While the overall mortgage market is shrinking, one type of loan is bucking the trend: mortgages for illegal immigrants.
Known as ITIN mortgages because most illegals have individual taxpayer identification numbers instead of Social Security numbers, they've apparently escaped the sub prime meltdown.
A recent Wall Street Journal article, Unlikely Mortgage Winner [subscriber link, also here] October 9, 2007, by Miriam Jordan [email her], gloats:
"For loans more than 90 days in arrears, ITIN mortgages have a delinquency rate of about 0.5%, according to independent estimates. That compares with 1% for prime mortgages and 9.3% for subprime mortgages extended to those with spotty credit histories."
As to why illegals rarely default, claims Jordan:
"ITIN-mortgage applicants are largely blue-collar, illegal-immigrant workers with only modest incomes. But they undergo more scrutiny—and provide more documentation—than candidates for stated-income mortgages and other subprime loans, for example. Most banks also ask applicants to show they have been filing taxes—with an ITIN – for at least two years."
North Carolina banker Scott Hastings, [send him mail] delighted that 20 percent of his institution's mortgage borrowers are illegals, is quoted as gushing:
"It's an absolutely promising market. These Hispanic families will pay their mortgage before anything else."
Oh yeah? Something's fishy here (not for the first time where the WSJ is concerned).
The notion that low income illegals are less likely to default than better heeled "prime" mortgage borrowers makes no intuitive sense. And if the ITIN market is so lucrative, why (according to the story) have only smaller mortgage lenders entered it?
Probably several factors are at work. For example, Hispanic families often double or triple up—which increases their household earnings but which depends on local governments winking at zoning violations.
But perhaps the most important factor: Illegal aliens are notoriously used as "straw buyers" in house flipping scams.
In Colorado, for example, a ring of mortgage brokers, realtors, appraisers, and loan officers in local banks recruited hundreds of illegal immigrants to apply for FHA mortgages. [Eight Arrested for Purchasing Homes with Forged Citizenship Documents, Jefferson County District Attorney's Office, Oct 25, 2006]
The illegals "were supplied with stolen identities, including ITINs, driver's licenses, W-2s, and income tax returns. Some were given green cards of legal immigrants. What couldn't be stolen was forged." [Rocky Mountain Mortgage Fraud Fever, By Carola Von Hoffmannstahl-Solomonoff, December 11, 2006]
In Las Vegas, Mark Young was convicted of making false statements on mortgage loans. According to the FBI,
Young conspired with other mortgage company employees and with employees of General Realty to manufacture and submit false employment and income documentation for borrowers. Most of the borrowers were illegal immigrants from Mexico. To date, 58 loans with a total value of $6.2 million have gone into default, with a loss to HUD of over $1.9 million. The Nevada First Residential Mortgage Company is no longer in business.
There are many similar cases, nationwide, and one dissimilar one—Tarik Hamdi, who apparently has used mortgage fraud to finance terrorist-related activities. Mortgage document fraud is so widespread that some rings reportedly operate out of real estate offices.
False documents enabled illegal immigrant straw buyers to "buy" homes they have no intention of living in. The seller—often a real estate speculator—had usually just purchased the property at a much lower price. The speculator and his accomplices—bank officers, appraisers, loan officers, and real estate attorneys—fraudulently qualified their illegal immigrant buyer to purchase properties at inflated prices. [Statement Of Susan Gaffney, Inspector General, HUD, March 20, 2001 PDF]
Part of the mortgage money is used to pay off the first—smaller—mortgage. Part is used to pay off the crooked appraisers, attorneys, and other enablers—including the illegal alien straw buyer.
The remainder is profit to the speculator.
No muss. No fuss. And no default—for a while: speculators can use part of their profits to service the mortgage on the unoccupied home, allowing them to pursue other such "opportunities" indefinitely.
Of course, this is a Ponzi scheme. It will collapse all the more quickly if the speculators are greedy.
Meanwhile, the abandoned homes are a blight on many inner-city neighborhoods.
But for the bank, this is a no-brainer. Federal mortgage insurance protects their investment in the event of a default. No risk means no need to be overly concerned with the legitimacy of borrowers—or their documentation.
A 2004 study by the DC-based National Association of Hispanic Real Estate Professionals (NAHREP) [Email them] estimated that more than 200,000 illegal immigrants from Latin America have qualified for FHA loans. A NAHREP board member asserts that "Being in the country legally or not is not an issue when you are buying a house." [Many Illegal Immigrants Becoming Homeowners With Legal Mortgages, By Alfredo Corchado, The Dallas Morning News, December 4, 2006]
My impressionistic estimate, looking at reports from across the country: as many as one-quarter of these may be "straw buyers."
One government source estimates 20,000 illegal immigrants hold FHA-insured loans in metro Denver alone.
"That's probably a pretty good guess," said Jefferson County District Attorney Scott Storey… "This was the tip of the iceberg." [FHA program key in surge of foreclosures By David Olinger and Jeffrey A. Roberts Denver Post, December 6, 2006]
Bottom line: default rates on illegal alien mortgages are low at least in part because mortgage scam artists—natives and immigrants alike—are making a killing from them.
The ultimate victim, as usual: the American taxpayer, who will one day get to bail out the FHA.
Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.
