Fraud: The mortgage broker as the gatekeeperGary Opperfraud, mortgage fraud, straw buyer, land flip, equity skim, red flags
Fraud in the mortgage industry costs everyone a lot of money.
The U.S. Department of Justice believes that fraud losses exceed
$60 billion per year. It costs lenders and brokers money when they
have to buy back loans. It costs borrowers more in increased costs
passed on from the lenders. It costs lenders and brokers more time
and money in quality control and internal control procedures. It
costs taxpayers more in taxes to pay government employees to
investigate and prosecute offenders. Most of all, it costs the
mortgage industrylenders, bankers and brokersour reputation.
Definitions and types of mortgage fraud
The word "fraud" traces its origin from Latin to a Sanskrit phrase
that means "he bends/injures." Black's Law Dictionary defines fraud
as the intentional perversion of truth for the purpose of inducting
another in reliance upon it, to part with some valuable thing
belonging to him or surrendering a legal right.
Mortgage fraud can be defined as any of the following:
•Application fraud: the intentional misrepresentation of
an applicant's income, assets, liabilities, credit history, credit
scores or job information;
•Real estate value fraud: the intentional misrepresentation
of the real property value by a real estate appraiser or other
•Real estate title fraud: the intentional misrepresentation
of the liens, judgments, lis pendens, survey problems or other
clouds on the title by a title company;
•Transaction fraud: the participation in a real estate scheme
to obtain a loan though misrepresentation of facts.
There are two types of fraud: fraud for property and fraud for
profit. Freddie Mac and Fannie Mae do not distinguish between fraud
for property and fraud for profit. Fraud for property occurs when
the borrower or other parties in a real estate transaction
misrepresent facts to a lender to help a borrower obtain a loan
and, therefore, a home. Other parties to the transaction include
real estate brokers, mortgage brokers, appraisers, title companies,
closing agents, lenders' account representatives, accountants, etc.
It is still fraud, no matter how admirable the idea sounds that a
professional is helping a customer obtain a loan and, hence, a
home. The lender should have the right to all of the facts and to
make the decision whether or not to loan to the applicant. "This is
not a noble cause. This hurts our reputation," states Jack Nunnery,
Chase Manhattan's national customer risk manager.
Fraud for profit occurs when an investor deceives a lender into
making a loan so that the investor makes a profit. The investor may
or may not have the help of other parties in the transaction.
Investor fraud includes a straw buyer, land flips and equity
A straw buyer is a person used to buy property to conceal the
actual owner. The straw buyer's income and credit are used to
fraudulently obtain the loan. The straw buyer, the actual property
owner and anyone else involved in the scheme are guilty of fraud.
Straw buyers are sometimes used when investors want the more
favorable interest rate, loan-to-value and other terms available on
owner-occupied property, when builders want to obtain working
capital, when sellers want to illegally get money from their
property or when borrowers cannot obtain a mortgage on the subject
A land flip is when real property is bought at or below market
price and resold at a price higher than market value. The higher
sales price is used to obtain an illegal higher mortgage loan
amount. The cooperation of at least a dishonest real estate
appraiser is necessary.
An equity skim example follows. The real property owner obtains
a high loan-to-value mortgage on tenant-occupied property. The
owner collects rent from the tenants, but does not pay the
mortgage. The owner skims equity from the property during the
prolonged collections and foreclosure proceedings.
Fraud can be committed by misrepresentations on application
documents, appraisal documents, credit reporting documents, income
documents and asset documents. The most prevalent fraud is income
documentation fraud. The red flags in these documents are numerous.
In fact, the Florida Association of Mortgage Brokers has a full-day
class and Chase Manhattan has a four-hour course on detecting red
flags. Most lenders will provide you and your company with programs
to help you spot red flags and stop fraud.
The mortgage broker as the gatekeeper
The first line of defense that the mortgage industry has against
fraud is the mortgage broker. Mortgage brokers are the gatekeepers
for mortgage lenders. Most mortgage lenders are removed from the
markets that they serve. The underwriters, processors, managers and
quality control personnel do not know a mortgage broker's local
market. A mortgage broker knows the local market.
The good mortgage broker is familiar with and will avoid shady
professionals and suspect transactions. A good mortgage broker will
be able to read his client for the red flags of fraud. Moreover, of
course, a good mortgage broker will not be a party to a real estate
scheme to defraud a mortgage lender. The future health of the
industry lies with the first line of defensemortgage brokers.
Lenders are doing more background checks on mortgage brokers. The
Mortgage Asset Research Institute maintains a database for lenders
with the names of the unscrupulous. Subscribers can access the
database and check to see if a potential broker or other
professional is listed.
The quality control department implements procedures to detect
fraud in the application, canceled checks, sales contracts, Social
Security number usage and verifications from third parties.
Inflated appraisals are rampant in the industry. With a fraudulent
appraisal, a mortgage broker may be able to obtain a loan in excess
of 100 percent, even with a sub-prime borrower. Most lenders accept
real property appraisals that are ordered by mortgage brokers or
the customer. Even if the words are not exchanged, an appraiser
knows that to continue to get business from a mortgage broker's
office, he needs to hit the right number. The right number is
provided on the appraiser's order form.
Lenders are tightening up on the unrestricted use of appraisers.
Many lenders are using independent review appraisers. Some are
using automated appraisal systems that make a statistical property
valuation with a margin of error. With tax preparation software,
fraudulent tax returns can be easily and quickly prepared. To
combat this fraud, lenders have borrowers sign a Form 4506. With
this form, a lender can compare the tax return submitted to the
lender and the tax return submitted by the borrower to the IRS. In
the future, lenders, with the help of computers, will have more
control of the raw data and, hence, the integrity of the data. The
good guys are using computers to catch up with the bad guys. With
more automation of the mortgage process, appraisal automation,
direct IRS and bank verifications, mortgage credit scoring and
increased use of other information databases, underwriters will be
better able to detect and reduce fraud before a loan is closed.
Until all of this technology is available, it is essential for
everyone in the mortgage industry to have safeguards to detect and
The computer has been a double-edged sword in the mortgage
industry. On one side, it has provided technology to speed up and
automate mortgage processes. On the other side, with scanners,
laser printers and graphic programs, high quality fraudulent
documents have been easier to create.
You must be constantly vigilant against lowering your standards.
"Everyone does it" is no excuse. Your career as a mortgage broker
is to present your borrower in the best, most honest light. The
fact that a borrower can't afford the payments and does not qualify
for a loan program does not give a broker the right to create
documents in order to close the loan.
There is a plethora of products that fit almost every situation.
This includes no-questions-asked hard equity loans where the lender
does not ask for any documentation (verifications, credit, income,
assets, debt ratio, etc.). However, in return, the loan-to-value is
generally 65 percent or less, and the hard equity lender has
absolute control over the appraisal.
Gary Opper, CPA, CFP is the president of Approved Financial
Corporation and is past president of the Florida Association of
Mortgage Brokers Miami Chapter. He may be reached at (954) 384-4557
or e-mail email@example.com.