February 20, 2018

The ease of applying for a home loan

I’m currently in the process of purchasing a new house. I called up a well-known national bank and said I wanted a mortgage. In the space of 30 minutes, I was pre-approved, had my rates locked in, and so forth. Pretty much the only identifying information I had to provide was the employer, salary, and social security number for myself and my wife, as well as some basic stats on our investment portfolio. Interestingly, the agent said that for people in my situation (sterling credit, paying more than 20% of the down payment out of our own pocket), they believe I’m highly unlikely to ever default on the loan. As a result, they do not need me to go the trouble of documenting my income or assets beyond what I told them over the phone. They’ll take my word for it.

(In an earlier post, I discussed my name and social security number having been stolen from where they had been kept in Ohio. Ohio gave me a free subscription to Debix, which claims to be able to intercept requests to read my credit report, calling my cell phone to ask for my permission. Why not? I signed up. Well, my cell phone never buzzed with any sort of call from Debix. Their service, whatever it does, had no effect here.)

Obviously, there’s a lot more to finalizing a loan and completing the purchase of a home than there is to getting approved for a loan and locking a rate. Nonetheless, it’s striking how little personal information I had to divulge to get this far into the game. Could somebody who knew my social security number use this mechanism to borrow money against my good credit and run away to a Carribean island with the proceeds? I would have to hope that there’s some kind of mechanism further down the pipeline to catch such fraud, but it’s not too hard to imagine ways to game this system, given what I’ve observed so far.

Needless to say, once this home purchase is complete, I’ll be freezing my credit report. Let’s just hope the freezing mechanism is more useful than Debix’s notification system.

(Sidebar: an $18 charge appeared on my credit card last month for a car rental agency that I’ve never used, claiming to have a “swipe” of my credit card. I challenged it, so now the anti-fraud division is allegedly attempting to recover the signed charge slip from the car rental agency. The mortgage agent, mentioned above, saw a note in my credit report on this and asked me if I had “challenged my bank”. I explained the circumstances and all was well. However, it’s interesting to note that the “challenge”, as it apparently appears in my credit report, doesn’t have any indication as to what’s being challenged or how significant it might be. Again, the agent basically took my word for it.)

Comments

  1. I just refinanced and they made it easy as well, but at closing (which I did at home) I had to have a Notary Public notarize the forms I was signing. I guess that’s not too hard to fake, but it does add another step in the process.

  2. One reason why banks and mortgage brokers don’t investigate borrowers too carefully is that it’s hard to make money off a fraudulent mortgage. After all, the collateral isn’t going anywhere, and as long as the bank can repossess it, the only thing a con artist can get out of the fraud is a few months’ free rent until the bank forecloses. There are a lot easier and more legal ways to get that.

    (In contrast, they’re likely to look into the purchased house very carefully, because if that’s not what it’s claimed to be, then not only does the bank stand to lose a bundle, but the bank’s losses go directly into the seller’s pocket–making the incentive to defraud the bank much higher.)

  3. Make sure you contact the AG’s office and report to them your experiences with Debix. I’m sure they’d be interested to hear about it since the state is footing the bill.

  4. Do you *know* they pulled a credit report on you? :^)

    If you think your experience is weird, consider the phenomenon of “no doc” and “stated income” loans. Basically, it’s the same as what you did, but for people who — for whatever reason — do not want to document their earnings or assets (or those of the person who they are claiming to be!).

    Your bank is probably right — you aren’t going to default. Whether these observations also apply to those electing the “no doc” or “stated income” loans is debatable. I haven’t checked (heh) but I bet these “liar’s loans” higher default risk are not compensated for by their higher interest rates.

  5. Sidebar to your sidebar: my credit card numbers were put on a card by somebody who went on a shopping spree in another state; the transactions were at locations where a physical card had to be present. An initial “test” run of the numbers was done at an online merchant before the physical card was created, which would make me wonder if your $18 charge is a hint of more to come.

