The booming mortgage refinance industry has paved for scams. Incidence of mortgage refinancing fraud is on the rise. Every year there is misappropriation of roughly hundreds of millions of dollars; the official figure is unknown and will probably never come out of the Pandora’s Box. There are only few incidents that come to the forefront and there are even worst case scenarios if we take the financial toll into account.
According to reports furnished by the Mortgage Bankers Association, in just a single month (September 2004), as many as 12,100 cases of anomalous financial activities were reported. This is in sharp contrast to 4,220 cases reported in the whole of 2001.
Reports suggest that the main fraudsters are the insiders who take care of mortgage refinance. They may include mortgage refinancing brokers, appraisers, realty agent, bankers etc. Rarely are borrowers involved in such scams. However, during subprime mortgage crisis it was reported that there were many borrowers who had given consent to mortgage brokers to inflate their income so that they qualified for a larger mortgage. These borrowers eventually fell behind on payments and lost their homes in foreclosure.
During the period 2000 to 2004, lenders extended loans for mortgage refinancing of USD$3.8 trillion in 2004 as compared to USD$1 trillion in the year 2000. Studies reveal that between 2000 and 2004, USD$450 billion home equity was cashed out by homeowners and these mortgage refinancing loans had property values that were exaggerated.
Some of the common ways of committing fraud include inflating income levels, forging qualifying documents, increasing the value of the property, enjoying kickbacks to get a deal finalized etc.
Why is the mortgage refinance industry flourishing?
Majority of the homeowners opt for mortgage refinance with different objectives in mind. It may be for the following reasons –
Lower interest rate
It is quite likely that when you first took out the mortgage, you agreed upon the rate of interest that was high. Now that the mortgage rates have nosedived, you want to enjoy lower interest rates. So, you can refinance your mortgage to enjoy lower interest rates and hence lower mortgage payments.
Extend or shorten the loan term
You can either extend or shorten the length of the loan. Many homeowners extend their loan term so that they have to pay less each month. On the other hand, there are many homeowners that shorten the loan term so that they can build up equity faster in the property.
Change from adjustable-rate mortgage to fixed-rate mortgage
Adjustable-rate mortgage will allow you to make lower payments initially but if the rates in the market escalate, so will your payments. Fixed-rate mortgage on the other hand, will allow you to enjoy fixed-rate mortgage throughout the term of the loan. So, many homeowners opt for mortgage refinance to change from ARM to FRM.
Get access to some cash
If there is enough equity in your property, you can free up some of it to get some extra cash that can be used for fulfilling your various financial obligations.
Since mortgage refinancing offers many benefits, homeowners usually opt for this option. But it is unfortunate that the industry is infested with scammers who are nullifying the positive effects of this industry.
