Weak housing markets appear to encourage mortgage fraud. Typically, fraud associated with home purchases requires multiple perpetrators, one of whom is the ringleader. While a lender is always the victim, another lender may be involved as a perpetrator. An appraiser, home seller and home buyer are always involved, perhaps innocently, perhaps not.

Loan originators who sell loans in the secondary market can be required to repurchase loans that quickly go into default. Usually these buyback arrangements don’t extend more than six months; however, beyond that the originator is off the hook.

In some cases, the ringleader protects the lender against buybacks by selecting borrowers who can carry the payment with the help of the supplement. So long as the supplement lasts, which will be one to two years, the likelihood of default is low. When the supplement stops, the default probability will jump, but that is no longer viewed as the responsibility of the loan originator.

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