Appraisal Fraud, Mortgage Brokers and the heating of the California Real Estate Market A lot of posts have written about the sometimes difficult relationship between appraisers and mortgage brokers. One thing has become clear though, appraisal fraud and appraisal exaggeration have played a part in the run up of housing prices well ahead of incomes in the California real estate market.

I realize that little supposition needs more support so let's take a look at the

role that the appraiser plays in a real estate transaction. Traditionally the appraiser's role is to secure the bank's interest in the transaction. The bank is the largest owner in any real estate transaction. Unless you are buying your home with cash, you need to get the money from somewhere.

Let's think back to how Ward Cleaver probably bought his house. It's a little different. Ward probably got a loan from a local bank guaranteeed by the VA. Little known fact about Ward - he served in WW2 as a SeeBee in the Pacific. His local banker probably knew his neighborhood, understood the value of the home and additionally was going to was likely to carry the paper throughout the life of the loan.

In today's market your loan is likely going to be done by mortgage broker. This broker has an interest in getting the deal done since that's the only way he gets paid. The actual lender on the property is probably going to re-package and sell the loan within a few months of the house closing.

So how can appraisal fraud play a part in a real estate bubble? The mortgage broker begins to assert pressure to "hit a number" with the appraisal. Don't think it doesn't happen?

According to Appraiser Petition - it certainly does

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

• the withholding of business if we refuse to inflate values,
  
• the withholding of business if we refuse to guarantee a predetermined value,
  
• the withholding of business if we refuse to ignore deficiencies in the property,
  
• refusing to pay for an appraisal that does not give them what they want,
  
• black listing honest appraisers in order to use "rubber stamp" appraisers, etc.
  

This combined with the free money and loose underwriting standards, means that that housing prices have grown faster than incomes and far faster than they should have. But this isn't a bubble blog.

Labels: appraisal, appraisalfraud, appraisers, mortgagebrokerbasics

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Using a Mortgage Broker - The Basics

Introduction

A home loan is a transaction in which you promise to repay money you have borrowed and also give the lender a mortgage on your home to secure repayment. In California, your promise to repay ordinarily is in the form of a promissory note and the mortgage is ordinarily in the form of a deed of trust. You need to make certain that you understand the terms of the loan before you become obligated. Whether you obtain a loan through a mortgage broker, a financial institution or some other lender, you should ask questions about the loan process and paperwork so that you understand the form of the transaction and the terms of the loan before you agree to them.

Using the Services of a Mortgage Broker

A mortgage broker helps you obtain a home loan. A mortgage broker may be licensed by either the California Department of Corporations or the California Department of Real Estate. Mortgage brokers make or arrange first mortgages and junior mortgages. A junior mortgage secures a loan which is secondary or junior to one or more other loans on the property. Some home loans arranged through brokers are very similar to a home loan you might obtain independently from a bank, savings and loan association (S&L), credit union, finance company, or other type of lender. Some brokers offer shorter loan terms and/or different repayment plans.

Prior to using the services of a mortgage broker ensure that you check to make sure they are properly licensed by checking with the California Department of Corporations at http://www.corp.ca.gov or 1-800-347-6995 and/or the California Department of Real Estate at http://www.dre.ca.gov or (916) 227-0931.

The Role of the Mortgage Broker

The mortgage broker is usually an agent for the purpose of arranging the home loan transaction. This relationship imposes a legal duty on the broker to disclose to you the material (important) facts you need to know about the loan. The broker has a duty of fairness and honesty to both you and the lender. These legal duties can be important in resolving disputes which arise after the loan is made, but the best way to avoid problems and disputes is to ask questions and be sure you understand the terms of the loan and each of the loan documents before you sign.

When acting as an agent, the broker speaks for you in submitting your loan application to a lender. Make sure that you give the broker full and accurate information, and that any loan application or other document the broker prepares for your signature is accurate and complete before you sign it. Make sure you understand the terms of the loan before you agree to it.

Mortgage Broker Commissions and Lender Fees

Mortgage broker commissions and lender fees are not usually set by law. Mortgage Brokers are paid either directly by you or by the lender who funds the loan. You may choose to pay the mortgage broker’s commission with:

• Cash (out of pocket) or
  
• Proceeds from the loan (this will increase your loan balance) or
  
• A lenders rebate or service release premium (see definition of lender’s rebate and service release premium below).
  

Compare fees charged by several lenders and mortgage brokers. You may be able to do this with a few phone calls. Ask about the amount of the fees and costs to be paid by you in cash before the loan is funded, the amount of the fees and costs to be paid from the loan proceeds or lender rebates, and the amount of fees and costs to be financed.

What Other Fees Should I Ask About?

