Make housing great again

make housing great again
“Dodd-Frank Has Imposed Regulatory Costs of $310 Per Household” (infographic from americanactionforum.org)

When President Trump was campaigning, one of his talking points was to “dismantle” Dodd-Frank.  And after a couple of weeks in office, it seems that it’s next on his “to do” list.  While many are already touting the move as controversial and partisan, the reality is that it’s a bipartisan issue.  Even Barney Frank was seen on CNBC this past Sunday admitting that his namesake legislation needs reform (video.cnbc.com/gallery/?video=3000590611).  Reforming Dodd-Frank will make housing great again.

Dodd-Frank is the nickname for Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  The purpose, as described in its title, was to “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Dodd-Frank changed the housing industry dramatically.  Besides altering the process of financing and buying homes, critics have claimed that the legislation has also restricted lending.

Dodd-Frank created the Consumer Financial Protection Bureau; which creates and enforces rules and regulations for consumer financial markets.  Besides adding new home buyer and seller disclosures as well as timelines, the “Know Before You Owe” rule changed the home buying process by creating a new level of bureaucracy embedded within the mortgage lending process.

Many critics of the CFPB also claim that it has too much power with little oversight, and point to last year’s Appellate opinion on PHH Corp v. Consumer Financial Protection Bureau as confirmation for necessary reforms., where Judge Kavanaugh wrote:

“…the Director of the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy. The Director unilaterally enforces 19 federal consumer protection statutes, covering everything from home finance to student loans to credit cards to banking practices. The Director alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law…That combination of power that is massive in scope, concentrated in a single person, and unaccountable to the President triggers the important constitutional question at issue in this case.”

One of the unintended consequences of Dodd-Frank was the restricted lending atmosphere in the mortgage industry.  Besides the overwhelming increase in rules and regulations as a result of Dodd-Frank, there has also been insufficient private portfolio and securitization of mortgages; which further limits access of funding to many home buyers.

Prior to the financial crisis, private mortgage securitization was prevalent; which provided a multitude of lending products, including “Alt-A” and subprime.  The wide access to private mortgage funding contributed to the homeownership rate to peak close to 70 percent (The most recent homeownership rate reported by the US Census was 63.7 percent, a forty year low).  Since the crisis, a majority (estimates were as high as 95 percent) of mortgages are insured or purchased by the government.

Before the financial crisis, Alt-A and subprime mortgages were widely available to give home buyers options to finance their homes, especially when they didn’t fit the underwriting guidelines for a conventional loan.  Many of these home buyers were self-employed or small business owners, whose financial picture was outside of the box of the requirements for a conventional mortgage.

Of course, FHA is an alternative to conventional mortgages.  FHA has lenient underwriting guidelines, like subprime mortgages; but is insured by the government.  However, the upfront and annual mortgage insurance premiums can be hefty.  Alt-A and subprime can seem more attractive when purchasing a home beyond the FHA loan limits, and/or when documentation becomes onerous.

Back in 2001, Federal Reserve Board Economist Liz Laderman wrote about the growth of subprime through the 1990’s (Subprime Mortgage Lending and the Capital Markets; FRBSF Economic Letter; December 28, 2001).

“An increase in access to the capital markets through loan securitization also contributed to growth in subprime lending in the 1990s. Securitization is the repackaging, pooling, and reselling of loans to investors as securities. It increases liquidity and funding to an industry both by reducing risk—through pooling—and by more efficiently allocating risk to the investors most willing to bear it. Investors had already become comfortable with securitized prime mortgage loans, and subprime mortgage loans were among various other types of credit, such as multifamily residential mortgage loans, automobile loans, and manufactured home loans, that began to be securitized in the 1990s. Through securitization, the subprime mortgage market strengthened its links with the broader capital markets, thereby increasing the flow of funds into the market and encouraging competition.”

Of course, Dr. Laderman also points out that the increased competition in the subprime market was a concern due to reported abusive lending practices.  However, she concluded:

“…subprime mortgage lending grew rapidly in the 1990s to become an important segment of both the home purchase and home equity mortgage markets. Evidence pertaining to securitization and pricing of subprime mortgages also suggests that the subprime market has become well linked with the broader capital markets, an important first step in the development of a fully competitive environment.”

