A controversial service promises to match people with poor credit with investors who have good credit to create a home purchase transaction. But regulators and industry experts frown on the practice -- with some labeling it outright fraud.
That is the concept being promoted by Use My Credit Management Inc., an 18-year-old company based in Council Bluffs, Iowa, which matches credit-challenged home seekers with investors who have good credit and then, through a processing company, handles the new purchasers' payments.
These investors have "very good to credit and ratios" and are "willing and waiting to apply for the loans that the credit-challenged client can't qualify for," according to UMC's Web site.
Because the mortgages are in and remain in the investors' names, UMC's approach avoids the criticism that has been arising when the credit-challenged person's credit is directly improved by appearing as the authorized user on the credit cards of people with very good credit.
But when comparing the two different approaches for credit-challenged persons taking advantage of another person's good credit, different questions regarding legality arise in each case, FTC spokesman Frank Dorman told MortgageDaily.com.
Boosting one's credit score by becoming an authorized user of the credit card of someone with better credit, he commented, "It's a fairly new phenomenon in the market and we're looking at it."
He said that, after being informed by MortgageDaily.com of UMC's procedure, he has asked FTC counsel to also look into this approach -- though he couldn't comment on the legality.
With the arrangement promoted by UMC, which didn't respond to repeated requests for comments, the installment contract payments are drawn the first of each month from the purchasers' accounts, and used to pay, in this order, the investor's lender, then the taxes and insurance and finally the fees to the investor and to UMC, according to its Web site. The funds received by the investor include the spread between the interest rate on the mortgages and the higher rates on the installment contracts.
The investors' only outlay is the use of their good credit to obtain the mortgage that is used to purchase the home. They provide no funds for the home purchase. All funds are provided by the credit-challenged home-seeker.
Although credit-challenged, buyer's must have at least 5 percent of the home's purchase price -- 2 percent if the seller contributes 3 percent -- for the down payment, and must pay the investor's "good faith estimate" of the closing costs in advance of closing as well as the cost of any home inspection demanded by UMC, according to the Web site.
The credit-challenged home buyer also may have to pay a one-time, up-front fee to UMC's management company to protect the investor should they not make even the first payment.
"Both of these uses of persons with good credit are fraud," mortgage broker Ginny Ferguson told MortgageDaily.com.
Borrowers using the piggybacking of credit are committing fraud by not revealing how they achieved their improved credit rating while investors involved in the UMC program would be committing fraud against the lender if they certify that the funds used to obtain the mortgage are theirs, as required in most loan applications, explained Feguson, a credit expert for the National Association of Mortgage Brokers who works with Pleasanton, Calif.-based Heritage Valley Mortgage.
"It's like a straw buyer in reverse," she said.
Spokespeople at Freddie Mac and Fannie Mae said it is unlikely that either government sponsored enterprise would purchase the investors' mortgages.
When the investors sell the homes they purchased they do so at a price that is higher than what they paid, and with higher interest rates than those investors are paying, according to the UMC Web site.
"UMC and the IPFs [independent private financiers] are not breaking any laws and the IPFs are not hard money lenders, straw men or predatory lenders," it states, and maintains that there is "nothing illegal, immoral or unethical" about the use of installment contracts.
"Everything from homes to cars is sold on installment contracts," the site states.
But a HUD official, speaking off the record to MortgageDaily.com, said that the use of installment contracts is "how they get away with the poor credit and all that stuff" with the loans.
Unlike with a mortgage, where title to the property is passed to the mortgagee, with an installment contract, title typically does not pass to the borrower until the final payment is made, Chicago real estate attorney Joseph Putnick told MortgageDaily.com.
"The technicality is that when you sell under a contract, it's not a sale, so technically it's not governed by the RESPA laws," explained Putnick, whose familiarity with installment contracts dates back more than three decades when he handled many suits by home purchasers with installment contracts. "And you don't get any equity until you pay off the contract."
But he said that everything about this approach, unlike the piggybacking of credit, is "probably legal, as long as everything is upfront. And the amazing thing is they're upfront about it."
UMC, with its installment contracts, does not offer any grace period to borrowers, a stipulation, according to UMC, that is included because the investor needs the money to pay his mortgage on the home and, if a payment is not coming, needs time to make some other arrangement to obtain funds for the monthly mortgage payment.
"If someone with bad credit can't make the payment," Freddie Mac spokesman Brad German told Mortgage Daily.com, "the house goes into foreclosure and the person with good credit has his credit damaged and now has a foreclosure to deal with."
He also said UMC's use of investors "has a lot of resemblances to a straw buyer situation -- someone with good credit is buying on behalf of someone with poor credit. That's basically what a straw buyer is."
And another aspect of the UMC process is akin to flipping, German said.
This happens when the investors' purchases and the credit challenged borrowers' purchases occur, "there will be a simultaneous closing," but with the sales price to the credit-challenged person increased, "because that is what investors do," according to the UMC Web site.
And the fact that some of the funds received by investors could be viewed as a fee also creates the potential for the investor being charged with fraud, German said.
"These mortgages do not sound like the sort of thing we would knowingly be buying," he concluded.