It depends largely on who is doing the audit. Numerous studies and reports confirm that over 80% of mortgages have legal violations related to the origin of the loan. Our experience in reviewing hundreds of files confirms this. One of the biggest problems, however, is that unscrupulous Mortgage Audit Companies produce "audits" that will not help the homeowner. These companies often use a generic software program that just looks at Truth In Lending Act (TILA) violations and nothing more. Most TILA violations have a 3 year Statute of Limitations. So, if the mortgage is more than 3 years old, the audit will not help even if violations are exposed. Note: If the mortgage is less than 3 years old, TILA violations can produce significant remedies which may include rescission (cancellation) of the loan.
We have found that the most powerful audit requires a complete manual review of ALL mortgage documents beginning with the initial application through closing. Few companies actually perform this type of in-depth forensic audit properly. One of the most common violations we find is fraud. The fraud is frequently in the form of inflated income, assets, or appraised value. We also find that the homeowner was unaware of the fraud because it was the loan officer who falsified the data in order to get the loan closed and receive his / her commission. Certain types of fraud have no Statutes of Limitations and are therefore enforceable even if the mortgage is more than 3 years old. This fraud often requires "assistance" from the loan processor, appraiser, and / or underwriter which duties include verifications of information contained in the application and supporting documents.
For example, we recently audited a file for a client that earned just over $ 4000 per month. They were applying for a $ 175,000 mortgage for the purchase of a home. Their debt-to-income (DTI) ratio was over 60% so the loan should have been denied. The borrower had recently graduated from college and had less than a year on his new job. He also had numerous student loans which were deferred while he was in school, but the payments would begin in just a few months. Rather than deny the loan (or instruct the borrower to find a less expensive property), the loan officer unlawfully inflated the borrower's income to $ 7500 per month. We know this because we reviewed copies of the initial loan application which showed the $ 4000 income. This was confirmed by copies of paystubs, W-2 forms, and Federal Tax Returns. The closing package told a different story. A revised "Residential Loan Application" was prepared by the lender which increased the borrowers' income to $ 7500 per month. There is only one place on the "Application" that reveals the borrower's income. It is on Page 2 which does not require a signature from the borrower. The borrower was shocked to learn that his income was stated as $ 7500. He never saw this amount until we pointed it out. Now that his student loan payments are due, he is unable to afford the mortgage payment and is facing foreclosure as a result. A loan modification is now being processed to lower his payments.
In another case, a borrower applied for a 30 year fixed conventional mortgage in 2006. He was well qualified and there should have been no problem getting this loan as requested. The loan officer, however, spoke the borrower into accepting a loan with a Balloon Payment which was due in 5 years. The rate was slightly better (.375%) which meant that the monthly mortgage payment was about $ 43 less per month. The borrower likened the lower payment, but was concerned about the Balloon Payment. The loan officer improperly persuaded the homeowner to move forward with the Balloon Note in spite of the borrowers concerns. The loan officer assured him that he would be able to refinance the loan before the Balloon Note was due and that he should take advantage of the $ 43 monthly savings. Why was the loan officer so insistent that he accept the Balloon Note? There are 2 reasons; first, the Balloon Note likely produced a larger commission for himself. Secondly, he was positioning himself to refinance the loan in order to earn another commission when the Balloon Note was due (a practice known as "Churning" or "Equity Stripping"). The loan officer was negligent because he had no way of knowing whether the borrower would qualify for the refinance as planned. Guess what … his Balloon Note came due in 2011 and he was not able to refinance because the property value had declined by about 50%. His lender refused to modify his loan and he was facing foreclosure as a result. The lender "Breached their Fiduciary Duty" by putting the Borrower in harm's way.
If you look at the numbers closely, you will see that theorrower really would not have saved any money even if the property value had not declined and he refinanced as the loan officer suggested. The $ 43 monthly "savings" mounted to $ 2580 over the 5 years before the Note matured. ($ 43 times 60 months equals $ 2580). But, the closing costs to refinance the loan would probably have been at least that much which would negate any real savings. This homeowner did nothing wrong, but he now has damaged credit (the note is delinquent because he could not refinance or tender the Balloon Note of almost $ 200,000). More importantly, he is worried sick that he will lose his home and not be able to buy another. The good news is that his attorney is confident that he will get his loan modified greatly due to the findings of our full manual forensic audit. This will likely result in the reamortization of the loan with an interest rate that is lower than he may have obtained through a refinance. There will be no closing costs and he expects a much lower payment as a result.
There are, of course, other types of mortgage audits for other purposes. Securitization Audits examine wherever the lender has the proper "standing" to foreclose. Another type can identify Foreclosure Procedure Violations (such as robo-signaling).
These are just a few examples of how homeowners have been victimized by predatory lenders. If you are considering a forensic mortgage audit, we suggest that you only deal with a reputable and qualified company who does a "Full Manual Audit."