Robert Maddox Featured in Managing REO

Servicing Shops Tackle Origination Fraud, Short Sale Scams

Media Mention

Robert Maddox, a partner at Bradley Arant Boult Cummings LLP, spoke at the “Loan Defaults – The New Fraud Dream” session at the MBA’s National Mortgage Servicing Conference in San Diego. He said the servicing industry is also seeing increased expenses in litigation for possible repurchase.

“That is the big ‘R’ that everyone is having to deal with right now. Most of you that are servicers have your own repurchase defense team to deal with those issues. Origination fraud causes a decreased reputation for the servicer unfortunately and across the whole industry. It also causes a decrease in property values. Portfolio values are obviously down as well,” said Maddox.

“It used to be classified as origination fraud, but once the loan closes it’s in servicing. You may go back up the line in repurchase but it’s something that servicing has to deal with. Litigation, default and REO have to deal with it. It may have happened on the origination side, but it’s servicing that’s going to have to clean it up. Even though it’s called origination fraud, it’s a servicing problem.”

Regarding short-sale scams, Maddox talked about how the borrower is delinquent and the property is up for sale.

Short-sale fraud against the borrower happens when short-sale specialists “prey on people who are in a really tough spot,” he said.

“The people I have seen, quite a few are former mortgage brokers who stayed in the market. They understand the industry and they are set up for these phony short sales. They sit down and talk to the borrower. You have to understand the psychology of the borrower in distress. They know they are behind. They are getting phone calls and letters. Someone says, ‘I want to help you,’ but it’s not your mortgage company. That has a powerful effect—to listen to that. This is the only person who says they can help. But they often say, you have to may be a lot of money, too.”

If there is no sale, typically the “specialist” gets $1,500 to $3,000 to cover the telephone bill, mail and faxes. “You should pay the mortgage, don’t pay them,” Maddox said. If there is a short sale, the specialist will make money off of it. The buyer has a good price, the servicer-investor will lose money and the borrower has no home. There are also tax consequences.”