Unethical Practices in the Mortgage Industry

FHA programs continue to be very successful in achieving the goal of promoting homeownership in America. Nonetheless, there are some instances of abuse, both on the part of lenders, sellers and borrowers. As with any type of loan, beware of predatory practices, review all documents carefully, never sign anything without reading it first, and compare the fees charged between several lenders.

In one type of predatory practice, a lender may steer a borrower towards an FHA loan, when the borrower would have been able to qualify for a conventional loan, for the purpose of taking advantage of the borrower and charging unnecessary fees. Avoid this type of practice by determining whether you can qualify for a conventional loan, before applying for an FHA loan.

One type of illegal practice is called property flipping, a technique in which the value of the home is inflated, and excess profits taken at the closing. For example, fraudulent investors may work with crooked appraisers to sell properties to home buyers at inflated prices. In some cases, the buyer may be cut in on the deal, but in others, the buyer is merely an unsuspecting victim, taken advantage of by the seller.

Other predatory practices may involve a seller not disclosing defects, or selling a home for more than it is worth. Some lenders may also alter documents to ensure that a questionable loan gets approved. HUD has been very active in fighting predatory lending practices, and making the public aware of fraudulent practices.

But in addition to lenders, buyers may also be guilty of fraud, and some analysts believe that since FHA mortgages are geared towards first-time buyers with limited credit, fraud is more prevalent; and in fact, FHA has seen an increasing claims rate over the past few years.