Archive for October, 2006
Improved IRS Technology Makes Mortgage Fraud Easier to Detect
Starting Monday, it’s going to get much riskier to fib about your income when you apply for a home mortgage. That’s because the Internal Revenue Service is overhauling a key income verification tool used by lenders — making it faster and easier to pull up electronically the confidential income tax information of borrowers.
“It could be huge” in spotting fraud upfront, before it’s too late, said Mike Summers, vice president of Veri-tax.com, a Tustin, Calif.-based firm that services 3,000-plus large and small mortgage lenders nationwide. Fraud in mortgage applications is now a multibillion-dollar-a-year problem, according to the FBI, and falsified income tax filings are an important contributing factor.
Some popular mortgage products open the door to bogus claims about income. Many lenders in recent years have offered “stated income” and other limited-documentation mortgages aimed especially at self-employed applicants. Dubbed “liar loans” by industry critics, stated-income mortgage programs allow applicants to bypass standard underwriting requirements for W-2s or copies of personal and corporate income tax records.
Instead, applicants simply assure the loan officer or broker that, yes indeed, we earn enough to qualify for the mortgage, and the transaction proceeds to closing. Often lenders will ask borrowers to fill out an IRS Form 4506-T along with their other mortgage documents.
That form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing income and tax data for as many as four years. The form must be signed by the borrower and can be used only during the 60-day period following the date of signing.
Until now, the process of faxing in 4506-T requests to the IRS and obtaining transcripts has been paper-driven and non-electronic. That has made income verifications slow and difficult to fit into lenders’ highly automated loan-underwriting systems. Most lenders have used 4506-T forms as a way to perform quality-control checks on pools of closed mortgages.
But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing — even on loans to applicants who are not self-employed or using stated-income programs.
“This is going to be light years ahead of where the IRS was before,” when the income-verification process was in the horse-and-buggy era, Summers said. “We are really excited” at the prospect of lenders making more extensive use of IRS double-checks before closings.
The only downside from a lending industry perspective: Rather than providing transcripts at no cost as in the past, the IRS now plans to charge a flat $4.50 for each tax year covered in a 4506-T request. Typically lenders want to see two years of returns, so the IRS policy change means costs will jump by $9 per loan application. Though lenders will be able to deal directly online with the IRS, most are expected to continue working through third-party vendors such as Veri-tax, who can handle large volumes of requests per month, but at a higher cost.
What does the IRS move to electronic tax verifications mean for mortgage applicants? For one thing, they will probably be asked to fill out Form 4506-Ts earlier and more frequently. Borrowers who are playing games with stated incomes or falsified 1040 tax returns are more likely to be spotted before closing and could be subject to prosecution.
Wider uses of 4506-Ts could also increase the potential for lender or broker abuse of the system. For example, some large wholesale lenders have required borrowers to sign the forms, but not date them or indicate the tax years to be checked. That allows secondary market investors — the firms that ultimately own and fund the mortgage — to access the data on up to four years of filings long after the 60-day limit prescribed by the IRS.
At worst, improperly executed Form 4506-Ts give unknown and unseen individuals the potential to obtain your most confidential income and tax information, then sell it, distribute it or post it on the Internet. With income checks likely to be faster and more frequent in the new electronic format, it will be more important than ever for home mortgage applicants to follow the IRS instructions on Form 4506 to a “T.”
That means never signing the form without dating it and specifying the tax years you’re authorizing to be checked. Even if the loan officer insists that it’s the mortgage company’s standard procedure — or worse, a precondition for obtaining the loan itself — never sign an incomplete 4506-T.
In the right hands, federal income verifications are a great way to fight fraud. In the wrong hands, it’s an open invitation to identity theft, or worse.
Bob Roscoe, Mortgage Marketing Associates, Minneapolis, Minnesota
Mortgage Rate History
Mortgage Affordability Ratios Change
Mortgage News
Some sweeping changes are coming to the mortgage industry in Canada.
For decades, a person’s ability to afford a mortgage was determined by two numbers (ratios). Total home ownership costs compared to total family income and total debt compared to total family income.
Basically your home ownership costs could not be greater than 32% of your salary and your total debt could not be greater that 40% of your total salary.
For example, someone making $50,000 could afford a mortgage size of $175,000 (more or less) given a 5% down payment.
This is about to change.
