Internet Lender – Legitimate, Swindler, or Identity Thief?
Article as printed in the Columbus Board of Realtors® IN CONTRACT Magazine September 2004
The multitrillion-dollar mortgage industry is a goldmine for cons, scams, schemes and swindlers. The schemes have actually been around for decades, but improved technology has made the scams easier to pull off and enable fraud to proliferate.
Consumers are daily receiving a barrage of e-mail, fax and mail solicitations for advance-fee loans, buyers clubs, credit card insurance come-ons, credit repair cons, internet spam offers and pyramid schemes that can involve work-at-home promises of telecommuting riches.
Results from the Federal Trade Commission’s recently released “Consumer Fraud In The United States” based on a random survey of 2,500 consumers, says nearly 25 million adults – more than 11 percent of the population – are probably victims of fraud in a typical year.
Identity theft and it’s related scams, such as phishing, topped the Federal Trade Commission’s list of concerns this past year. Phishing occurs when fraudsters masquerade as legitimate companies to trick consumers into handing over their personal and financial account information. If you’ve ever received an unsolicited e-mail that appeared to be from Citibank or Paypal and that asked you to update or verify an account, you’ve been targed by a ‘phishing’ scam. So far, financial service companies and their consumers have been targeted the most.
What’s more, 75 percent of fraud related to credit, including credit-repair scams, often target those carrying high debt loads or having bad credit.
One of the greatest concerns for the real estate industry are the scams promoting home mortgages that are artificially low interest rates. Solicitations may even appear to come from the original lender as marketers can get this lender and loan information from the courthouse public records.
Use extreme caution as these perpetrators are often not lenders at all but identity thieves or resellers of application information.
Those 2.7 percent 30-year mortgages turn out to be either short-term “teaser” adjustable loans that allow payments at artifically low rates for short periods, or programs that require a large number of discount points to get the ‘great’ rate.
Jon Sadler, Vice President of Fifth Third Bank has seen this happen all too often. “Borrowers are taken advantage of when these promotional rates turn out to include outrageous closing costs and large pre-payment penalties. In addition, I’ve seen several situations where buyers had their bags packed and ready to go and the deal fell through just days before closing.”
A big cost that may drive up borrower’s costs are yield spread premiums (YSPs). Simply put, they are fees lenders pay mortgage brokers for charging a higher rate to the borrower. By law, they don’t show up until it’s time for you to see the final settlement sheet, typically the day of or the day before you must sign the paperwork (at closing).
YSPs can be advantageous for the borrower that does not have the cash to pay the closing costs that cover the mortgage broker’s fees. But some brokers can take advantage of the borrower by raising the rate so much that the broker is making an exorbitant amount of money on the loan, making it a predatory product.
“It doesn’t take a rocket scientist to make loans to rich guys in the suburbs. But for the rest of the world, it takes a little work,” says Lenny Zangardi, President of Strategic Mortgage Company. “People will buy books and CDs on the internet. They shouldn’t trust the biggest financial transaction of their lives to a random email from a stranger. They need to sit down with a qualified local professional lender to weigh alternatives and determine the product that best suits their needs.”
Consumers who receive dubious offers promising low rates in exchange for personal application information can forward them to the FTC at email@example.com. Homeowners can also call in complaints at 1-877-FTC-HELP.
Following are some of the more common methods of using legitimate mortgage loan methods to dupe the mortagee into paying higher fees and/or commit outright loan fraud.
The bi-weekly concept is simple: Make a mortgage payment every 2 weeks instead of making a payment every month. This is accomplished by cutting your monthly payment in half and make this half-payment every 2 weeks. Because there are 52 weeks in a year, you end up paying the equivalent of 13 monthly payments instead of 12 (26 bi-weekly payments which equate to 13 monthly payments). This forced prepayment will typically reduce a 30-year loan to less than 20 years.
Although many traditional lenders offer this service, they typically do not promote it as the service fees offset the benefit. Solicitations are more often from third party services who will charge a set-up fee ($300-$500) and a per transaction fee of ($2-$3). They might also offer incentives such as grocery gift cards or a discount off the set-up fee if you commit by a certain date. But, keep in mind, if they are offering an incentive, they are getting a greater value in return.
The better solution is to do this on your own. But a payment every two weeks isn’t necessary. Simply take your monthly mortgage payment and divide it by 12. Take this amount and add it to your normal monthly payment and let the lender know the extra is for principal reduction. Otherwise it might end up in your escrow account. In this way, you can get your mortgage debt paid down faster without having to pay the setup and monthly fees.
Aside from promoting an artificially low interest rate, zero-down loans might be the second most popular way for fraudsters to attract unknowing buyers.
There are a number of legitimate zero-down loans available to assist potential home owners who have little or no down payment saved. Keep in mind that, in exchange for having no money up front for a down payment, the lender will likely charge a higher interest rate and the buyer may have to pay a higher mortgage insurance premium which is not tax deductible.
HUD’s proposed 2005 fiscal budget includes a proposal which would allow buyers to take out no-money-down mortgages insured by the Federal Housing Administration and roll some closing costs into the loan as well. The maximum loan size, then, would be 103 percent of the home’s price.
If approved by Congress, HUD expects a higher default rate on no-money-down loans because they will carry greater risk. But borrowers will be charged a slightly higher mortgage insurance premium to cover the extra risk. After five years, the premium would be reduced to the same rate paid by other FHA borrowers.