The mortgage broker may charge you loan application processing fees. You may incur appraisal and credit inquiry expenses. However, if the mortgage broker asks for payment in advance for any service other than an appraisal or credit inquiry, call the DRE to see if the broker has approval to do so. Closing costs may include charges for document preparation, escrow services, title insurance, notary services, and recording fees. You may also be charged for fire or homeowner’s insurance coverage, optional credit life or disability insurance, or beneficiary statements.

You do not have to buy credit life or disability insurance. Credit life and disability insurance benefits make your mortgage payments if you die or become disabled. Many credit life and disability policies have limitations, called exclusions, that excuse the insurer from paying under a variety of circumstances. Make certain you understand the terms of the policy and what it excludes. You can also secure financial protection from disability or death through standard term life insurance or disability insurance. Before you buy credit life or disability insurance, compare the cost with the cost of a term life or disability policy.

Do My Costs Increase if I Borrow More Money?

Many loan costs and fees are based on the amount of the loan. Usually, the more you borrow, the higher the costs and fees. Also, your costs and fees are limited by law on first mortgages under $30,000 and junior mortgages under $20,000 which are arranged through a broker, licensed by the Department of Real Estate.

An Overview Of The Loan Process

Selecting a mortgage broker or lender – As stated earlier, brokers usually act as your agent with the lender. You can also deal directly with some lenders, without using a mortgage broker. Whichever you choose, ensure that you have checked out the company. Try to use companies that people you know have used and can tell you the level of service provided. Rates should be competitive with other companies. Remember that if the deal sounds to good to be true, it probably is.

The Loan Application – You will have to provide a completed loan application. Some brokers will come out to your home to take the application, you can fill one out yourself, or some brokers have Web sites that allow you to submit the application on-line. You will probably be asked to pay for a credit report and appraisal fee up front. If a broker tells you the credit report and appraisal costs are not being charged to you, make sure to get it in writing. Also verify that you will not pay for these items at the close of escrow out of your loan proceeds or that the broker will not demand payment for the fees, if you do not close the loan. The broker will also require that you submit the required documents that the lender requires in relationship to the loan program you are trying to obtain. Both the broker and lender will provide you with required disclosures regarding the terms of the loan. It is important that you review these disclosures and ensure that the terms meet with your approval.
Processing the Loan – This is the process were the broker obtains the required information and submits it to the lender’s underwriter for loan approval. This is a critical stage in obtaining your loan. Ensure that you respond to all requests for information in a timely manner. This will increase your chances of getting the loan or learning why you don’t qualify. This is also the time you may want to lock in an interest rate. Remember to keep in contact with the broker and to monitor the loan process, ensuring that the broker is meeting the agreed upon time frames.
Closing the Loan – This is the final stage of the loan process. The closing can take place at a title company, escrow company, or the broker’s office. The broker may use a signing service that will bring the documents to you for signing. No matter where the signing takes place, this is the time to ensure the loan terms and costs are what you asked for. Read all documents. Do not let yourself be rushed. If you have questions, ask them and make sure you understand the answers. If the terms and conditions are not what was agreed upon, do not sign the loan documents. Request that the documents be redrawn stating the correct terms.

How Do I Choose a Mortgage Broker and a Loan?

Call lenders and mortgage brokers and ask about interest rates and fees for the size loan you need. Be sure to ask:

• What types of loans are available?
  
• What is the approximate amount you will have to borrow to receive the amount of cash you want? (That is, what amount of fees will be financed and deducted from your loan proceeds?)
  
• Does the lender or mortgage broker offer loans in the dollar amount you need?
  
• How much is the lender’s fee or broker’s commission on this size loan?
  
• What other fees or costs will you be charged and what is the estimated amount of each?
  
• Will you have to pay any fees if the loan is denied?
  
• Will you have to pay any fees if you apply, but then change your mind?
  
• What is the amount of the monthly payments, and the amount of any balloon payment?
  
• Will the loan be fully amortized/paid off by the regular monthly payments?
  
• What is the length of the repayment period/term of the loan? (The more time you have to repay, the lower your payments will be on a fully amortizing loan.)
  
• What is the simple interest rate?
  
  
• Is the interest rate fixed or does it vary over the term of the loan?
  
• What is the Annual Percentage Rate?
  

On an adjustable rate mortgage (ARM), the interest rate — and your monthly payment — may increase with an increase in the index used in your mortgage. In an ARM, the current interest rate is calculated by adding a fixed margin (such as 2%) to an index such as the Cost of Funds Index published by the Federal Home Loan Bank Board. INDEX RATE + MARGIN = MORTGAGE RATE.

For adjustable rate loans, ask the lender or broker:

• How long is the initial interest rate guaranteed?
  
• How often can the interest rate change?
  
• What is the largest monthly payment you could face?
  
• How often can the payments change?
  