A 2006 article by Souphala Chomsisengphet and Anthony Pennington-Cross (The Evolution of the Subprime Mortgage Market; Federal Reserve Bank of St. Louis Review; Vol. 88, No. 1) described the history of subprime mortgages.  The authors stated:

..Because of its complicated nature, subprimelending is simultaneously viewed as having greatpromise and great peril…

Through it’s history, subprime lending has had crises where this lending sector took pauses to reflect on missteps.  Chomsisengphet and Pennington-Cross described a “retrenchment” of subprime lending in the late 1990’s; but during that time, the facts point to huge losses in the subprime sector due to seemingly rampant illegal flipping and fraud.

Private mortgage funding isn’t entirely Alt-A or subprime mortgages, although there’s a place for responsible Alt-A and subprime lending.  Prior to the growth in securitizing these types of mortgages, banks and financial institutions privately held (portfolio) these loans which increased their institutional risk and provided incentive for originating performing loans.

How can Dodd-Frank be reformed?  One only has to look back to the S&L crisis of the 1980’s and listen to William K. Black.  Black was the Director of Litigation for the Federal Home Loan Bank Board in the aftermath of the S&L crisis.  His conclusions included a list of “Lessons not Learned.”  The focus of his list was fraud and ethics.  Black discussed curbing “control fraud” (fraud perpetrated by CEOs as well as those who are in power) and other types of fraud.  He wrote The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry  first published in 2005, but was recently updated.

Not surprisingly, Mr. Black reemerged after the financial crisis to provide testimony to Congress, including testimony in 2010 to the Committee on Financial Services United States House of Representatives regarding “Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner.”  In a 2010 interview with Bill Moyers (pbs.org/moyers/journal/04232010/transcript1.html), Black discussed CDO’s (collateralized debt obligations), fraud, and their role in the recent crisis.  And although many, including the Financial Crisis Inquiry Commission, cited failures in the financial system as cause for the financial crisis; they all fall short in seeing William K. Black’s “control fraud” in action – Fraud was the vehicle that drove the unrelenting greed in the CDO and mortgage markets.

With regard to housing, there is much potential for reform within Dodd-Frank.  However, maybe begin with SEC. 941 “Regulation Of Credit Risk Retention” of Dodd-Frank.  SEC.941 requires a securitizer of residential mortgages to have skin in the game by retaining some of the risk of any asset or mortgage backed security that is sold, transferred, or conveyed.  Additionally, the securitizer is prohibited from hedging or transferring their credit risk.  Exceptions to this section include federal programs insuring or guaranteeing mortgages; which includes FHA and VA mortgages, as well as mortgages from institutions supervised by the Farm Credit Administration (including the Federal Agricultural Mortgage Corporation).  However, Fannie Mae and Freddie Mac are not exempt.

The President can make housing great again by incentivising private investment in the mortgage industry either through increasing portfolio and/or private securitization in the mortgage markets – along with reducing fraud (and control fraud) while ensuring responsible lending practices.  Private investment in mortgage funding will open the doors for many home buyers and increase homeownership rates.

By Dan Krell
Copyright © 2017

Original published at https://dankrell.com/blog/2017/02/10/make-housing-great/

If you like this post, do not copy; instead please:
link to the article,
like it at facebook
or re-tweet.

Protected by Copyscape Web Plagiarism Detector

Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Money laundering through real estate

In the post financial crisis era, when anti-fraud units from various law enforcement agencies stepped up activity to prosecute real estate related crimes; real estate continues to be a vehicle for scammers and fraudsters.  Although mortgage fraud and identity theft have been the mainstay, money laundering through real estate has not received the same attention.  That is until this year, when a pilot program was initiated to identify money laundering in residential real estate.  The program was ordered through the Financial Crimes Enforcement Network of the US Department of the Treasury (FinCEN), which is tasked with the protection of our financial system by primarily combating money laundering (fincen.gov).

FinCEN’s concern is the laundering and/or structuring of money through all cash deals into luxury real estate, primarily through shell companies.  Through the use of LLC’s or other business structures, individuals can hide assets anonymously.  According to FinCEN, “Money laundering” is the disguising of funds derived from illicit activity so that the funds may be used without detection of the illegal activity that produced them.

