Mortgage woes could be 'tip of the iceberg'

Legitimate real estate and mortgage industry professionals say they are angry and disgusted by the damage done to their businesses by a handful of dishonest players.

“We will tell a customer truthfully if a loan is not good for a customer: ‘We’re not going to do the loan. You will have to go somewhere else,’” said Morris Capouano, owner of Equisouth Mortgage Inc., a lender with 17 employees in eight states based in Montgomery, Ala. “The sad thing is somebody else is going to do that loan. That’s the broker who is concerned about lining their pockets.”

Some real estate appraisers say they've been pressured by mortgage brokers to improperly doctor their reports and inflate the value of a home to increase the chances that a mortgage application will be approved.

“A lot of the smaller guys — the smaller fee shops — they’re very beholden to their clients,” said Diana Yovino-Young, a Berkeley, Calif., real estate appraiser with a family-run business. “So to have even one deal like this go bad — and to basically state the truth — they could lose that client, and that could be 90 percent of their income if they’re a one-person shop.”

One popular tactic among mortgage brokers looking to inflate a home’s reported value is to pitch the job to multiple appraisers at the same time, said Yovino-Young.

“They’ll send out a fax and give you the address of the property and they’ll say, ‘Can you come in at $750,000, say,’” she said. “And the first one who calls back and says, ‘Yeah, that’s doable,’ will get the job. Of course, all of this is completely illegal.”

In some parts of the country, appraisers say, the practice has become so widespread that those who wouldn’t go along saw their business dry up.

"Every day in my office I received threats, attempts at bribes and was told, 'You make this value,' 'We need it pushed,' 'I’ll give you all my business for the rest of the year,'" said Richard Hagar, a Seattle-area real estate appraiser. "(Mortgage brokers) do not want ‘no’ from the appraiser. They start yelling and screaming."

Hagar says the pressure ultimately forced him to find other work in addition to appraising. He now teaches state-approved courses on detecting and preventing real estate and mortgage fraud in Washington, Oregon, and Arizona. 

“The fraud problem, it crushed my firm," he said. "I went from 10 appraisers to two. It happened so much, I lost 80 percent of my business.”

Doctoring the documents
In addition to predatory lending, which takes advantage of unwitting borrowers, in some cases lenders were defrauded when entire mortgage applications were faked to trick them into approving loans, said many of those interviewed.

“We have problems with blatant forgery,” said Ed Coleman, compliance coordinator for the South Carolina Real Estate Appraisers Board. “Appraisals are e-mailed to mortgage companies. A mortgage company, if they’ve got the right programs, they can pull a PDF (file). I don’t care if it's protected — they can change it, and they put the signature back on. I’m not computer literate, and I can do it.”

Lenders say these schemes are sometimes difficult to spot: A bogus tax return prepared with a popular tax software package may look just like a real one. On the other hand, some bogus applications are relatively easy to pick out, according to Capouano, the Alabama-based lender.

“It’s hard to prove who did it,” he said. “But if the customer provides W-2s to us and the broker provides W-2s and they're altogether entirely different, then we know there’s a problem here. And we’ve seen that happen.” 

Phantom properties
In one recent case in South Carolina, a home seller was accused of doctoring legitimate appraisals of vacant lots by digitally cutting and pasting pictures of completed houses onto loan documents and submitting them to a California lender, which approved the loans, according to Coleman. No one picked up on the problem until an underwriter from the company happened to be vacationing in Myrtle Beach, Coleman said.

“He knew they’d had some payment problems with a few people in (the area),” he said. “So he rented a car and drove over to look at these properties — and they weren’t there.”

In some parts of the country, organized groups prey on first-time homebuyers and other unsophisticated borrowers, the HUD inspector general’s office has found. Illegal aliens, who are enticed into applying for loans with bogus or stolen Social Security numbers, fake tax returns and manufactured employment histories, have become a popular target, according to Donohue.

“They might be approached by a person who asks: ‘Are you renting a place?’” Donohue explained. “They might speak the same language, and the person would share how much they’re paying. And they’d be told, “Well listen, I can put you in a house for half that.”

No money down
Homebuilders who offered easy credit are also playing a role in the unwinding of the subprime market, according to interviews. These builders offer to cover closing costs as a "gift" for buyers with no money to put down.

“So now you’ve got somebody in a house who put no money down and that additional cost that covers that gift rolls into the mortgage,” said Donohue. “But what you’ve done is you’ve artificially inflated the value of those spec houses. And then you give them a very attractive ARM mortgage that’s going to, as we see, accelerate in the next two or three years.”

Industry insiders say that borrowers often were encouraged to take out low “teaser-rate” adjustable mortgages with assurances that after a few years of building a solid payment history, they could refinance at the lower, fixed rate available to those with better credit.

Now, with defaults rising and subprime lenders swamped by bad loans, borrowers who are in over their heads and looking to refinance are seeing interest rates on new loans jumping out of reach. 

“But I believe to this moment there are brokers out there who are doing these loans knowing that the rates have changed and they’re not passing it on to the customer until they sign the document,” said Capouano. “You should never have to go to a closing and be surprised, and that’s obviously happening far too much.”