Prior to providing the funding lenders conduct

Prior to providing the funding, lenders conduct searches to determine if the property is encumbered
by a lien. However, liens on a property may not be recorded for several days or months and thus
cannot be immediately verified. Consequently, lenders do not discover that they hold a third, fourth,
or fifth lien on a property (rather than the expected second lien) until later. The money obtained
from the multiple HELOC totals more than the original property purchase price, exceeding the
out-ofpocket expenses incurred to secure the property.
HOME EQUITY CONVERSION MORTGAGE (HECM)/REVERSE MORTGAGE SCHEMES
A HECM is a reverse mortgage loan product insured by the Federal Housing Administration
(FHA). While other reverse mortgage loan products exist, the HECM is the most well known and
widely available. It enables eligible homeowners to access the equity in their homes by providing
funds (in many instances in a lump sum payment) without incurring a monthly payment burden
during their lifetime in the home. To be eligible for a HECM, borrowers must be 62 years or older,
own their own property (or have a small mortgage balance), occupy their property as their primary
residence, and participate in HECM counseling. There are no income, credit, or employment qual-
ifications required of the borrower, and no repayment is required if the property is the borrower’s
primary residence. Closing costs may be financed in the mortgage loan. The homeowner is respon-
sible for property taxes, insurance, maintenance, utilities, fuel, and other expenses.

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Chapter 7
Loan Types,
Terms & Issues
MORTGAGE FRAUD RED FLAGS
LOAN APPLICATION RED FLAGS
• Significant or contradictory changes from handwritten to typed application
• Employer’s address shown as a post office box
• Commute is significantly unrealistic
• New house too small to accommodate occupants
• Borrower is downgrading to smaller or less expensive home
• Down payment in some form other than cash
• Significant changes as application process proceeds
• Lack of accumulation of assets compared to income
• Accumulation of assets compared to income appears to be too high
PARTICIPATION AGREEMENTS
In a participation loan, two or more lenders own a share or interest of a loan made to a debtor. This
allows the lenders to share or distribute the risk. Lenders may also make the loan to the debtor as the
primary or lead bank, only to sell to other lenders or investors later who will then become participants
in the loan, thus allowing them to invest funds that might have proven otherwise unproductive. The
primary bank retains all dealings with the borrower and services the loan; the participating banks
do not have contact with that borrower.
Another form of participation loan allows the lenders to share in the profitability of the property,
in addition to collecting principal and interest on the loan. If a lender collects principal and interest
and shares in the profits when the property is sold, then it is called a Shared Appreciation Mortgage.