The real estate market has taken a downturn during the past few months and some are concerned that a recession might be imminent. During a recession, it is important for mortgage lenders to protect themselves because some people might try to take advantage of the situation. By understanding some of the common issues that might arise, mortgage lenders can be prepared.
Applicants Falsify Information
One of the major issues that mortgage lenders face is applicants falsifying information on a mortgage application. Some of the common pieces of information that applicants might embellish (or outright lie) include:
- The amount of money they make
- How long they have been with a certain company or employer
- The amount of debt they currently owe
- The assets they currently have
It is important for lenders to verify this information because it is a reflection of the risk the lender might take on with that individual as a client. In order to avoid lending to someone who isn’t qualified, it is important to follow-up with employers, banks, and investment accounts to ensure the information is accurate.
In addition, lenders need to take steps to prosecute those who perpetrate mortgage fraud. Under federal law, those who commit mortgage fraud could face a fine of up to $1 million in addition to possible prison time, particularly in states where mortgage fraud is a felony.
Not Protecting Loans
The biggest risk that lenders assume when they provide mortgages is mortgage default. Even with the best vetting processes, there is always a chance that someone might default on a loan. They might face a large medical expense or they could lose their job. Sometimes, the two are tied together.
For this reason, mortgage lenders need to make sure they properly protect their loans. There are several options for lenders to protect their mortgages. These include:
- Forcing Borrower PMI: One option is to force borrowers to pay for private mortgage insurance. This is one of the basic ways that lenders protect themselves. While this does protect banks against default, it can make it harder to find borrowers, as they will not like the added expense. In addition, borrowers might lapse on their payments, exposing lenders to risk once again.
- Self-Insuring: Another option is that lenders might be interested in purchasing insurance themselves. This eliminates the hassle of tracking borrower PMI to make sure it doesn’t lapse; however, it creates an additional overhead expense.
- Blanket LSI or VSI: This is either called Lender’s or Vendor’s Single Interest. This eliminates the negative contract with borrowers related to insurance lapses and fully protects lender portfolios. It also eliminates the hassle of insurance tracking.
These are a few of the ways that lenders can protect their loans against the risk of default. When a recession strikes, it is important for lenders to protect their assets appropriately.
Quality Control and Compliance Is Important
It is critical for mortgage lenders to have strong quality control and compliance services. If there is a suspected case of mortgage fraud, it must be investigated appropriately. All lenders must take appropriate measures to protect themselves, their assets, and their customers.