Fraud Part 3: The impact?

   

Fraud: Part 3
What is the impact?

The regulators are focusing on mortgage fraud and will come down hard on firms that do not have the appropriate checks and balances in place.

Financial crime manifests itself in varying degrees of severity, making it difficult to determine what constitutes a breach in the law for brokers and their borrower clients.

A client tweaking their salary to get the loan they need to buy a property may seem acceptable (after all, it isn’t hurting anyone, right?), as might the act of getting an estate agent to inflate the price of a property so they can pocket the extra on the loan.

But jail sentences are applicable for both of these examples. For many, this type of ‘white collar’ may be regarded by some as perfectly acceptable. Sad, but true.

And these are exactly the sorts of areas the various agencies are clamping down on. Together with cooperating lenders, these watchdogs are working hard to sift out not only blatantly criminal acts but also the sort of ‘white lie’ activities that put borrowers in a position whereby they take out mortgage loans they are unable to afford.

The regulators are prepared to come down hard with fines on lenders, loan officers and borrowers who are caught in these white-collar crimes of fraud.

So what does this mean for the mortgage industry? Last April agencies launched initiatives to tackle mortgage fraud, setting up a streamlined reporting systems designed to reduce fraud involving loan applications processed by banks and brokers.

So how can brokers and borrowers ensure they stay on the right side of the law?

The key issues for brokers for avoiding financial crime are to ensure they are comfortable with information supplied to them, by borrowers. Verify everything possible and question the information that just “doesn’t seem right”.
Banks and Brokers should look out for lack of evidence of income and falsified bank statements or employment details and use a common sense approach with scrutiny of the documents you are provided. Borrowers must not only supply accurate and honest information, but must watch to make sure the lender is not committing fraud by falsifying information to get the loan closed and not telling you the borrower they are doing so all in the name of ‘helping you’.

Consider whether the incomes look realistic and watch out for suspicious trends such as similarities in applications. Same with verifying assets and debts.

As for accountability for suspected fraud, brokers and lenders are responsible for identifying and protecting themselves, with banks and brokers being responsible for the advice they give in programs and documentation.

Regulators and the ‘fraud cops’ are particularly looking for collusion between borrowers and lenders or loan officers and even between the vendors (i.e. appraisers, title companies and inspectors). All that said, it is very difficult to determine in which exaggerations of income come from borrowers and banks or brokers in collusion and which is by only one of the parties.

The extent to which financial crime affects the mortgage industry is yet unclear. With so many delinquencies and foreclosures and those numbers escalating, the impact is not measurable and may not be for months or even years to come.

Mortgage fraud is prevalent, and in more cases than anyone can imagine. We can have many parties to the transactions taking part in fraud by inflating values of houses or the amounts of mortgages. People attempt inflating their salaries to get mortgages they shouldn’t and they have little chance of repaying these further down the line.

It is usually the lending institutions that suffer the greatest losses or so says the headlines. But what about the borrowers; the families that suffer foreclosure and bankruptcy as a result of these seemingly innocent ‘little white lies’ just to buy a bigger, better house. At some point, we have to realize it isn’t worth it.
With over $1 Trillion in mortgages all coming due for their first payment adjustments in 2007 (all the interest only, optional payment ARMS and other exotic mortgages out there) and those house payments going up between 25% and 50% instantly, the delinquency and foreclosure rates are expected to climb dramatically throughout the next two years. Many of those loans (many experts guess as many as one third of them!) have some sort of say ‘less than honest’ statements in their original loan application files.

What might the impact be to the single largest part of the US economy? Time will tell!