Competition breads better products and this is what is happening in the mortgage industry. For years CMHC has been the sole supplier of mortgage insurance. Even if your mortgage wasn’t insured, CMHC had a major role in determining your bank’s mortgage policies.
A few years ago GE (General Electric) was given permission to compete against CMHC. They did a great job and some improvements in the mortgage business, as CMHC and GE wrestled for market share, are apparent. (i.e. lower insurance fees)
The story is about to start a new chapter. AIG has come to Canada and will become the third competitor to enter the mortgage insurance business.
CMHC wasn’t a great competitor being, at heart, a government run organization. However, GE (renamed Genworth) and AIG are going to clash in ways that will be great for the general consumer.
The first bout will lay waste to the decades’ old fixed ratio numbers mentioned above.
Starting Monday October 23, 2006 that same person making $50,000 can now afford a mortgage size of $290,000 (more or less) given a 5% down payment. That is over a $100,000 difference. The best part is that the mortgage interest rate charged on either mortgage will be 5.25% or whatever the current best rate is.
The new rules allow for a 44% of total debt to total salary and allow for 40 year amortizations. The 32% ratio has been dropped altogether.
Please note you need to have very good credit and very little other debt in order maximize you mortgage size.
If you have mortgage questions we have answers.
Dan Eisner AMP, MBA
Owner
True North Mortgage
www.truenorthmortgage.ca 1-877-248-6677
Chicago foreclosure rate twice the national average
Originally published in Crain’s Chicago Business on Tuesday, Oct. 24
By Lorene Yue
The number of Chicago-area homes entering some stage of the foreclosure process increased in September, keeping the metropolitan area’s rate at more than twice that of the nation.
A total of 6,177 homes in the eight-county metro area were in the foreclosure process last month, a nearly 5% increase from August, according to a report released by RealtyTrac Inc., which tracks foreclosures. The Chicago area represents the bulk of the 7,431 Illinois homes at some stage of foreclosure.
“Chicago foreclosure activity has increased more than 60% over the last months, boosting the foreclosure rate to an unexpectedly elevated level given the area’s low unemployment rate and above-average home price appreciation,” James Saccacio, CEO of RealtyTrac, said in a statement.
In the Chicago metro area, one household in every 471 are in some stage of foreclosure. That compares with one in 658 households for Illinois and one in 1,030 for the nation.
The rate for the Chicago area, based on the number of homes in the foreclosure process compared to the total number of homes, was also the second-highest among the nation’s top five metro areas, according to RealtyTrac. Only Dallas had a higher rate than metro Chicago, while Los Angeles, Philadelphia and New York all were lower.
Housing experts are concerned about the increase and don’t anticipate a slowdown for the remainder of the year.
“I wouldn’t be surprised if (foreclosure numbers) go higher than that,” said David Rose, director of research for the consumer advocacy group National Training and Information Center in Chicago. “If the second half of the year is anything like the first half, we are going to see a jump.” Mr. Rose’s organization tracked 4,695 foreclosures started in Chicago for the first six months of the year. Last year, the city had 7,575 for the entire year.
He said the housing boom of the late 1990s and early 2000s, when low interest rates and easier access to credit helped stoke a hot home-buying trend, is proving to be problematic for consumers who find themselves financially stretched in the economic slowdown.
“A lot of people were getting into houses they couldn’t afford with teaser rates,” he said. “Then the loans reset and they get into trouble.”
The national trend doesn’t look any better, said Rick Sharga, a vice-president at RealtyTrac.
“Over a trillion dollars is going to readjust in the next 15 months,” he said. “We had almost 850,000 foreclosures last year and we are at 913,000 through September.”
Mr. Sharga predicted that national foreclosures could hits 1.2 million to 1.3 million by the end of the year.
Cook County homes represented the bulk of September foreclosure activity for the metro area, with 4,401 homes entering some stage of the process. September’s figures were up nearly 3% from the previous month and the rate of filings was more than twice the national average.
DuPage County was the only county in the metro area to experience a decline in foreclosure filings. The 369 properties entering any stage of the foreclosure process in September marked an 11% decrease from August.
More Will and Kane county homeowners were in the foreclosure process in September than August, according to RealtyTrac. Will County’s figures were up 17% from the previous month and at rate of nearly four times the national average. Kane County’s numbers were up 16% and at a rate that was nearly three times the national average.
“We’ve got some rough times to look at in Chicago and we will see pockets of housing where the prices are not rising,” Mr. Rose said.