    I hope that you’ll follow up on whether you ever get a cellphone page from Debix.

  6. Lucky Homeowner says:

    I gave even less information than you did, and my credit report was very inaccurate. Turns out it was inaccurate in my favor (a lucky break that will probably never happen again).

    I never gave any employment information beyond “day laborer,” was not asked for any bank or tax records at all, only put 5% down, and I never showed any form of identification whatsoever. I gave the loan officer (from one of the top 5 mortgage companies) my name, SS#, D.O.B., and that was that. I even did it all over the phone or via FedEx- I have never met her!

    My 30-year loan was locked in at under 6% and I have to pay PMI due to the low down payment, but I was moving in within 35 days of seeing the For Sale sign and I was a 32 year old trim carpenter at the time, picking up work wherever I could find it as I liked to wander a lot and take the day off if I felt like it.

    Here’s the deal: I am a “junior,” with the exact same name as my father except for that “jr” at the end. When I was told my credit score, which I had never bothered to look up, I was amazed… Even I knew I wasn’t THAT reliable (somewhere around 845)! Well, his score and mine were combined on my report, and he was a mid-70’s retired CEO who had never been late with a payment, much less defaulted on anything.

    I didn’t say anything about my report, mainly because I didn’t really understand the whole credit thing at the time (as if I do now…ha!), but my gut feeling was to keep quiet and let it play out. For what it’s worth, my father lives on the other side of the country, had his own mortgage to pay, and has never even visited the state I bought my house in. If I had not actually been his son, it would not have made any difference so long as I spelled the name right and connected it to the right SS#, which was really mine, and the D.O.B which was also reported accurately.

    I’m still living in the house, and am still wondering why everyone with decent credit hasn’t had their identity stolen yet. My mortgage and other debts have never affected his score, so I didn’t even accidentally “borrow” his credit; I guess I just fell through the cracks this time. It’s the only time life has EVER been unfair… in my favor!

  7. However, it’s interesting to note that the “challenge”, as it apparently appears in my credit report, doesn’t have any indication as to what’s being challenged or how significant it might be. Again, the agent basically took my word for it.

    It is possible that the details of the challenge were in the version of the credit report that the creditor sees. By asking the open ended question (describe the details of the challenge) rather than a closed question (“I see you are challenging the charge from a car rental company, true?”), they have more assurance that the person on the phone with them is the actual person represented by the credit report.

  8. At a talk yesterday by Chris Hoofnagle (Berkeley), he showed data that in 19% of cases, even if there is a fraud alert that specifies that they have to call a cell phone or ask for a password (token) from the applicant, the credit report requestor often doesn’t honor this. A freeze is a good idea… you just have to “thaw” your credit within some amount of time (15 minutes to hours) before you can apply for something requiring a credit check.

  9. Dan,

    A bank is as free to ignore a freeze as they are to ignore a fraud alert. Poor process on the bank’s part is outside all of our control.

    While the bank didn’t invoke Debix (and should have), you’d be protected under FACTA against an ID thief who did this, because Debix would have no record of the bank ever trying to contact you. They’d have a high burden of proof in trying to recover money after their sloppy processes are documented.

    I’m surprised you’re not naming the bank who is failing, but are naming Debix.

  10. Adam: The blame truly rests with the credit reporting companies, who should be treating things like freezes and whatnot as mandatory rather than as an advisory to the organization pulling up the credit report. That said, if you’re right, then the bank is truly at fault, given the present system. The bank in question is Merrill Lynch. Go figure.

    Dan Simon: I think you’re underestimating the degree to which a bad loan could be converted to profit. Example 1: say you own a tear-down property and a colluding buyer purchases it as if it were a mansion, borrowing far more than the property’s value. Example 2: say you get a home improvement loan and you’re not the actual home owner. It’s easy to go on. If the bank never bothers to do basic investigation of the claimed facts, they’d be trivially vulnerable to fraud. (Maybe they do all this due diligence behind the scenes, but if they don’t…)

  11. Dan,

    There are interesting ‘logic of collective action’ issues along with switching costs issues which currently dominate the way America chooses to regulate credit agencies and their customers.

