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Subprime lending has many faces: the first time buyer reaching for a home of his/her own, a speculator riding the crest of rising real estate values, the real estate agent or broker discovering ways to close more deals, a homebuilder to liquidating inventory, Wall Street finding a plethora of new products, and more and more and more. All this based on credit standards that reached beyond credit guidelines proven safe over years of experience. In many ways the artificial exuberance of the dot com boom/bust is being replayed.
The scope of this crisis is so broad it has countries loosing substantial percentages of their reserves, world-class corporations taking multibillion dollar losses and homeowners losing their largest investment in record numbers not to mention a national recession. When is this exactly going to stop? The answer has more to do with public confidence and jobs than litigation but the Courts will play a role and that is the opportunity for the financial expert witness.
In the last six months I have consulted on a number of exotic mortgage litigations including subprime loans, applicant/borrower identity theft, borrower fraud and loan officer fraud. There is no one person or thing to blame. The following are typical challenges a consulting expert will face during the mortgage issues.
Subprime lending, particularly Stated loans, where the lender accepts what the borrower claims as income, offers a variety of opportunities for borrowers and loan agents alike to obtain loan approvals that a more traditional underwriting would have denied. How and by whom the information or misinformation on the application was crafted is but one test for the expert. Others are: was the information reasonable, was there adequate supervision by the supervising loan broker, was the lender reviewing the loan package, was the reasonableness of the applicant’s information tested and numerous other issues in the underwriting, documentation, closing, servicing and securitization areas.
Even identity theft is finding its way into the mortgage crisis. In a recent case a creative agent was processing two loans simultaneously for two different borrowers on two different properties. One applicant had superb credit, and the other did not have any credit. The first applicant had good income; the other hardly enough to make payments. The agent placed the applications with two separate lenders but using the name on the credit worthy borrower on both. Both loans got approval, and the lenders who noticed the multiple requests for credit reports did not think anything of it, since an outside loan agent had submitted them. This was only discovered after the borrower with good credit wanted an equity loan and was turned down because she did not disclose all of her credit commitments.
Another hidden opportunity for the expert is with credit analysis by FICO Score. In a recent assignment an applicant took his lenders to court for reporting his series loans to the credit bureaus. The litigant claimed the lenders reported his equity line and credit card accounts incorrectly since the information reported made his credit score drop. A study of the multiple credit reports in evidence showed that the credit score did drop in spite of the borrower making every payent in on time. The reports also showed account balances above the limit, and over half of credit availability being utilized per account. Both are major factors in harming one’s credit score.
Residential mortgage lending is document intense. The numerous disclosures, valuations,and security signings can confuse the borrower as often as inform him or her. Miscommunications happen and often litigation comes next. The plaintiffs in a recent case swore they were to have a fixed rate loan despite signing documents titled ADJUSTABLE RATE MORTGAGE. They claimed they did not ask to pay off their Equity Loan even though their signatures were on the letter confirming the payoff.
As this economic stumper continues, the need for qualified experts who can explain in simple terms the complexity of financial regulation process will be sought after.
The author is a legal Banking Consultant Expert Witness who has taken cases and provided expert witness testimony through the expert witness services company, Consolidated Consultants. He has a background in banking, mortgage banking, credit quality, and commercial credit. For over twenty years he has served as an expert consultant and/or witness. Find him and many other technical expert witnesses listed with full C.V.’s. This is a free service.