Recent changes that made the Home Affordable Modification Program available to real estate investors could be leading to increased fraud, according to a new government report. As we previously reported on this blog, the Treasury Department expanded HAMP earlier this year to relax qualification requirements and pay servicers and bond investors more for principal reductions. Under the new changes, property investors can seek mortgage modifications under the program as long they intend to rent them out.

However, HAMP does not currently require independent verification that the property is rented out. Rather, mortgage servicers are permitted to rely on the borrower’s certification that he or she intends to rent the property. This could lead to fraud, according to a Special Inspector General of TARP report released late last month.

“This does not go far enough,” SIGTARP wrote in the report. “It is absolutely essential that Treasury establish a vigorous compliance regime related to this expansion of HAMP. Requiring only a self-certification, without a strong compliance and enforcement regime to ensure that the intent is carried out and the property is actually rented, leaves the program vulnerable to risks that TARP funds will pay investors for modifications for mortgages on vacation homes that are not rented.”

According to SIGTARP, a borrower with a vacation home could certify an intent to rent and receive a mortgage modification without ever actually renting out the property. Also, since there are no restrictions, the borrower could rent it out for as little as one week during a five-year modification period.

“Loan servicers cannot know a borrower’s true financial situation until there is a renter, meaning that eligibility decisions may be made in error based on a borrower’s certification of an intent to rent,” according to the report.

To remedy the problem, SIGTARP made the following recommendations:

• The Treasury require a borrower to prove the property is rented at the time of the modification and state under threat of perjury that the occupancy hasn’t changed.
• The Treasury require the borrower to immediately notify a servicer if the property goes vacant for more than three months, and that servicers should report any changes to Treasury in the monthly reports.
• The Treasury halt any payments through HAMP for a property vacant for more than three months.

Source: Housing Wire

Parker Ibrahim & Berg LLC represents national banks, mortgage lenders, mortgage servicers and other financial services companies, applying its knowledge across the full range of litigation, enforcement, transactional and regulatory issues confronting the mortgage banking industry.

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