    Nominally, freezes prevent anyone from getting new access to your records, but records are often widely distributed and cached. They may have had details about you from a pre-screen report when they were considering marketing to you. A bank may well be able to get your credit score without seeing your credit report. It’s hard to say precisely what happened–there’s a lot of obscurity in what we as consumers see.

    It may help to think of the credit agencies as employing hacker-esque attorneys to enable them to do what they want while complying with the letter of the law.

  12. I read over the documents they sent me, and it’s at least somewhat better than I feared. There are a number of additional steps listed that will occur before the loan closes. This one seems to have been a side-effect of signing up with Debix:

    “An Initial Fraud Alert has been identified on the credit report for Dan S Wallach; Mortgage Services is required to take steps to verify your identity.”

    We’ll have to see what those steps end up meaning in practice.

  13. Interesting. They may consider that they can clear the fraud alert by checking your photo id as part of the closing process. Given that they do that anyway, they may be cost-optimizing by claiming that’s enough. I’ll be interested to hear what happens.

    And good luck with the house buying process! 🙂

  14. Wait until you see the final documentation that needs to be signed and notarized.

    At this point, the exposure to the bank has is the few hundred dollars (retail; probably significantly less for them) in doc preparation for the rate lock–a minor amount, especially if you’re a current customer of theirs.

    Approving someone for a loan when they are explicitly not going to have to pay PMI (i.e., when the loan itself will be for no more than 80% LTV) and they have a good credit score (which they clearly accessed) is a no-brainer.

    The remaining obstacles (house appraisal, inspection) are all greater risks to you–they aren’t going to sink any more cost in until you actually close, and negative information may impact your loan amount (likely not terms, though it has been known to happen).

  15. Example 1: say you own a tear-down property and a colluding buyer purchases it as if it were a mansion, borrowing far more than the property’s value. Example 2: say you get a home improvement loan and you’re not the actual home owner.

    Example 1 is exactly the case I described in my parenthetical remark: the lender does have to investigate the collateral property very carefully, to ensure that the current owner can’t make off with uncollateralized loaned cash.

    Example 2 is a variation: again, the lender has to investigate the collateral carefully to make sure that it can actually be seized by the bank in the event of a default. In the case of a home improvement loan, that includes making sure that the borrower can actually commit the home as collateral. I believe, though, that conventional mortgaged purchases are structured such that the lender’s right to seize the collateral property is protected regardless of the buyer’s deceptions. And as long as the lender can grab back something of value equivalent to its loan, it’s pretty well protected from fraud.

  16. My wife and I are about to close on our first home purchase, and while our experience has been different, it has also been perplexing and infuriating to the analytical control addict (aka myself).

    What we experienced is that there seem to be quite a few laws, at least in Texas, which mandate that the lender disclose certain estimates of the loan amount and closing costs within 3 days of first contact, or any change to those estimates. This sounds like a great idea, designed to keep the buyer informed about the loan. The problem is that this necessitates so much paperwork that at least in our case, they left other information out (basic flow chart description of how the process works, real information about different loan types, etc), saying “we’ll figure that out later” or “don’t worry about that”.

    As a first time home buyer, all the government mandated pamphlets they give you explain the dangers of ARMs, but NONE, not a single paper even attempted to explain the process that one goes through between applying for a loan and closing on the property. The result is that we are forced to trust in people we have no prior relationship with who are saying “it will be fine” but aren’t explaining why it will be fine. We have no easy way of verifying what steps need to happen, or what steps have been done, we are completely out in the cold. If I were buying a root beer float at a restaurant from a waitress I had just met, I’m okay with trusting her. But I’m not, this is the single largest purchase and financial decision which my wife and I have made, and we feel like a lapdog being drug around by the neck.