• Can the amount you owe increase through negative amortization? (This can happen if your monthly payment is less than monthly interest costs.)
  
• What is the formula that will be used to set the rate?
  
• What would the rate be today if it were set by that formula?
  
• What are the caps on how high/low the interest rate can go?
  
• Is there a cap on how high or low a payment can be adjusted when the interest rate adjusts?
  

A good way to determine how much the fees and costs will be on a loan is to ask each lender or broker two questions: 1) "Approximately how much do I have to pay in cash before the loan is funded?" and 2) "What is the approximate amount of money I will have to borrow to end up with a certain amount of cash?" By comparing the answers you can find out how much you would have to borrow from each source to end up with the same amount of cash paid to you.

Consumer Checklist: The Loan Application

• Accurately report your income, assets and debts.
  
• Never sign a blank application.
  
• Ask for a copy of your signed application.
  
• To avoid delays, promptly provide the information requested by the mortgage broker.
  
• Ask approximately how long it will take to process the application and obtain the loan you are requesting.
  

Using the Mortgage Loan Disclosure Statement

In most cases, a mortgage broker must cause to be delivered to you a Mortgage Loan Disclosure Statement (MLDS) within 3 business days after you complete and present to the mortgage broker a written loan application or before you become obligated to take the loan, whichever is earlier. Ask to receive the statement as soon as possible and read it carefully. It will provide you with the following information about the loan:

• the amount you are borrowing (the principal);
  
• the estimated amount of any costs which are to be financed as part of the principal;
  
• the estimated amount you will pay in fees to get the loan, including commissions to the mortgage broker; and
  
• the estimated amount of money that you will receive from the loan after costs, fees, and commissions have been deducted.
  

Compare the line on the statement showing the amount of the principal with the line stating the amount of cash which will be paid to you. The difference between these two numbers is the amount of fees and costs which will be financed as part of your loan debt.

The statement must also include estimates of the maximum costs of arranging the loan. It must list the estimated amount of each of these fees, if they apply:

• appraisal fee
  
• lender fees
  
• escrow fee
  
• title insurance charge
  
• notary fee
  
• recording fee
  
• credit investigation fee
  
• fire or other hazard insurance premiums
  
• credit life or disability insurance premium
  
• beneficiary statement fees
  
• reconveyance fee (when you are refinancing an existing loan)
  

The disclosure statement should also list any existing loans or liens against the property. If you expect the new loan to pay off a debt, check to be sure that debt is listed.

Be sure to ask for this disclosure statement before you sign the loan papers. You do not become obligated to accept the loan until you sign the loan agreement or promissory note. If the disclosure statement does not describe the terms that you expect or want, don’t sign the loan papers. Any changes from the original terms, cost, or expenses, must be disclosed to you in a timely manner.

If the loan transaction is federally related, you may not receive an MLDS but you should receive a Good Faith Estimate conformed to California disclosures and certain Truth-in-Lending disclosures. These are federal disclosures which together generally provide the same information as the MLDS. (See discussions below regarding RESPA and the Truth-in-Lending Act.) If the broker does not provide the MLDS, he/she must separately advise you of any compensation received or expected from the lender and whether the loan includes a balloon payment.

Get It In Writing

Do not be afraid to ask the mortgage broker or lender to show you where the loan papers describe any particular features of the loan which have been promised to you. If the terms you have been promised are not there, ask the mortgage broker or lender to put them in writing. Promises made only orally may not be enforceable.

Your Rights Under the Federal Truth-in-Lending Act

The Federal Truth-in-Lending Act (TILA) applies if the broker makes the loan with its own funds or arranges the loan for a lender who makes five or more home loans per year. If the TILA applies, the lender must provide you a disclosure before you become obligated which tells you: the identity of the creditor; the amount financed; that you have a right to an itemization of the amount financed; the dollar amount of the finance charge; the finance charge expressed as an annual percentage rate (APR); the number, amount and periods of payments; the total of all payments; any late payment charge; and whether or not there is a charge upon prepayment of the loan principal.

The disclosure statement must also identify the property which is to secure the loan and should tell you whether the terms of the loan permit assumption of the loan by someone buying the property from you.

If the TILA applies, you may have a right to rescind (cancel) the loan within three days after certain events, including the consummation of the loan transaction. When you do not receive proper disclosures about the loan, the right to rescind can last as long as three years from the time you obtain the loan. Any request to rescind the loan should be made in writing.

The TILA right of rescission does not apply to all loans arranged by mortgage brokers, so do not rely on the possibility of later rescission as a substitute for careful study of the loan before you agree to it.

