If we count mortgage fraud as one of the key factors in the current economic crisis, then we can congratulate the state of Louisiana in the steps they took to prevent fraud. Louisianas state Office of Financial Institutions (OFI) took action in December of 2007 to join other states in passing legislation to prevent mortgage fraud. Legislators felt that even though there was not a reported high incidence of mortgage fraud, many of Louisianas homeowners were especially vulnerable because of the two recent devastating hurricanes, Katrina and Rita.
OFI examiners sought legislative funding to assist with communication within its agency; analysis of statistics and tracking cases. Educating the public about mortgage fraud, including foreclosure help scams, became a top priority. The OFI also investigates allegations of fraud such as buyers pretending to purchase a house as an owner occupied dwelling when it is in fact an investment property. Appraisal fraud is also actively investigated. Appraisal fraud occurs when property appraisers inflate the value of a property to obtain a larger mortgage, often at the behest of a lender or mortgage broker.
This scam may seem to boost instant equity in the property, but in truth is a huge detriment to homeowners. This type of activity is particularly insidious, because in the event of a market downturn, homeowners often suddenly owe more on their property than the propertys real value. (Thibodeaux, 2007). While researching this paper I became curious as to how foreclosures in Baton Rouge might compare to another city. I chose Hialeah, Florida to compare, because they are similar in size and not too far off in median age. Also, Florida is ranked in the top four states in foreclosure rates.
California, Arizona and Michigan are the other three. As of July, 2007, Baton Rouge had a population of slightly over 227,000 residents; and Hialeah had a population of just over 212,000. Median age groups for both areas was between 30 and 37 years old, so neither is strictly a retirement area. The median household incomes for both areas were nearly identical at just over $32,000. per year. The similarities between these two areas ends there. (Citi Data, 2008). According to Zillow there are 66 foreclosures in Baton Rouge and a whopping 1326 foreclosures in Hialeah.
I chose to use the information from Zillow rather than Realty Trac. Realty Trac displays as foreclosures properties in any degree of foreclosure; while Zillow displays houses as foreclosures after they have been sold at a foreclosure auction. Realty Trac when they display foreclosures includes as foreclosures any property anywhere on the foreclosure timeline. If a homeowner has been served with a Notice of Default or a Lis Pendens, it shows up on Realty Trac as a foreclosure. Some of these properties will not be sold at a foreclosure auction.
There are many things that can happen between the time a homeowner is served with a foreclosure complaint and the auction at the county court house. A homeowner may remedy the foreclosure by paying all past due payments. The property may be sold as a short sale after a homeowner has received the foreclosure complaint. A short sale cures a foreclosure. Similarly, a homeowner may successfully negotiate a mortgage loan modification after having been served with a foreclosure complaint. A loan modification changes the terms of a mortgage loan to make it more affordable for the homeowner.
Lenders have many tools at their disposal to make changes to the terms of the mortgage loan. It is within the lenders power and discretion to lengthen the loan period for the mortgage, say from a 30 year mortgage to a forty year mortgage and adding the missed payments to the end of the loan period. This provides the homeowner with some immediate relief and the lender does not lose. Or a lender has the ability to change the terms of a mortgage from an adjustable rate mortgage to a fixed rate; or simply change the rate to a lower interest rate.
Lenders also have within their power to reduce the principle of the mortgage loan, although lenders are understandably reluctant to do so. (Zillow, 2008). Besides the actual number of foreclosures in Baton Rouge and Hialeah there are also some other striking differences between their respective housing markets. Even though the median household incomes for both areas is nearly identical the median home prices are very different. In Baton Rouge the median home price in 2007 was $142,000. ; and the median home price in Hialeah for the same time period was $245,000.
amounting to over a $100,000 difference. The rate of appreciation in the two housing markets also provides some insight as to why one area is so rife with foreclosures and the other is not. In Baton Rouge the median home price was $93,000 in 2000. The increase to $142,000. in 2007 represents about 5% appreciation per year over seven years. By contrast, Hialeah saw an increase from a median home price in 2000 of $102,000. to more than double over 100% in the same time period, which is around a 20% per year rate of appreciation.
It is small wonder that so many homes in Hialeah have gone to foreclosure auction. (Citi Data, 2008). When I plugged the different principle amounts into a simple mortgage calculator and used an optimistic 6. 5% interest rate, and a 30 year fixed mortgage loan; the results were remarkable. The homeowner in Baton Rouge would pay $897. 54 per month for his $142,000. home; and the homeowner in Hialeah would pay $1,548. 57 for his $245,000. home. Both homeowners are working with nearly identical incomes.
After researching the literature and the data collected for this paper, I wondered whether mortgage fraud played a large role in Hialeah, Floridas foreclosure rate. According to the Federal Bureau of Investigation (FBI) Florida is one of the states where mortgage fraud is most common, and Louisiana is not mentioned in their report. The FBI defines mortgage fraud as the intentional misstatement, misrepresentation, or misstatement by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.
(FBI, 2007). Analysis of available information indicated that mortgage fraud was most concentrated in the north central region of the United States. Data from law enforcement and industry sources were compared and mapped to determine which mortgage fraud states for 2007 were Florida, Georgia, Michigan, California, affected by mortgage fraud according to available sources included Arizona, Connecticut. (FBI, 2007). Mortgage fraud is described as a low-risk, high yield white collar crime.
Individuals in finance related occupations such as mortgage brokers, lenders, and accountants were most likely to engage in mortgage fraud. These perpetrators, since they are familiar with the mortgage loan process are best positioned to exploit the process vulnerabilities. Victims of mortgage fraud may not only include the borrower and the lender, but entire surrounding neighborhoods as well. If foreclosure rates due to high incidence of mortgage fraud, such as artificially high appraisals, the effect is that the surrounding neighborhoods values also begin to decline. (FBI, 2007).
It seems clear that there are a couple of important factors that explain the differences in rates of foreclosures in the two cities examined, Hialeah, Florida and Baton Rouge, Louisiana. First, Louisiana government took steps to prevent mortgage fraud before it ever became rampant. Second, Louisiana enjoyed a relatively modest appreciation in home values during the boom years, home prices never exceeded an amount that a family living within their means could afford. The opposite is true in Florida. In fact, Florida rated number one in the incidence of mortgage fraud in 2006 and 2007.
It is simple enough to imagine that appreciate rates in double digits could not last forever. If the galloping rate of appreciation during the real estate boom years was caused by mortgage fraud then the house of cards was destined to finally collapse. References Citi Data (2008). Baton Rouge and Hialeah. Retrieved December 11, 2008. http://www. city-data. com/city/Baton-Rouge-Louisiana. html http://www. city-data. com/city/Hialeah-Florida. html Daily Report (2008). Baton Rouge ranks near bottom for foreclosure activity Oct. 23, 2008 Retrieved December 10, 2008.
http://www. businessreport. com/archives/daily-report/2008/oct/23/667/ Federal Bureau of Investigation (2007). Mortgage Fraud Report Retrieved December 10, 2008. http://www. fbi. gov/publications/fraud/mortgage_fraud07. htm Thibodeaux, Anna (2007). Buyers Beware. December 17, 2007. Retrieved December 11, 2008 http://www. businessreport. com/news/2007/dec/17/buyers-beware-fnc1/ Zillow (2008). Retrieved December 11, 2008. http://www. zillow. com/homes/map/Hialeah,-Florida_rb/ http://www. zillow. com/homes/map/Baton-Rouge,-Louisiana