A 2008 FinCEN report (Money Laundering in the Residential Real Estate Industry: Suspected Money Laundering in the Residential Real Estate Industry; April 2008) found that suspicious activity reports (SAR) remained steady through 2002.  However, began to increase in 2003, and sharply rose through 2005; the increase was significantly more than the rapidly expanding real estate market at that time.  Findings of the report indicated that over 75 percent of those engaging in money laundering activities were unaffiliated with the real estate industry.

The program to identify money laundering in residential real estate seemed to be the next logical step in a series of investigations.  As a result, FinCEN announced Geographic Targeting Orders (GTO) on January 13th of this year.   The GTO was enforced from March 1st, 2016 through August 27th, 2016.  And required title companies to report the individuals behind the companies buying high end real estate without financing (all cash deals), located in Manhattan and Miami-Dade County.

In an April 12th FinCEN news release, former FinCEN director Jennifer Shasky Calvery stated “The analysis and DOJ forfeiture cases continue to show corrupt politicians, drug traffickers, and other criminals using shell companies to purchase luxury real estate with cash. We see wire transfers originating from foreign banks in offshore havens where shell companies have established accounts, but in many cases we also see criminals using U.S. incorporated limited liability companies to launder their illicit funds through the U.S. real estate market.”

On July 27th, FinCEN announced the expansion of the GTO, beginning August 28th and lasting for 180 days.  The geographic areas were expanded to include: New York City; Miami-Dade, Broward and Palm Beach counties; Los Angeles County; San Francisco, San Mateo, and Santa Clara counties; San Diego County; and Bexar County, Texas.

Increased scrutiny of money laundering in residential real estate compelled the National Association of Realtors® to issue Anti-Money Laundering Guidelines for Real Estate Professionals (realtor.org; November 15, 2012).  The voluntary guidelines state that the real estate agent’s exposure is generally “mitigated” because most real estate transactions involve financing and mortgages (which are regulated).   However, when encountering risk factors that fall outside the norm, NAR encourages due diligence and reporting of suspicious activity.

By Dan Krell
Copyright © 2016

Original published at https://dankrell.com/blog/2016/08/05/money-laundering-and-real-estate/

If you like this post, do not copy; instead please:
reference the article,
like it at facebook
or re-tweet.

Protected by Copyscape Web Plagiarism Detector


Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Mortgage fraud persists and is local

mortgage fraud persistsMortgage fraud persists and may never go away. Frankly it seems as if the fraudsters are becoming increasingly creative and brazen. The 2014 LexisNexis® 16th Annual Mortgage Fraud Report (lexisnexis.com) seems to agree with the sentiment, saying: “The reduced volume of consumers who are able to qualify for mortgage loans has led to a fiercely competitive and, in some ways, familiar Fraud for Profit marketplace… Ultimately, fraud and misrepresentation, especially in the mortgage application process, is likely to remain a serious and ongoing national problem.”

Looking into why mortgage fraud persists, the LexisNexis® Mortgage Fraud Report indicated that 74% of reported loans in 2013 involved some form of application fraud or misrepresentation. The increase included the misrepresentation of credit information, including credit history and references. Appraisal fraud was reported to be at a five year low; which is most likely due to the implementation of the appraisal Home Valuation Code of Conduct that reformed the relationship between the lender and the appraiser.

Mortgage fraud persists throughout the country. Although the LexisNexis® Mortgage Fraud Report ranked Florida and Nevada number 1 and 2 respectively for mortgage fraud during 2013, don’t think that other regions are immune from scammers and schemers. Mortgage fraud can pop up anywhere.  For example, I am local to the Maryland area, which is ranked 9th in mortgage fraud; which has a Mortgage Fraud Index of 110, that indicates there was more fraud than would have been expected from the number of mortgages originated.

Mortgage fraud persists and is local.

A July 21st news release from the Maryland District of the U.S. Attorney’s Office (justice.gov/usao-md) reported that a Bethesda MD man pleaded guilty to conspiracy, wire fraud, and aggravated identity theft that stemmed from a mortgage fraud scheme. The scheme defrauded lenders to the tune of $3.8 million by using the names of immigrants and students, as well as false financial information, to buy almost three dozen row houses in Baltimore – all are in default or foreclosure.

The scheme used “straw purchasers” to purchase the homes. The defendant told them that he would prepare mortgage applications, manage the property after purchase, and promised 80% of proceeds of a future sale. Besides paying the straw buyers cash after buying homes, the defendant also paid them for referrals of other potential straw purchasers.