The TILA was amended in 1994 with respect to certain loans, other than purchase money loans, secured by the borrower’s principal dwelling. In these "high rate/high fee" loan transactions, also known as "Section 32" loans, the TILA now places some additional restrictions on creditors, requires more disclosures, and gives borrowers cancellation rights. The amendment defines a creditor as someone who, in any 12-month period, originates more than one high rate/high fee loan. Also, any such loan arranged by a mortgage broker is subject to the new requirements. A high rate loan is one in which the APR exceeds by 10 points or more the yield on Treasury Securities having a similar term. A high fee loan is one in which the total points and fees exceed the greater of 8% of the loan amount or, as of 1-1-00, $451.00 (adjusted annually on January 1 based on the change in the Consumer Price Index). The TILA is enforced by the Federal Trade Commission (FTC). The FTC will answer questions concerning the TILA and high rate/high fee loans.

Signing the Papers: What to Expect

When the time comes to sign the papers, several documents will be presented to you. They will probably include:

1. Promissory Note – In the promissory note, you promise to repay the money borrowed. The note should state the amount you are borrowing, the interest rate, whether and how that interest rate may change, the term or length of the loan, and the amount of any balloon payment.
   
   
2. Deed of Trust – The deed of trust gives the lender a lien on your home. It also gives the lender the right to foreclose on your home if you don’t repay the loan.
   
   
3. Escrow Instructions – The escrow instructions tell the escrow holder how to pay the loan funds. If existing mortgages or other debts are to be paid off by the loan, be sure that the escrow instructions tell the escrow agent to pay off these debts.
   
   
4. Broker Agreement – Read the broker agreement carefully. Does the agreement require you to pay the broker’s fee even if you don’t receive the loan you requested? Make sure the agreement is consistent with what the broker has already told you about your rights and obligations.
   
   
5. Declaration of Oral Disclosures – This is a statement that the broker has orally explained certain terms of the loan to you. Before you sign a paper saying that you have received explanations, make sure that you have received the explanations and that you understand what you have been told.
   
   
6. Mortgage Loan Disclosure Statement – The mortgage broker must give you this statement, which sets forth the loan terms and estimated costs, within 3 business days of receiving your completed written loan application or before you become obligated to complete the loan transaction, whichever is earlier. If liens or debts are to be paid off by the loan, be sure they are listed on the disclosure statement. (In lieu of the MLDS, in a federally related loan transaction you may only receive Truth-in-Lending disclosures and a Good Faith Estimate of costs conformed to California disclosure laws. See "Using the Mortgage Loan Disclosure Statement" above.)
   
   
7. Truth-in-Lending Disclosure Statement – Some, but not all, mortgage brokers must give you Federal Truth-in-Lending Act disclosures about the cost of the loan before you become obligated on the loan.
   

Take your time and read each document carefully.

What Should I Do About a Dispute with the Authorized Servicer?

If you have a disagreement with the authorized servicer about your loan, write a letter to the servicer and keep a copy. State what the problem is and what you wish the servicer to do about it. Be specific. If your payment wasn’t credited, give the account number, amount, date, and number of the check. Do not send your original documents such as canceled checks. Keep all the originals and send copies with your letter. Confirm in writing any telephone conversations with the servicer. If you don’t receive a satisfactory response and the servicer is required to be a licensed real estate broker, you can file a complaint with the Department of Real Estate. Also, Section 6 of RESPA requires the servicer to acknowledge your request within 20 business and must try to resolve the problem within 60 business days. If not you may have certain rights, such as the right to file a civil lawsuit against the servicer.

Mortgage Insurance: Notice to Borrower

Civil Code Section 2954.6 requires that if private mortgage insurance (PMI) is a condition of a loan the lender must notify the borrower whether the borrower has the right to cancel the PMI and, if so, what conditions must be met in order to cancel.

Servicing: Making Your Monthly Payments

It is very important to make all your payments and to make them on time. Your promissory note may include a provision requiring you to pay a late charge for each late payment. For some home loans, the law allows a late charge of up to 10% per installment.

The person who collects your loan payments is often referred to as the authorized servicer. Sometimes this is the mortgage broker.

NOTE: Civil Code Section 2937 requires that if the servicing responsibility for a loan is to be (or has been) transferred, both the current and new servicer must notify the borrower of the change and its effective date.

CALIFORNIA DEPARTMENT OF REAL ESTATE Offices

Principal Office
2201 Broadway
Post Office Box 187000
Sacramento, CA 95818-7000
(916) 227-0864

District Offices
2550 Mariposa Mall, Suite 3070
Fresno, CA 93721
(559) 445-5009

320 W. 4th Street, Suite 350
Los Angeles, CA 90013
(213) 620-2072

1515 Clay Street, Suite 702
Oakland, CA 94612
(510) 622-2552

1350 Front Street, Suite 3064
San Diego, CA 92101
(619) 525-4192

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