. If you paid down your principal with that savings, you'd have $3,000 a year of accelerated equity accumulation.  

Risk factors

Of course, it can be harder in practice. Suppose you plan to sell the property once the introductory rate expires. Your home's value could plummet, and selling wouldn't pay off your loan balance. Or the real estate market could stagnate, making it difficult to unload your home.
If you plan to refinance, a tight lending environment could make that challenging. If your home value drops, you may not have enough equity to refinance. Credit standards could change, making you a less-than-desirable borrower. Or rising interest rates could disqualify you for a new loan based on your monthly income and expenses.
 

Worst-case scenarios

These risks could derail your plans to pay off the mortgage, so evaluate what might happen after the ARM resets. Check its periodic cap; this is the maximum amount your mortgage rate can increase at each adjustment. If this cap is 2%, your 3/1 3.5% ARM could rise to 5.5% in year four, 7.5% in year five, and so on. In year five, your payment could rise to $2,023.57, which is $320.02 more than with a FRM. Assuming a rising ARM, you'd give back all your savings from earlier years in year seven.

These numbers could substantially differ depending on the periodic and lifetime caps associated with your specific ARM. A less aggressive mortgage with a lower periodic cap could take significantly longer to sour.
If your risk tolerance and flexibility levels are low, an FRM is a better loan for you. Ultimately, even though there can be cost savings with an ARM, you should choose the mortgage that gives you peace of mind in any market.
   

 

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