    Ultimately I have to conclude that the loan and home purchasing process is typically so complex and variable that the people in the industry assume no buyer wants to invest the time to understand what is actually happening. This means that it works great for people who really don’t care how something is done, they just want someone else to do it, and they will yell at them if it doesn’t get done. Unfortunately I’m not that type of person. I want to know what is going on now, what the next ten steps are, and what the three most likely problems will be over the next week.

    The result is that I have been a nervous wreck for the last month and a half, and I have less trust in the people we’re ‘trusting’ now than I did when I first met them. That will likely translate to us choosing a whole new slew of people to work with for our next home transaction, starting the same grueling cycle all over again.

  17. Carlos Gomez says:

    In the province of Ontario, Canada, the legal landscape until recently has been skewed such that in the case of a mortgage fraud, the lenders have precedence over the original homeowners.

    the following CBC article describes how easy it is to perpetrate the fraud.

    http://www.cbc.ca/consumers/market/files/scams/real_estate/

  18. There have a few well documented reports in the Ontario media about people who have been able to somehow get second mortgages on homes that they didn’t even own.
    The big thing to watch for in this scam is no mail. They steal some id by doing a change of mail request at the post office. That gets the ball rolling.

  19. As a former mortgage loan officer, I recognized many sales tactics in the previous posts and have a few tidbits of advice that will hopefully prove useful. It sounds like you are in store for a fairly smooth transaction as it can vary from situation to situation and I hope I can enlighten those of you that seem to be in doubt regarding the whole process.

    As far as the credit monitoring portion, putting FACTA alerts on your credit actually increases the amount of documentation needed to COMPLETE, not initiate (ie the credit pull) the transaction. Some of the lenders I worked with would require you to go to your SSA office (with 2 forms of ID) to get a SSN confirmation letter basically stating that you are you and your SSN is yours. In other words, you have to activate your social. 🙂 You may also be asked to send a faxed copy of your SSN card along with your DL/ID to comply with Patriot Act requirements.

    Since the bank is required to verify your identity, if there are numbers on your credit report where you can be contacted, you can definitely expect a call before the transaction is through (on a quick side note, I sincerely doubt they will overlook this step, as some have posted, if it is indeed a large bank simply due to the liability issues incurred in being negligent). I assume that since you approved the credit pull, either verbally or through a consent form of some kind, it was not necessary to ask your permission as they likely already had it.

    As far as the finance scenario, since you have “sterling” credit (that can relative from lender to lender), you will likely have some options at your disposal since you qualify for different loan programs. No doc or low-doc loans are not always the best options and I encourage you to consult your loan officer to see what else is out there. As with anything in life there is always a caveat and with no and low doc loans the caveat is that you sacrifice your rate for an easy transaction. Banks might especially be tempted to use this as a sales tactic as clients with good credit are the most likely to balk since you you have you options as mentioned.

    As I mentioned, there is a good chance you may be able to walk away with an ever better loan than what is offered if you are willing to do a little work. While the bank is very sure you will not default, they would be even more sure if you were able to sate their well-founded anxiety with stated income loans. If you can provide the documentation to prove the nice figures on the loan application, you are typically considered lower risk, and woulden’t ya know it, you get a lower rate too! The reason the bank or the loan officer may be pushing the no doc loan is simply to get you closed before you close with someone else, which brings me to another bit of advice.

    ALWAYS SHOP AROUND – there is little harm in doing so if done carefully. Many people are under the impression that EVERY credit pull brings down your credit scores when this is actually a myth. Credit bureaus allow for reasonable shopping without detrimenting your credit by allowing you a window of at least 14 days during which any mortgage-related inquiries count as one for credit scoring purposes. You can read more and confirm what I mentioned regarding credit inquiries at :

