The sub-prime forum: Fraud isn't just for the FBIKen OrmanMortgage fraud
Welcome to "The sub-prime forum," a column designed to help
improve your knowledge of alt-A lending and offer tips to increase
your share of this lucrative market.
Author's note: I would like to take this opportunity to
introduce myself as the new author of "The sub-prime forum" and
thank a great business partner and friend, Richard Bitner. Mr.
Bitner, the former president of Kellner Mortgage Investments (KMI)
and author of this article up until last month, left KMI and Plano,
Texas to pursue other opportunities within the mortgage business
and has moved to North Carolina. We certainly wish him the
As for me, I've been writing mortgage loans for 14 years,
now. I am a finance company veteran (that's no joke—I
literally have a scar to prove it). The mortgage industry has been
wonderful to me, and I consider myself very fortunate to be a part
of an amazing and compelling industry.
In 2005, sub-prime lenders set another volume record, as they
have every year of the last five years, growing by 400 percent.
That kind of stout volume growth brings with it a slew of problems,
with mortgage fraud and misrepresentations of material facts being
two of the most serious. In fact, these issues are so serious that
the federal government requires that form FNMA 1003 (Uniform
Residential Loan Application) disclose the punishment for such
violations by stating in Section IX, " ... penalties including, but
not limited to, fines or imprisonment or both ... "
In December 2005, the FBI issued a press release that stated,
"Mortgage fraud is one of the fastest growing white collar crimes
in the United States," and that lenders are projected to lose more
than $1 billion in 2005. The press release also stated that 80
percent of mortgage fraud was perpetrated by industry professionals
who commit "fraud for profit," which usually involves multiple
transactions, straw buyers, inflated appraisals and occupancy
misrepresentation. My company lost hundreds of thousands of
dollars, last year, because of fraud. I would like to share with
you some basic principles, regarding fraud and how you can keep
from writing fraudulent loans.
First, you must acknowledge that there are individuals in your
town, on your phone and on your Web site who are plotting to use
you. They want to use you to help them steal. To confuse the issue,
the schemes are devised with the help of real estate professionals
(real estate agents, builders, investors, appraisers, title
representatives, accountants, loan officers, processors, etc.).
These individuals are experienced and educated in the inner
workings of the mortgage process and are motivated by greed. They
will lie, alter documents, misrepresent ownership and inflate
value. They want you to risk your livelihood, reputation and
freedom by turning your head, closing your eyes and embracing
negligence. Many of our colleagues find themselves faced with these
temptations and choose to go along with the farce.
Second, you must formulate and practice a consistent quality
control review of new applicants, even if they are referred to you
by a trusted source. In the past year, I have witnessed loan
officers whom we trusted submit fraudulent loan packages to our
underwriting department. These loan officers did not verify the
authenticity of the documents with which they were presented. They
simply assumed the documents were legitimate and relied on the
lender to alert them to any misrepresentations. For the obvious
misrepresentations, here are some steps you can take to verify the
authenticity of the documents:
Pay stubs, W2s and stated income
• Check Social Security and Medicare withholdings. The
accurate percentage is 6.2 percent for Social Security and 1.45
percent for Medicare. Compare it with both current earnings and
year-to-date earnings. If the calculated figures do not calculate,
it may not be fraud, but you will know to ask more questions.
• Check Social Security earnings. The cap was $90,000 in
2005 and $94,200 in 2006. Medicare earnings are not capped.
• If you are still skeptical, ask the proposed buyer to
execute a 4506T (IRS Form 4506T—Request for Transcript of Tax
Return) and ask one of your trusted lenders to run it through its
quality control service. We are happy to help our brokers through
• Stated-income, no-doc and no-income loans have higher
incidences of fraud. Perform reverse phone searches on the employer
and the buyer's current residence. In several incidences recently,
we have found serious discrepancies.
• Most fraudulent loans exclude real estate agents and
multiple listing services. Many of the subject properties have had
ownership transfers in the most recent 12 months. Ask the proposed
buyer how he came across your name or company. Also, ask how he
came across the subject property and if he is aware that the seller
acquired it in the last 12 months.
•Research the buyer and seller through the tax assessor's
Web site. Discovering the number of properties your proposed
borrower and seller own is easy to do with a couple of clicks of
the mouse. Many buyers of flipped properties will have recently
purchased multiple properties, which are not listed on the real
estate-owned section of the 1003. Additionally, a professional real
estate investor typically will not buy a flipped property.
These tips are good first steps to ensuring that the loan
packages you intend to submit to your lenders have had at least a
cursory quality control overview.
Third, work closely with your lenders. You assure your lender
that you are a responsible partner by taking remedial steps to
verify details of the loan and loan documents. Unfortunately, loan
officers, processors, appraisers, brokerage owners, etc.
misrepresent facts to lenders every day, which creates an
environment of distrust. Lenders appreciate brokers and loan
officers who are serious about their reputations and intend on
making the mortgage industry their careers.
Fourth, hire employees with character. Experienced loan officers
and processors may be able to help your company grow without a lot
of training, but they may also bring with them unacceptable
referral sources or knowledge of how to twist the system for
illegitimate gain. When interviewing a candidate, ask specific
questions about where he worked, why he left and how he generated
leads. Ask for several professional references with at least one
coming from a direct supervisor. Additionally, get permission to
pull credit. Credit reports detail residency and work histories,
and might shed light on discrepancies and help you make a more
informed decision about your prospective employee.
This issue is not complex. The bad guys inflate property value,
flip properties, lie about occupancy, lie about being real
estate-owned and lie about income. They will even falsify federal
documents to try to pull it off. By instituting a consistent
quality control review that includes reviews of loan documents,
borrower verification and property ownership transfers, lenders and
brokers will have taken the first steps to becoming more
responsible partners in the mortgage process. Let's all mind our
stores better this year, and maybe we can get a few more
unscrupulous peers out of the business and off of the street.
Ken Orman is president of Kellner Mortgage Investments, a
nationwide wholesale sub-prime lender based in Plano, Texas. He can
be reached at (866) 416-9995, ext. 105 or e-mail [email protected]