However, there is another type of zero-down loan scheme which is both unethical and illegal. This scheme has been around for quite a while and puts the lender at risk. It entails the buyer asking the seller to increase the purchase price by the amount of down payment needed. The seller carries a second mortgage for the increased amount but destroys the note after the closing and the lender is left holding a mortgage on the property for 100% of its value. If the buyer defaults, the lender is stuck holding the bag as there is no PMI insurance to pay a claim.
“Executing a contract in this manner isn’t legal or ethical on a number of levels and concerns not only lenders but appraisers, buyers of other comparable properties and the county auditor among others,” cautions Mark Spangler, Vice President of Mortgage Lending, Prospect Bank.
Whether seeking money to pay for medical treatment, finance a home improvement, buy long-term care insurance, or supplement their income, many older Americans are turning to “reverse mortgages.” They allow older consumers to convert the equity in their homes to cash while retaining home ownership.
With a “regular” mortgage, you make monthly payments to the lender. But with a reverse mortgage, you receive money from the lender and generally do not have to repay it for as long as you live in your home. In return, the lender holds some – if not most or all – of your home’s equity.
In addition to receiving tax-free income, the other major reverse mortgage advantage is the senior citizen homeowner has no personal liability – repayment only comes from the residence, not personally from the homeowner. No repayment is required during the period provided the qualified homeowner lives in the principal residence at least six months each year. If the homeowner vacates the home for more than 12 months, such as while living in an assisted living center, the reverse mortgage “matures” and becomes due. Of course, if the homeowner dies or sells the residence, then the reverse mortgage and it’s accrued interest must be repaid.
If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.
FHA’s reverse mortgage insurance makes HUD’s program less expensive to borrowers than the smaller reverse mortgage programs run by private lenders without FHA insurance.
The concern: Older Americans are being targeted by companies charging large fees (6-10 percent of the total amount borrowed) to act as unneeded middlemen. No one needs these services to get a reverse mortgage. HUD gives people the name and phone number of a nearby HUD-approved non-profit housing counseling agency at no charge. The counseling agency gives callers information about the program and tells them how to contact at least three participating lenders. To find a counselor that serves your neighborhood, call HUD’s toll-free number: (800) 569-4287.
People who want to report complaints about firms charging high fees for reverse mortgage information can also call HUD toll free at (888) 466-3487.
In the usual case, flipping is nothing more than a legal and lawfull speedy re-sale. For instance, Smith buys a package of five houses from an estate and immediately sells one at a fair market value. Or, Jones buys a property knowing that Green is willing to pay a higher price.
Where flipping becomes illegal is when the re-sale relies on inflated appraisals, fake documents, sales to straw buyers who represent original sellers and phantom second loans. In some cases, illegal flipping involves a series of instant sales and re-sales with a single property and an inside group of buyers and sellers. The insiders move the title back and forth among themselves, in each case raising the sale price and thus creating a fictional basis for larger loans.
Illegal flipping is rare as it leaves reams of evidence, the penalties are severe, and the protective systems evolved by the lending industry work enormously well.
Consumer Reports rated online mortgages and published their results in April of 2006. They chose six websites that often came up when trawling search engines for lenders. Three sites Ditech, E-Loan and Quicken Loans act as sales arms for their own mortgage companies. LendingTree, meanwhile collects and distribues leads to outside lenders. But two other sites, HSH and Bankrate, take themselves out of the equation. They act as information clearing houses, listing lenders – including some who pay to appear there with rates and leaving you to click through.
They found that applying for a loan online may mean more hassles and dealing with a lot more salespeople than you would face if you shopped in person. Most important was that they determined that it is possible to find rates in your own backyard that are lower than or comparable to those advertised on the major mortgage web sites.
“On the internet, a marketer only has a few seconds to snag a customer,” says Dave Dewey, Area Manager, Wells Fargo Home Mortgage. “So they throw out the hook but not the whole picture. You have to get enough facts to be able to compare apples to apples. Then compare the loan specifics with a local lender you trust. Remember – the deal that looks too good to be true – probably is.”
What Can You Do?
Know how to recognize marketing pieces directly targeting consumers which is not from a legitimate mortgage broker or lender. When a mortgage promotion states a rate and term, but no “annual percentage rate” (APR) or type of program, that may be a tip-off of a scam and also violates the Truth in Lending Act.
Be very cautious of unknown ‘lenders’ – ESPECIALLY those who show up in your inbox. Even though they may use the name of a reputable lender, perhaps even your own lender, they may be completely unrelated.
Shop around at several online lenders, your credit union, and local lenders in your area.
Ask for the loans contract interest rate, but also the annual percentage rate (APR), which expresses closing costs and the contract interest rate as part of the overall rate. Also ask for a detailed good-faith estimate of closing costs. Some lenders are also offering guaranteed good faith estimates or guaranteed-fee mortgages. Scrutinize them nevertheless. Verify if there is an early prepayment penalty if you were to sell or refinance the loan.
When possible, pay closing costs up front instead of wrapping them into the mortgage to avoid paying interest on a few thousand dollars for the loan’s full term.
Think twice about lowering the interest rate by paying discount points up front, especially if you believe you’ll live in the house for six years or less – the average stay before most homeowners move on.
Rely on your Columbus Ohio Realtor who probably has established relationships with reputable Columbus Ohio Mortgage Lenders to serve your home loan needs.