The Chickens Come Home To Roost & When The Dust Settles-Lender Discovers Mortgage Fraud
Things were going great. Work was great. The economy was smoking and people reportedly making a killing in real estate. “Flipping” this property, buying this one, selling that one and just living the “American Dream” to the fullest. It was the best of times.
At best investments tend to be cyclic in nature with tops and bottoms. Like many investors following the maddening crowd many buy at the top only to watch the value of the investment drop. Suddenly, the market slowed. “Flips” were stalled. Many investor sellers had difficulty moving their property and their bloated equities began to shrink.
Turning the clock back a year, Chris and Delores got the fever to get in on the action. They wanted to get into real estate and called an out of state broker who had helped their friends find a deal and finance it. Their friends were gushing about what a great deal they had found. The local real estate market in their small Wisconsin town was still static so Chris and Delores were looking south in a red hot market in Florida close to the water. Chris and Delores had fully intended to buy a home in a resort area that they could rent out on a weekly or monthly basis to offset the mortgage payments and use the rest of the time for their family when vacation time became available.
The broker called and indicated a unit had come up in the same building that their friends from the same hometown had purchased a few months before. The negotiations ensued and because of the red-hot market the seller had no interest in helping with any closing costs or prepaid expenses. In fact there were three offers on this one unit and the broker explained that if they were serious about owning this unit they would have to pay ,000 over the listed price. After a brief discussion among themselves and a call to their friends who urged them on, Chris and Delores decided to go ahead with the deal. With the market really smoking in the area, the seller would not fix anything and would only sell the unit "As-Is, Where-As” with the right to inspect. Chris and Delores accepted the terms which included 10 days to get a home inspection and five days to make application with a lender and secure a required mortgage commitment within fifteen days of the acceptance date of the contract. The home inspection revealed that the air conditioning might at best last a year or a little more with good care and maintenance. The air conditioner was fifteen years old and was used a lot in the humid and hot climate.
The electrical system was going to need some upgrades and the carpet and paint was definitely need of upgrades. All this added up to out of pocket money if not right away certainly soon. However, with the euphoria of the investment climate at the moment, Chris and Delores again pressed forward and waived the inspections and accepted the condo unit “As-Is, Where-As”. Now that was all left to do was to set up the financing.
The broker called and started gathering information on income, debts, assets and personal financial information to complete a loan application with all the disclosures. Chris and Delores were doing ok with good jobs but did not have a lot of financial depth, but had excellent credit with a few credit cards and two car loans and an outstanding student loan.
The broker came back with a Good Faith Estimate and Truth-In-Lending Statement with 10% down plus closing costs and prepaids. The sales price was 5,000. The GFE showed ,500.00 down payment plus ,852 in closing cost and .950 in prepaid expenses which included tax escrows and prepaid interest. This would require ,302 cash investment with the provision of two months of payment reserves of approximately ,000.00 in provable assets. Chris and Delores were stunned; they had no idea that it would take this kind of cash. In a panic, they called the broker and shared that there was no way they could come up with that kind of investment. They further shared that their friends had bought their unit with a 100% loan. The broker shared, “yes but they bought it as a second home”. “Well could we do that?” The broker said, “well…it would need to be a legitimate second home.” Chris and Delores discussed and called the broker back and said, “ Well, we would like to buy it as a second home.” The broker says, “Well from what I can see…you don’t make enough money to full document on a second home and carry all your other debts.” Chris and Delores hung up and called their friend. He shared his strategy. By checking one little box on the mortgage application (Form 1003) and signing their name, Chris and Delores applied for a second home with stated W-2 income. Second home, by implication, means you will not be renting the property.
A year passes, market slows, air conditioner breaks, rentals slow, job layoff, foreclosure is started. The file is picked through, fraud is discovered. Criminal action is started.
About the Author: Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.