In another case, a former Maryland real estate agent was recently sentenced to 57 months in prison and ordered to pay $2,482,856.05 in restitution for conspiracy to commit wire fraud and aggravated identity theft that stemmed from a mortgage fraud scheme. According to a March 31st news release from the Maryland District of the U.S. Attorney’s Office, the defendant and his co-conspirator help straw buyers obtain mortgages by “using stolen or false identities, false documents – including W-2 forms, earnings statements, and bank statements – and false credit information…” Straw buyers’ credit worthiness was fraudulently enhanced by creating fictitious lines of credit. The scheme also included inflated appraisals and false contract addenda to direct payments for repairs that were never made.

And it’s not just the usual suspects who are the perpetrators. The MERS scandal that erupted in 2010 not only let us see behind the wizard’s curtain of mortgage lending, but it also brought to light the notion that mortgage fraud can occur at any level. An asset manager, of a commercial mortgage special servicer located in Bethesda MD, pleaded guilty to wire fraud “in connection with a scheme to steal over $5 million from his company,” according to the Maryland District of the U.S. Attorney’s Office. The April 22nd news release described how he redirected funds intended to be applied to defaulted commercial mortgages.

Original published at https://dankrell.com/blog/2015/08/01/mortgage-fraud-persists-and-is-local/

Copyright © Dan Krell
Google+

If you like this post, do not copy; you can:
reference the article,
like it at facebook
or re-tweet.


Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Appraising the Mortgage Crisis

by Dan Krell
Google+

Although the mortgage meltdown and crisis is not new news, new information continues to shed light on what led to the mortgage meltdown. In addition to the scandals and fraud allegations at many levels, many are still unaware of the impact of appraisal practices on present market conditions.

Stories of appraisers being coerced into inflating values or providing favorable appraisals are not news. However, as Justice Department probes expand beyond subprime lenders to some of the country’s largest lenders, we may hear more about how underwriting and appraisal practices played a part in creating the bubble that burst. As the probes expand, we may begin to hear more about appraisals that were artificially inflated by coercion, collusion, and/or fraud. Some appraisers purportedly have already come forward to report how they were forced to provide appraisals that were consistent with an inflating market. Supposed consequences for not complying with lenders’ demands would result in loss of business for the appraiser.

Along with other factors, artificial, fraudulent, or misleading appraisals have played a role in historical mortgage crises, such as the Savings and Loan Crisis (of the 1980’s) and the flipping schemes (of the 1990’s). Prior to the critical mass of the S&L crisis, obtaining a real estate loan seemed relatively easy (at the time); the result was a $120 Billion (plus) government bailout. An article published in the CPA Journal (December 1989) reported that a 1988 FLHBB (now the FHLB) report to Congress referred to fraud and insider abuse as the leading factors leading to the S&L collapse; other factors identified by the report leading to the crisis was the collusion by thrift management, borrowers and appraisers to conceal losses and liabilities.

As a result of the S&L crises, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was created. FIRREA was to ensure that type of fraud and abuse that occurred in the S&L crisis would not happen again. Consequently, title XI of FIRREA led to licensure of appraisers, the creation of the Appraisal Foundation, as well as the Uniform Standards of Professional Appraisal Practice (USPAP).

In the mid to late 1990’s, mortgage and appraisal fraud hits again in the form of flipping schemes. Although not as widespread as the S&L crisis, the flipping schemes hit the subprime mortgage market very hard. In many cases, flipping schemes used artificially inflated appraisals to net a large gain to the seller (the loan officer, appraiser, and/or title agent were often in collusion).

Interestingly, real estate market declines followed both the S&L crisis and the flipping scandals. The large buyer’s market and recession occurred at the tail end of the S&L crisis in the early 1990’s.

Currently, investigations are reportedly focusing on practices to hide decreased portfolio values sold on secondary markets. In addition to the allegations surrounding appraisals, lenders’ have also used Broker Price Opinions (BPO) to ascertain values on portfolios as well as for lending purposes. BPO’s are usually completed by real estate agents or brokers who typically have no appraisal training; additionally the BPO typically does not follow USPAP.

If it is not yet clear, history is repetitive and cyclical. Our response this time, however, can undermine the next real estate crisis.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 10, 2008. Copyright © 2008 Dan Krell.

 

(Post Script – Today, Congress is to release report outlining causes for present mortgage crisis.)