By Philip Haldiman, Editor-in-Chief | The Dealmaker
A recent study listed Arizona as having the fourth highest mortgage fraud rate in the country last year and being in the top five in the last five years.
Mark Stapp, director of ASU’s Master of Real Estate Development, has provided expert witness services on several fraud cases and foreclosures.
He told The Dealmaker that the mortgage process is less than perfect, but offered his thoughts and observations on why fraud might be prevalent in Arizona and in general.
“The system is not designed to unwind, just wind up and I’ve seen a lot of abusive practice on the part of servicers,” Stapp said. “This is really unfortunate and in the end, many times, the investors I believe actually lost more by servicers foreclosing than if loans were worked out. But the system is not designed for that kind of empathy.”
Although it’s been tougher after the financial crises, Stapp said the residential mortgage business was designed to quickly and efficiently originate mortgages on a very large scale.
“But the system is like a lobster trap – getting out is not easy,” he said.
The reasons are numerous but, he said, here are a few:
Those who originate have no association with the loan after it’s closed. There are several players including escrow agents, appraisers, underwriters, etc. who are all involved in the origination process and deal personally with the borrower. The loan is then pooled, traunched, repackaged and sold to investors. The “bank” simply manages loan processing/servicing to ensure monthly payments are made. If something goes wrong, there is not a good way to work out the problem because:
1) The servicers have no authority.
2) They are paid more to enforce all loan provisions rather than to seek individual solutions.
3) The loan has been split into several pieces – it is no longer owned by one party who can unilaterally make a decision.
4) Decision makers are far away (these are pools of loans) and one mortgage is too small to worry about – it’s just part of a bigger investment so there is no empathy
5) It’s safer to simply follow the letter of the documents. The decision maker is merely a fiduciary for a fund.
6) There is no longer a personal connection to the borrower once the loan is made – it’s not personalized the way it was when it was originated.
More insights from Stapp:
- Because we use escrow agents rather than attorneys, paid to handle transactions, a “gate keeper” at the document processing level can be less than rigorous — fraudulent documents can be processed more easily. It’s cheaper, but leaves open the process for collusion with originators.
- We used to originate a lot of loans. The origination process was/is the beginning and the entire process is a perfect example of principle agent problem and moral hazard.
- Because banks and mortgage companies sell their loans off their books immediately the objective is to originate lots as fast as possible.
- I saw lots of borrower fraud as well as lender fraud. There was also lots of fraud by other players in the process like escrow agents and appraisers who colluded with originators. The bank got a bad mortgage because the documents were manipulated. In the end the borrower got screwed along with the investors who bought the loans.
