The real estate market began to free fall in 2007-2008 in large part due to poor lending practices spurned by deregulation in the financial industry. This led to lenders giving loans to people who shouldn’t have had them because they couldn’t sustain them. There is plenty of blame to go around when it comes to why it became the market crashing catalyst. Political agendas, real estate (un)professionals, Wall Street money grabs, etc.
One thing that I saw a lot of back then was “No Doc” or “Low Doc” loans. Ultimately, the lender would ask the borrower about income and assets but did not require documentation of that information while qualifying for the loan. Well, that was really just asking the borrower to lie to the lender and saying “Don’t worry, nobody will check to see if you are telling the truth.” In effect the mortgage industry was condoning mortgage fraud.
Well, fast forward to 2010, The Wall Street Reform and Consumer Protection Act (aka Dodd-Frank) is signed into law and the mortgage industry gets a well needed overhaul. As with any pendulum swing after a wild swing to one side a wide swing in the other direction is to follow. Consumer demand for mortgage money still remained although with the recession in full swing at that point the market had a slow turn around.
I know, many of you already know all of this and more as this recap is just to point out that where there is a demand in the marketplace it will be met one way or the other. You can still get limited documentation loans but there has to be evidenced an “Ability-to-Repay” within the loan package to a certain extent to get them and they are far less available overall. This is a good thing… but as I said where there is a demand in the marketplace it will get met one way or another.
Of the 6 different types of mortgage fraud predominately increasing as recently identified by CoreLogic, a financial and real estate data firm, income fraud is number one increasing by as much as 22%. Getting all of the documentation to put a solid mortgage package together can be a significant challenge for borrowers who are self employed, run businesses, investors, or have sources of income outside the traditional W2’ed job. If this is you, start getting your documentation in order right away, be patient, and know that you may need to have everything updated before closing. While this can be a pain in the back side, safeguarding our mortgage process is worth the effort.
About one out of every 109 mortgage applications has been found to contain false or misleading information, according to real estate data firm CoreLogic.