If a lender does not detect borrower fraud, it is because the lender is not trying, perhaps because the lender is itself engaging in fraudulent activities.[/quote]
Absolutely so, analyst. But here comes the legal question: if borrowers signed fraudulent documents (with the full or partial complicity of other parties, like mortgage brokers, etc), are they liable? I’d say they are. I’m not an attorney, but I think fine print is there for a reason. They could claim that they were encouraged to file a false application (I’m sure it happened a lot). But I don’t think that claim would stand up in court. The “rep and warranty” business is a very serious legal business, the whole secondary market depends on it. No bank would buy a loan without a “rep and warranty”. They need to have someone to sue if fraud turns up. And the lawsuits could come down the chain all the way to the person who signed on the application (the borrower).
I perfectly understand and agree with your point about the non-recourse provisions of the law, but I really think it doesn’t cover fraud. If I go to H&R Block and collude with my preparer to file a fraudulent tax return, I don’t get a free pass just because the preparer cajoled me into it.[/quote]
My original post did not speak to the question of intentional misstatements. Absent intentional misstatements, everything stands as written.
Now let’s examine the case of intentional misstatements. It is not plausible to me that borrowers in any significant numbers can successfully misrepresent their financial capabilities if the lender seriously attempts to verify them. So I do not accept the concept of one-sided misrepresentation by the borrower. For all lenders where misrepresentation is a recurring theme, I believe there was material participation by the lender.
I would further predict that, since borrowers know that any misrepresentations can be easily discovered by the lender, joint (lender and borrower) misrepresentation was instigated by the lender, not the borrower, in the vast majority of cases.
If there is joint misrepresentation, I would expect that the lender (co-conspirator) has no case against the borrower. So as between lender and borrower, the effect of the non-recourse laws would not be altered, and decisions about the progression of events leading to a foreclosure sale by auction would be unaffected.
The difficulty of ultimately determining who misrepresented what to whom is the reason, I believe, why the non-recourse laws were written, to avoid the need to ever debate the matter with respect to owner-occupants. Just do a proper appraisal and maintain a proper loan-to-value ratio, and there will never be a problem.
The failure of the “professionals” to do their jobs, and the lax regulation environment which allowed them to operate in that manner, are the causes of the problem that people should be focused on. Focusing on the greedy owner-occupant-borrowers detracts from the time spent discussing the regulatory rules which need to be imposed on the people who work every day in businesses related to owner-occupied real estate.
