The Mortgage Manifesto!

Fraud - Fraud - and Even More Fraud!

FRAUD – FRAUD – AND MORE FRAUD:

Up to seventy percent of mortgage payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to the FBI’s latest Mortgage Fraud Report.  At a time when the industry is focused on finding the source of its record number of foreclosures, this information empowers lenders with the insight that can help them proactively prevent costly mortgage defaults and foreclosures.  Lenders that implement fraud prevention programs can protect themselves against mortgage fraud, the fastest-growing white-collar crime in the country, while also reducing the number of costly and time-consuming defaults and foreclosures.

The study found that mortgage defaults were largely concentrated in adjustable rate mortgage (ARM) loans, but were present among other loan types, too.  The report also revealed that seven of the top 10 states with the highest concentration of mortgage fraud were also in the top 10 states for foreclosures, namely California, Florida, Arizona, Georgia, Indiana, Michigan, Ohio and Texas.

We talk about the increasing numbers of defaults and foreclosures, we need to really look at the root of the problem. The latest information clearly indicates that borrower fraud plays a significant role in the record number of defaults and foreclosures we’ve been seeing over the past couple of years. 

The good news is, now that lenders know one of the leading causes of defaults and foreclosures, they can move forward into a solution.  Lenders can significantly reduce their number of defaulted and foreclosed loans by implementing a good fraud prevention program.

That said, they must likewise, look no further than behind their own doors of operation for fraud. It is estimated that as many as half of the fraudulent income numbers were written into applications by the loan officers (lenders) or were involved in “coaching” the borrowers to do so simply to get the loan approved and closed.

Mortgage fraud costs lenders an estimated $4 billion per year and identity theft is the fastest-growing segment in the fraud arena. That cost is passed on to borrowers in the form of higher rates, loan costs, and tightening of the underwriting guidelines that now prevent some borrowers from qualifying for a loan they might have otherwise received just a year ago.

Over 60 percent of all mortgage fraud involves income or identity misrepresentation by the borrower, and according to the FBI, often involves the willful participation of an industry “insider” or other professionals such as the loan officer and or broker. There’s no denying the detrimental impact of mortgage fraud upon the industry, but with the right fraud prevention programs and training of the lender’s representatives, we will see less fraud in the future… especially after what we have seen now over the last two years.

Sadly, it has greatly effected every level of the real estate and lending industries.

Fraud: Part 4

Fraud: Last but not least…

Aside from income, employment and asset verification fraud we have outlined in the first 3 parts, the other areas of fraud usually occur in real estate purchase transactions. The most obvious are:

Two different settlement or closing statements: One or more of the parties to the transaction (buyer, seller, title officer, lender or real estate agent) coordinate to have one statement ‘created’ showing the seller receiving all the funds in the sale of the home. Then there is a second settlement statement ‘created’ that is the actual agreement between the seller and buyer where the buyer receives cash after closing from the sale transaction (in other words from the seller) but that settlement statement the lender never sees. That is fraud.

Seller pays cash to the buyer after the close of escrow:  Unlike the example above where there was a coordination between all the parties, there are transactions where the buyer and seller agree to have the seller pay the buyer some cash amount after the transaction closes and the title co, real estate agent or lender may or may not have known at all. This often occurs...

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?

More Fraud...

Now, aside from the typical, average W2 employee, we have income that can be more difficult to predict, document and prove. This would be income from commissions, overtime, bonuses, and of course, the self employed borrower where the income is a combination of salary and/or profits and cash flow.

If the loan officer and borrower are unable to or unwilling to document income in the manner required by standard lending guidelines (2 year tax analysis, year-to-date profit and loss statement, etc) they often choose one of the many more exotic or creative loan programs where there is a reduced requirement for documentation.

These are known in terms such as: stated-income, no-income, no-ratio, and no-doc, among others. And it is here where we see the greatest potential for fraud. Let me first state what the actual guidelines intend in these type loans...

Loan Fraud: Did You Do That?

Loan Fraud: A Four Part Special Report         

Sometimes Committed By You And You Know It...
Sometimes Committed For You Without You Realizing It!

And… You Are Liable In Either Case!

Loan Fraud is being committed each and every day in mortgage lending. That is a fact… Period.

Fraud is getting more attention today than ever before. Why? Because there is a rippling effect of seriously rising rates of delinquency and foreclosure; and as I read recently, it is like the shockwave after an earthquake; the media, the Feds and every possible governmental and private regulating agency will be seeking reasons for the problems and solutions to them.

Below are the areas of fraud typically seen in home mortgage transactions: 

1.    Income: In most 99% of all mortgage transactions, one of the key areas of your financial picture that the lender is required to verify in writing and with documentation from your own records, a two year or more period of annual and monthly gross income and employment history. If a borrower is salaried or hourly W-2 type fixed income, it is pretty difficult one would think; to commit fraud.

That used to be the case. Now with technology, color and laser printers, lenders are seeing ‘manufactured’ employment pay stubs and W-2 forms. Sometimes it is obvious and blatant while at other times, it is nearly impossible to tell. Add to that, borrowers then have “their friend” (co-conspirator) perform the verbal verification or write the verification of employment for them. Yes, this does happen.

Those types of income or employment verification fraud are most often committed by the borrower and the lender doesn’t know.