Mortgage Audits - Do They Really Help?

This will depend largely on who is doing the audit. Numerous studies and reports confirm that over 80% of mortgages have legal violations related to the origination of the loan. Our experience in reviewing countless files confirms this. Among the biggest problems, however, is that unscrupulous Mortgage Audit Companies produce "audits" that won't help the homeowner. These companies often make use of a generic software program that just discusses Truth In Lending Act (TILA) violations and nothing more. Most TILA violations have a 3 year Statute of Limitations. So, if the mortgage is more than 3 years old, the audit won't help even if violations are exposed. Note: If the mortgage is significantly less than 3 years old, TILA violations can produce significant remedies which might include rescission (cancellation) of the loan.

We have found that probably the most powerful Securitization Auditing needs a complete manual overview of ALL mortgage documents you start with the initial application through closing. Few companies actually perform this kind of in-depth forensic audit properly. One of the very most common violations we find is fraud. The fraud is generally in the shape of inflated income, assets, or appraised value. We also find that the homeowner was unaware of the fraud because it had been the loan officer who falsified the info to be able to have the loan closed and receive his/her commission. Certain kinds of fraud don't have any Statute of Limitations and are therefore enforceable even when the mortgage is more than 3 years old. This fraud often requires "assistance" from the loan processor, appraiser, and/or underwriter whose duties include verifications of information included in the application and supporting documents.

As an example, we recently audited an apply for a client that earned just over $4000 per month. These were applying for a $175,000 mortgage for the purchase of a home. Their debt-to-income (DTI) ratio was over 60% and so the loan should have been denied. The borrower had recently graduated from college and had less than a year on his new job. He also had numerous student loans that have been deferred while he was in school, however the payments would begin in just a couple of months. Rather than deny the loan (or instruct the borrower to find a more affordable property), the loan officer illegally inflated the borrower's income to $7500 per month. We realize this because we reviewed copies of the first loan application which showed the $4000 income. This was confirmed by copies of paystubs, W-2 forms, and Federal Tax Returns. The closing package told an alternative story. A revised "Residential Loan Application" was prepared by the lender which increased the borrowers'income to $7500 per month. There's only 1 put on the "Application" that discloses the borrower's income. It is on Page 2 which doesn't require a trademark from the borrower. The borrower was shocked to find out that his income was stated as $7500. He never saw this amount until we pointed it out. Now that his student loan payments are due, he is not able to spend the money for mortgage payment and is facing foreclosure as a result. A loan modification is now being processed to lower his payments.

In another case, a borrower applied for a 30 year fixed conventional mortgage in 2006. He was well qualified and there should have now been no issue getting this loan as requested. The loan officer, however, talked the borrower into accepting a loan with a Balloon Payment that was due in 5 years. The rate was slightly better (.375%) which meant that the monthly mortgage payment was about $43 less per month. The borrower liked the low payment, but was concerned with the Balloon Payment. The loan officer improperly persuaded the homeowner to move forward with the Balloon Note notwithstanding the borrowers concerns. The loan officer assured him he would be able to refinance the loan prior to the Balloon Note was due and he should make the most of the $43 monthly savings. Why was the loan officer so insistent that he accept the Balloon Note? You can find 2 reasons; first, the Balloon Note likely produced a bigger commission for himself. Secondly, he was positioning himself to refinance the loan to be able to earn another commission once the Balloon Note was due (a practice known as "Churning" or "Equity Stripping"). The loan officer was negligent because he had no means of knowing whether the Borrower would qualify for the refinance as planned. Guess what...his Balloon Note came due in 2011 and he was unable to refinance as the property value had declined by about 50%. His lender refused to change his loan and he was facing foreclosure as a result. The lender "Breached their Fiduciary Duty" by putting the Borrower in harm's way.

If you look at the numbers closely, you might find that the Borrower really would not have saved anything even though the property value hadn't declined and he refinanced since the loan officer suggested. The $43 monthly "savings" amounted to $2580 over the 5 years prior to the Note matured. ($43 times 60 months equals $2580). But, the closing costs to refinance the loan would probably have now been at the least that much which may negate any real savings. This homeowner did nothing wrong, but he now has damaged credit (the Note is delinquent while he couldn't refinance or tender the Balloon Note of almost $200,000). Moreover, he's worried sick he will miss his home and not manage to buy another. The good thing is that his attorney is confident that he can get his loan modified largely due to the findings of our full manual forensic audit. This will likely bring about the reamortization of the loan having an interest rate that is less than he might have obtained by way of a refinance. You will see no closing costs and he expects a much lower payment as a result.

Working exclusively as a business-to-business service provider, MAO is able to devote ourselves to providing expert research enabling our clients to achieve results. forensic audit services