    http://www.myfico.com/CreditEducation/CreditInquiries.aspx

    I have worked for small brokerage firms and I have worked for direct lenders with billion dollar credit lines and frankly, I recommend the brokerage firms for the following reason. In mortgage lending, the fees associated with the making of the loan are often left at the discretion of the loan officer. This goes for big name direct lenders as well little broker shops that can be one-person operations. Since all of the big mortgage companies have a wholesale division that sells to brokerages, you may get a better loan by dealing with a smaller, nimbler company that can keep overhead down and not have to charge as much as a result. Brokerages can be especially useful when dealing with unique lending situations. They usually have a portfolio of lenders they work with and thus, a portfolio of options as opposed to the big fat bank that has only their product at only their rates and that’s it. Some direct lenders even have the option of brokering out and getting you a better deal elsewhere but simply wont to keep your loan in their portfolio, ultimately shafting you, the consumer, because you did not weigh your options.

    The caveat to working with a brokerage is that because these are smaller companies without inflated advertising budgets, it can sometimes be difficult in finding a good brokerage. This is a great time to bring the subject of home purchase up in casual conversation. Many times friends or family can help (to the degree you feel comnfortable discussing your affairs) in recommending someone they have worked with or someone they know. For example, my sister made the mistake of not consulting me prior to a refinance and I could have done the loan for half the cost with a better rate (at a tidy profit for myself as well). She got a 6.25% and paid 1.5 points when I coould have gotten her a 6.00% with .75 points up front.

    You definitely do not want to give your information to just anyone as I have horror stories (both from direct lenders and brokers) such as negliegence by having people’s documentation piled in folders without any thought given to information security, convicted felons (convicted of no less than FRAUD) handling said information and so on. Again, this went on at both large and small institutions from my experience as well as accounted by associates of mine in the field at other companies.

    Whatever you do, NEVER FILL OUT AN ONLINE REQUEST FOR HOME LOAN QUOTES. Even if the company, well-meaning and upright though it may be, claims that only a small number of lenders will get the information, lenders often resell the information (usually on leads they dont close), resulting in incessant phone calls at all hours and some lenders even disregard legal business hours resulting in calls when you are trying to sleep.

    Another point to consider is to not be afraid of paying a point up front for your loan (sorry for the pun – I couldn’t resist). Banks have been in existence since currency has been in use and you will not walk away with anything for free. So-called “free loans” often carry an artificially high rate, on which the broker or the loan officer makes their commission, known as a yield spread premium, which is paid by the bank. To simplify it, the bank pays the loan officer a bonus for selling you x + .5% when you actually qualified for x. If you plan on living in your home for a long time (5 years plus) you may want to consider paying a point or even buying down the rate. There are plenty of calculators available online that will give you figures on what your long term savings will be if you buy your rate down and to what extent. If you live in the house for just a short-term then avoiding closing costs with a slightly higher rate might be the best way to go in order to conserve equity.

    A good loan officer or broker will have no problem explaining the process to you so that you feel comfortable at every step of the way. Not to beat a dead horse, but you usually have to pay good people to work for you, so again, dont be scared of a point up-front. It should raise a huge red flag when your loan officer tells you not worry about any portion of the homebuying process. This is a sales tactic that is taught by managers in the hope that you will forget about whatever it was that concerned you and make the transaction close a whole lot faster (with fewer objections). Insist on not simply knowing but understanding the transaction, or at least the portion relevant to your end of the process as you would likely get bored to tears listening abouts margins and indexes and so on.

    If necessary, remind the loan officer that by offering you great service at a fair price, you will be inclined to recommend him/her to a friend (thus doubling their commission) and you would actually do a friend a great service in doing so. I am sure that you would appreciate a good friend’s sterling recommendation right about now if it meant no headaches and a very competitive offer.

    I apologize if I went on too long but given the fact that these are transactions involving hundreds of thousands of (insert your currency here), I thought the subject would merit the lengthy discussion in the hope that someone might benefit from my long-winded post and save precious time, money and undue stress.

    I will also be happy to answer any questions anyone might have about this topic. I guess freedom to tinker extends into finances as well.