Georgia FHA Home Loans - (& Opinion)

I have noticed there are some misunderstandings about which cash back at closing is fraud and which is not.

Teri Eckholm recently blogged "Mortgage Fraud - Important Reminders for Buyers, Sellers and Agents" and one of the comments from Neal Bloom which included "jack up the price so that the buyer can get the seller to contribute towards closing costs"

Let's clarify something here: If, during the negotiations for the transaction, the buyer asks the seller if they will contribute the lender allowed closing costs to close the deal and the seller says "yes, if you will pay (for example) $206,000 instead of $200,000 I will contribute $6000 to closing" and - very important and - the appraisal can support that value increase this is not mortgage fraud.

The big litmus test is this: did any of the proceeds of the loan go back to the borrower(s) or to any third party company or unlicensed "locator", "bird-dog", "consultant" (whatever) for any reason? Were there any liens at the closing that were not recorded with the county records department? (Unrecorded liens is an old old trick that just keeps popping up.) Were any contractors paid at closing for work allegedly done on the property?

The above are all RED FLAGS for mortgage fraud. But they are not, by any stretch, the only ones. This posting is only about Cash Back At Closing Defined.

Clarifying another misperception: Just make sure it is on the HUD-1. This will not help. Although it may be a surprise to you there are underwriters, closing agents, mortgage brokers, real estate agents, etc., who will allow red flags to get through closing. That's why 80% of mortgage fraud involves insider collusion.

For several years now during my Mortgage Fraud Detection and Prevention Workshops I have used the example of the popular television show CSI. Where Gil Grissom asks, "what does the evidence say?" I use the same terms only I ask, "What do the documents say?" 

Mortgage fraud is serious, serious business. I have been damaged by mortgage fraud in a very personal way because I have been defrauded. Even though we have very strict guidelines and checks and balances there were times in the past when a couple of files made it through our QC and through our investor's QC. Unknown to the general public when that happens there is a lot of finger pointing and positioning and even legal parrying that can cost the originating lender and the investor thousands of dollars in time and resources. (Just one of the many reasons we keep very detailed records of every conversation, email, fax, etc.)

But what about Builder Incentives?

Personally, as a lender, I do not like them. However, because builders do have such a great profit margin in a hot market it is possible for them to have concessions from their 10% to 30% profit margins. What I do not like about it is the same reason cash back is mortgage fraud: it does artificially increase the loan amount. In other words if the builder was not rebating the buyer buy paying their mortgage payment for 12 months (or whatever) then the sales price and thus the loan amount could be reduced by the same amount as the rebate. Why is this allowed to continue? Probably because it has yet to be challenged in the right way - and everyone involved is making more money because it's a higher sales/loan value.

This is the same thing that makes paying a bird-dog (locator, consultant) from the proceeds of the loan mortgage fraud: it artificially raises the sales price and the loan amount. Here is an example: a real estate broker recently received an offer of $1,800,000 on a home she had listed for $1,400,000 although the appraisal (very recent comps on the same street and all over the neighborhood easily supported the higher value) indicated a value of $1,990,000 - She called me and asked what I thought. I told her I am not paid to think but there is a fish in the cupcake here.

The first thing I would do as a QC agent at a lender is notice the listing price compared to the sales price. Then I would make a note to question the listing agent about other offers. If there were other offers of 1.45, 1.5, 1.55, 1.65 etc., then I could lower that red flag because I knew the property was hot and it was being bid up. However, when I asked if she had received any other offers she said, "no".

Suspecting what was happening I asked to see a copy of the offer letter. There was nothing unusual about it except everything.
1. There was no licensed real estate agent involved
2. The person faxing the offer was not the buyer
3. The buyer lived in California the property was in Georgia
4. The offer was marked as "CASH"
5. There were no previous phone calls or other communications ... just a faxed offer
6. The closing date was requested in 10 days (certainly do-able but unusual)
7. There were no appraisal or inspection contingencies

So here was my list of questions for the offer maker:
1. Who are you to the buyer?
2. If the buyer is in California and the property is in Georgia is this a hold or a flip and if it is a hold who is going to be managing the property?
3. Show me the money - I need a bank certified letter of funds.
4. Why are you offering $400,000 more than the property is worth?

And the response:
1. I am a consultant finding properties for investors.
2. It's a flip.
3. Actually "we're" still trying to get the money together.
4. Oh, my fee is $400,000

Not. Ever. Going. To. Happen.

We called the buyer who's name and address but not contact information was on the offer. It helps to have investigative skills and tools. Once we discovered there was a lender involved and they had pre-approved the deal at $1,800,000 we called the Loss Mitigation Department at the lender. We told the lender and the buyer the entire deal. The property closed with a real offer, a pre-approval letter from a grateful lender at the real price and the involvement of a Georgia licensed real estate agent. Could anyone have been guilty of fraud if this had closed? You bet. The seller, the seller's agent, the loan officer, and the underwriter. The bird-dog? Probably not. Disgusting, eh?

The property was sold at $1,400,000 - nothing paid by the seller except the real estate fees. 

In review here, like it or not, is the short list of what the lender's quality assurance investigation team looks for (in addition to a hundred other things) to discover misrepresentation of the use of the lender's funds:
1. Listing price to sales price
2. Sales history of the subject property
3. Disbursements to any third parties (anyone other than the seller)
4. Mysterious (unexplained) large deposit into the buyer's account
5. Liens to be paid at closing not discovered during the title search