Mortgage Fraud

Thu - 7/29/2010

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Mortgage Fraud - Serious Business

Did you know that over 80% of mortgage fraud involves industry insider collusion? Did you know that if you sign a mortgage agreement using falsified or misleading information that you can be held accountable for mortgage fraud?

"It takes a village" is a popular saying of late and in the case of mortgage fraud only 20% of it is committed without the help of an industry insider. One reason that percentage is so small is because of the increasingly powerful detection and prevention tools on the market today. When an insider is involved, however, they may know more about "how to work the system" and therefore allow mortgage fraud to be perpetrated.

Lenders and brokers like Novation use a multistep process to help stop mortgage fraud. We have a full time Quality and Compliance Officer who manually scans files for "red flags". We have processors who do not originate who look at the file manually. We check AVM and property history on files submitted as well as the business background of any business selling a property.

Common types of mortgage fraud perpetrated with insider collusion:

Overstatement of Income - if the loan officer tells YOU how much income to state on a loan "to qualify" this could be mortgage fraud. Essentially everyone knows how much they make. If you make $35,000 and the loan needs $50,000 to qualify and the loan officer says, "You can't qualify on your income, you'll have to go stated to get this loan." That's a fraud flag. Stated income loans were designed for the self-employed borrower or borrower who has multiple streams of income and cannot provide exact paperwork to prove their income. It's a needed but often misused loan. Stated income loans in and of themselves are not fraudulent - abusing them is.
How is it detected? Spending patterns are the first indicator. Someone who states they make $150,000 per year but only spends $20,000 according to their credit report is a flag. Generally people spend between 25% and 50% of their income on their credit. Therefore someone who makes $150,000 per year would be expected to have payments on credit amounting to between $37,500 and $$75,000 per year.
How can you detect it? Look at your Uniform Residential Loan Application (FNMA Form 1003 URLA) it plainly shows your income on page two (2) just below your employment information. If you didn't give them that number, stop. Ask yourself where they came up with that number and if that number is realistic. If not, do not sign the documentation. You should report this type of fraud to the FBI. Even if it was only "attempted" fraud if the same name comes up over and over again eventually justice will be served.

Falsification or Creation of Supporting Documentation - if your paystubs show you make $300,000 per year you probably stand a good chance of qualifying. There are many loan officers today serving time, are on probation or have a felony criminal background preventing them from ever working in the industry or enjoying other benefits of American life because of this more obvious crime.
How is it detected? The easiest way is by asking for a copy of the borrower's last two years of tax returns then ordering a 4506-T from the IRS to verify those numbers. One of the first cases I ever submitted to the IRS was when a borrower refused to sign the 4506-T form. I asked, "Will that be a problem?" When she replied in the affirmative I walked straight to my office and phoned the FBI while the client was still present.
Another way of detecting is by ordering a VOE but if they have a friend in the office that can still be overcome. Then we have a couple of formulas we use to uncover it mathematically.
How can you detect it? Read all of the documentation in your file at the closing table. If you work for Pizza Pal and make $43,000 a year as a manager but you get to the closing table and you work for JHBDOI Engineering and make $135,000 per year there is an issue. As we always say, "Do the documents show the truth?" If not, walk. Do not sign - do not close.

Over Valuation of the Property - is an old reliable that we have all but shut down. We check values on every property regardless of the source of the appraisal. We do allow "outside appraisers" but we always have a known and trusted appraiser cross check the values and we purchase an AVM on the property as well as entering the file into the DISSCO system from Interthinx. Obviously this one requires an appraiser willing to over state the value. We will no longer accept appraisals from appraisers who have "had their values slashed" and were not able to provide substantive proof of their value in reply. Even then the value most likely remains lowered.
How is it detected? It used to be that it was detected when the property foreclosed. Now, thanks to modern technology, we or our investor generally detects it prior to closing. We have at least five (5) ways to instantly verify value. If the value from the verification sources are all within a couple of percent of each other but the appraisal is 20% higher (or even 10%) there is going to be a physical "review appraisal" to verify the value.
How can you detect it? It's a little more difficult for most individuals outside of the industry to verify the value of a property but there are ways. On important way is to use the services of a professional, licensed, experienced buyer's agent. If the seller has offered to "let you use their appraisal" be very concerned and don't use it. Legitimate lenders are going to require the appraisal be ordered through their office and in their name anyway.

Falsification of Occupancy - has long been one of the top forms of mortgage fraud among real estate investors. We know when we quote a rate to qualifying applicant who finds a broker/lender who will close the loan with a rate anywhere from .5% to 2% lower exactly what has happened: either the borrower or the loan officer has made the indication that the borrower intends to occupy the home. Yes, this is mortgage fraud.
How is it detected? This one is simple. Utilities, tax returns, billing addresses. The verification method of which I am most fond it hiring interns and trainees to knock on doors weeks or months after the closing.
How can you detect it? First of all you should know that if one lender, especially in Georgia where there is a cap on fees, offers financing at say 9% and another offers it at 6.5% on an investment property but all else is the same they are submitting the file as an owner occupied property.

To learn more about mortgage and real estate fraud and how to avoid it I recommend you attend the Real Estate Investor's Quick Start Work Shop or the First Time Home Buyer's Work Shop at your convenience. Both are offered during office hours at no cost to you and occasionally outside of office hours as well.

Some interesting fraud stories:
http://www.mortgagefraudblog.com/index.php/trackback/3170/
http://www.mortgagefraudblog.com/index.php/trackback/3151/

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