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National Mortgage Professional
Aug 22, 2008

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 professional; •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 skim. 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 property. 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. Industry reaction 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 reduce fraud. 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. Conclusion 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 approv01@aol.com.
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