Although the bulk of the mortgage industry's efforts seems to deal with stopping preventable foreclosures, there has been no shortage of interest in fighting fraud. August Blass, CEO of National Loan Auditors – a provider of quality control, pre- and post-close auditing, risk assessment consulting and fraud prevention services – discusses the importance of cleaning up the industry's tarred reputation.
Q: FHFA Director James Lockhart recently announced that Freddie and Fannie will be requiring loan-level identifiers (e.g., loan originator, origination company, field appraiser and supervisory appraiser) on all applications beginning Jan. 1, 2010. What difficulties do you anticipate this change will bring with it?
August Blass: Loan originators and property appraisers will have to be licensed. This means there is one more administrative step for originators and appraisers to go through to be able to originate loans or appraise properties. The specifics of how the licensing process will work are unclear at this point, so it is hard to say how new licensing procedures will affect the industry. One can only assume that there will be some difficulties during the transition process.
All form loan applications will have to be changed, or an addendum will have to be added, in order to include the new information.
Q: Do you believe the FHFA initiative regarding loan-level identifiers will have meaningful effects?
Blass: It depends on how it is implemented. If the FHFA and government-sponsored enterprises actually do begin looking at loans more closely for fraud, then the licensing and increased information will be a powerful tool to target those parties that are routinely perpetrating fraud. If the loan-level information is just put on the application and nothing is ever done with it, then it will be meaningless.
Also, these new identifiers are not a cure-all, but they do have the potential to drastically decrease fraud. The identifiers and licensing will make it more difficult for people to commit fraudulent acts. Originators will be tracked closely by their license, making it harder for a person to jump around and commit fraud. With the addition of the appraiser information in the loan, the appraisal process will be more transparent, making fraud easier to detect.
Q: What must servicers and lenders be mindful of when foreclosure actions are challenged in court?
Blass: When foreclosure actions are challenged in court, servicers and lenders must be mindful of a number of things, all of which relate back to one concept: value.
The lender is looking to increase profit margins as much as possible on a specific loan. The best way to do this is to get repaid over the life of the loan. However, this is not always going to be the case. In some cases, the lender will have to foreclose on the home. When this occurs, the lender should consider what makes the most financial sense.
If foreclosure is deemed to be the best route, then the lender will want to minimize costs associated with that foreclosure as much as possible. There are a few ways in which a lender can do this.
First, servicers and lenders must make sure they keep in mind the federal and state laws that govern a foreclosure. Foreclosures are highly regulated, and the smallest deviance from those statutory guidelines will give a borrower the ability to challenge a foreclosure in court. This draws out the process and increases costs.
Secondly, servicers and lenders must be mindful of how they sell the property, if they do ultimately succeed on their foreclosure. The sale of the foreclosed home is just as regulated as the foreclosure process. If a lender were to violate one of the statutory provisions, the borrower could challenge the sale of the property, and the lender would end up right back in court.
The bottom line is lenders need to ensure that they are acting in a way that will optimize the amount they make and minimize the loss on any loan or property.
Q: The report also concluded that better cooperation and collaboration among mortgagees is required if lenders are to cut into fraud. Do you agree, and if so, in what ways could greater cooperation help the industry?
Blass: If lenders are serious about cutting down the amount of fraud that occurs in the mortgage industry, then they will have to scrutinize every step of the process. This means that they will have to pry into who the borrower is, who the broker is that made the loan and who made the appraisal in order to determine if all these parties existed and met their duties in the transaction.
It is imperative that the lenders begin to cut down on the amount of fraud that occurs in the mortgage industry. Allowing fraud is just bad business and hurts all parties involved. If the mortgage industry wants to turn itself around. it must cut down the amount of fraud that occurs and restore borrower confidence in the industry.
To reduce instances of fraud, borrowers and lenders are going to have to cooperate with one another. Borrowers will have to give more information and jump through more administrative hoops in order to obtain their loans. Lenders – asking more of the borrower – will have an increased duty to ensure there is sufficient oversight to prevent fraud from occurring.