Mortgage Insurance Battles May Lie Ahead
Thursday, November 06, 2008
Banks and mortgage companies facing a rising tide of mortgage delinquencies may begin looking to their insurance providers to offset a large portion of their losses. But mortgage insurers, hit with a flood of claims, are casting a cold eye at the fraudulent loan practices and underwriting that ran rampant as the housing bubble inflated -- and are rescinding coverage when they find fraud in the applications.
Vineet Bhatia, a partner at Susman Godfrey LLP and member of the firm's Financial Fraud Task Force, notes that an insurer can rescind a policy if it can demonstrate that the policy was issued under false premises, i.e. if the policyholder materially misrepresented its business, its risks, or its underwriting practices. Unfortunately, at the peak of the housing boom, fraudulent practices were not uncommon.
In September, DSNews.com reported on a new technology from a California-based company that performs a comprehensive investigation of mortgage documentation. Based on loan audits the company had conducted at that time, it found that over 80 percent of adjustable-rate mortgages (ARMs) revealed major TILA (Truth in Lending Act) and RESPA (Real Estate Settlement Procedures Act) predatory lending practices and real estate/mortgage fraud violations.
According to Bhatia, grounds for denial or cancellation cited by mortgage insurers include:
- Fraudulent underwriting practices: Loan originators and underwriters approved loans using grossly inflated statements of borrower income and assets, fraudulent employment and occupancy information, and false debt-to-income ratios.
- Misrepresentation of loan quality: Banks and other entities created pools of bad loans, and then shifted losses to mortgage insurers by lying about the quality of the loans.
- Bogus appraisals: Banks and other originators used sham appraisers to inflate property valuations that were used to underwrite increasingly risky loans. Appraisers who refused to participate in the fraud were blacklisted by banks.
- Concealment of underwriting exceptions: Banks and other entities claimed that the loans they sought to insure were originated according to established underwriting guidelines, even though they knew that the loans failed to meet underwriting guidelines.
“No insurer can afford to underwrite systemic, industry-wide fraud,” Bhatia said. “Rescinding policies that were procured by fraud will become more common as mortgage insurers take steps to protect their rights under mortgage insurance policies.”
Vineet Bhatia, a partner at Susman Godfrey LLP and member of the firm's Financial Fraud Task Force, notes that an insurer can rescind a policy if it can demonstrate that the policy was issued under false premises, i.e. if the policyholder materially misrepresented its business, its risks, or its underwriting practices. Unfortunately, at the peak of the housing boom, fraudulent practices were not uncommon.
In September, DSNews.com reported on a new technology from a California-based company that performs a comprehensive investigation of mortgage documentation. Based on loan audits the company had conducted at that time, it found that over 80 percent of adjustable-rate mortgages (ARMs) revealed major TILA (Truth in Lending Act) and RESPA (Real Estate Settlement Procedures Act) predatory lending practices and real estate/mortgage fraud violations.
According to Bhatia, grounds for denial or cancellation cited by mortgage insurers include:
- Fraudulent underwriting practices: Loan originators and underwriters approved loans using grossly inflated statements of borrower income and assets, fraudulent employment and occupancy information, and false debt-to-income ratios.
- Misrepresentation of loan quality: Banks and other entities created pools of bad loans, and then shifted losses to mortgage insurers by lying about the quality of the loans.
- Bogus appraisals: Banks and other originators used sham appraisers to inflate property valuations that were used to underwrite increasingly risky loans. Appraisers who refused to participate in the fraud were blacklisted by banks.
- Concealment of underwriting exceptions: Banks and other entities claimed that the loans they sought to insure were originated according to established underwriting guidelines, even though they knew that the loans failed to meet underwriting guidelines.
“No insurer can afford to underwrite systemic, industry-wide fraud,” Bhatia said. “Rescinding policies that were procured by fraud will become more common as mortgage insurers take steps to protect their rights under mortgage insurance policies.”
