Mortgage fraud is out there. Learn the facts and how to prevent it.
What is mortgage fraud?
Mortgage fraud is a misstatement, misrepresentation or concealment of a fact or action that deceives and may be relied upon by a mortgage lender through the mortgage origination, purchasing or servicing process.
Two classifications of mortgage fraud:
• Fraud for Housing:
Borrower's intent is to repay the mortgage; however, false information may be provided to facilitate loan approval.
• Fraud for Profit:
Typically involves a collaborative relationship among industry professionals with the intent to deceive. Multiple misrepresentations exist. An organized scheme may involve multiple transactions.
Common areas of misrepresentation
• Income/employment
• Credit/Social Security Numbers
• Occupancy
• Assets of borrower
• Value of property
Is mortgage fraud "rampant"?
According to the media and statistics from the Federal Bureau of Investigation, mortgage fraud continues to grow at alarming rates. In September 2004, Assistant FBI Director Chris Swecker stated "it has the potential to be an epidemic." The potential impact of mortgage fraud is being compared to the Savings & Loan crisis.
Common mortgage fraud schemes:
Strawbuyer
• Acts as the borrower, but does not intend to take ownership, occupy or make payments on the property. The strawbuyer may have been paid a fee to purchase a property on behalf of a third party.
Chunking/Real Estate Investment Schemes
• A borrower purchases multiple properties in a short period of time. Applications are made to multiple lenders, but may not disclose that other properties are being purchased and often may include multiple "primary residences". These schemes often are initiated with a seminar or program that show unsophisticated borrowers how to get rich by investing in real estate.
Sales Contract Manipulations or Puffing
• In a stressed market, an over supply of homes for sale encourages sellers to be creative. Sellers may offer excessive incentives to a realtor, third party or directly to a buyer to facilitate a sale. Property values may be inflated to cover the excessive inducements or concessions.
• Writing a sales contract for a price above the listed price or true market value for the purpose of providing the purchaser or other third party cash from the purchase of the sale. Property value is inflated to cover the "overage".
Property Flips
• A series of rapid real estate transfers or sales for the purpose of inflating the true value of the subject property.
Builder Bailout
• This scheme typically occurs in a flat or declining market when a developer or builder has excess inventory. A builder may make an incentive a buyer to purchase by offering excessive concessions (e.g. new car, vacation, etc.) which distorts the true value of the subject property. Or, a builder may recruit a strawbuyer or uninformed investor to purchase the home.
Are you protected from mortgage fraud?
Lenders need to adopt practices to mitigate the risk of originating loans containing fraud. Conducting a thorough review of the customer and supporting documents prior to loan submission is essential.
Preventative steps you can take
• Know your employees.
- Conduct reference checks prior to hiring.
- Closely monitor early submissions.
- Investigate remarkable volume swings.
• Know your third party service providers and referral sources.
• Provide training to your employees regarding mortgage fraud red flags.
• Subscribe to and review credit repository alerts, which can identify Social Security Number, name or address issues.
• Validate SSN directly with the Social Security Administration.
• Validate Income, Self-Employment and Tax Documents using the IRS Form 4506-T.
• Subscribe to collateral risk databases or use automated valuation tools to review the subject property.
• Review all supplied documents for mortgage fraud "red flags":
- Does the borrower's employment, age, income and credit history make sense?
- Do the pay stubs, tax documents, bank statements or other borrower supplied documents contain misspellings, font changes or inaccurate information?
Do the numbers add up?
- Does the sales contract contain errors, corrections, or excessive changes?
By using the Internet, fraudsters are arming themselves with the latest tools and information to create identities, employers, appraisals and credit to support a loan request.
• Use available Web sites to validate information:
- Secretary of State Web Sites - Validate licenses or corporations
- Salary.com (free) - Find income ranges for a position by geographical area
- Telephone number validation (free)
-Reversephonedirectory.com, Anywho.com, WhitePages.com, Switchboard.com
- Searchbug.com (free)
- Ancestry.com (free) - The SSN is matched to the Social Security Master Death Index
- Searchsystems.net
-Database providing access to many public records by state and county
Quick mortgage fraud facts:
• Mortgage Fraud Suspicious Activity Reports filed by depository institutions rose 51 percent during the first six months of 2006 compared to the same period in 2005.*
• Between 1997 and 2004, mortgage fraud reported by depository institutions increased by 969 percent.**
• MARI, Inc. reports that the top states with mortgage fraud incidents for 2006 were Florida, California and Michigan. For 2005, top states were Georgia, Michigan and Utah.***
• A study published in February 2007 by BasePoint Analytics found that "up to 70 percent of mortgage early payment defaults can be linked to a significant misrepresentation on the original loan application."
• Industry experts estimate that the average loss severity on a loan that contains misrepresentation is 35 - 40 percent of the principal balance. This means for every $200K loan that contains misrepresentation and goes to default, a $70K - $80K loss may result.
Who do you think will be responsible for this???
*The SAR Activity Review, By the Numbers, Issue 7, November 2006
**The SAR Activity Review, Trends, Tips & Issues, Issue 10, May 2006
***MARI's Ninth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association, April 2007
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