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MBA: Commercial/multifamily mortgage originations fall in Q2

Aug 20, 2008

Mortgage fraud trends and tips: With mortgage fraud on the rise, the need for quality control is more important than everAnna DeSimonemortgage fraud, financial crimes, MIDEX, MARI Mortgage fraud in the United States is pervasive and growing. Over the past three years, the number of Suspicious Activity Reports (SAR) filings related to mortgages has tripled and the number of investigations processed by the FBI has quadrupled. By definition, mortgage fraud schemes contain some type of material misstatement, misrepresentation or omission in the funding, purchase or insuring of a loan. There are two distinct types of mortgage fraud. Fraud for housing represents borrowers who make false statements in order to qualify for a loan. Fraud for profit involves collusion by industry insiders and, according to the FBI, accounts for 80 percent of fraud cases. Mortgage originations dropped $1 trillion dollars between 2003 and 2004. Sadly, it is the reduction in originations that is considered a factor in the increase of fraud. If the perpetrators of mortgage fraud are industry insiders, they can maintain their lifestyle. In June 2004, the FBI consolidated its mortgage fraud program into the Financial Crimes Section of the FBI's Criminal Investigative Division and has been proactive in forming partnerships with federal agencies, regulators and industry trade groups to combat fraud. The FBI embarked on a zero-tolerance program within the mortgage industry to identify and stop the frontline of industry insiders involved in mortgage fraud through mandatory reporting. Insiders are defined as appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and processors, settlement/title company employees, mortgage brokers and loan originators. The FBI has collaborated with the Mortgage Bankers Association of America (MBA) and industry leaders to establish broader SAR requirements for mortgage lenders. Non-depository lenders, appraisers, brokers and other mortgage professionals who do not have adequate protection under the current safe harbor program would file a Suspicious Mortgage Activity Report, known as the SMARt Form. Over the past 10 years, major mortgage lenders, agencies and insurers have been submitting information describing incidents of alleged fraud and material misrepresentation to a central database. The database is maintained by the Mortgage Asset Research Institute Inc. (MARI) and is known as the Mortgage Industry Data Exchange (MIDEX). MARI can mine the MIDEX database to obtain statistics on a wide range of mortgage fraud characteristics. The MIDEX data show the types of problems found in loan fraud files seem to have been relatively stable throughout the past four years. The geographic distribution during the past four years has fluctuated slightly and the statistics for a given state may differ for prime lenders versus sub-prime lenders. The MARI Fraud Index (MFI) is a numerical system that that measures fraud. An MFI rating of 100 indicates the level of fraud that would be expected from a given state based on the level of origination. An MFI of zero means that no fraud was reported. An index of 300, for example, indicates the level of fraud is three times greater than would be expected. Lenders must deploy fraud detection and deterrence steps on both a pre-funding and post-funding basis. While many mortgage programs in today's industry call for less documentation and verification, lenders are cautioned to use stricter controls. Fannie Mae and Freddie Mac have strengthened quality control requirements on the SISA (stated income, stated asset) loans. Quality control steps must include a salary reasonableness test to assess whether the borrower's stated income conforms to the industry, geographic area and job title. This may be completed at no cost through's Web site ( A second step for quality control auditors is to validate the employer through telephone and web directories. Verbal re-verifications of employment are also completed and documented by quality control staff. Most lenders and secondary market investors require a Request for Transcript of Tax Return (4506/4506T) to be signed by borrowers at closing. This authorizes the lender to obtain copies of tax transcripts from the IRS, but only if the quality control re-verification is completed within 60 days of closing. While the industry generally orders tax return transcripts for self-employed borrowers, the 4506T also enables lenders to obtain a W-2 wages-only verification. Fast, easy and inexpensive, this one-line transcript immediately identifies bogus W-2 forms. Fabricated W-2 forms are very common because these standard forms can be purchased in any stationary store. Pay stubs have been created through sophisticated use of computer word processing graphics. In light of today's awareness of consumer privacy and information security, lenders must take careful measure to ensure that all document re-verification on a pre-funding and post-funding basis is treated confidentially. Before faxing an employment verification, the receiver should be notified. Mailed re-verifications should be addressed to the signer of the original employment verification or addressed to "payroll" and clearly marked confidential on the outside of the envelope. Re-verification of checking or savings account statements is often neglected, since they appear authentic. However, financial statements may be cut and pasted to show higher account balances belong to another person and the pasting is virtually undetectable after photocopying. There are a wide number of tools and resources available for lenders in the area of fraud detection. Lenders must train staff on mortgage fraud trends and issue clear directives on an inter-departmental level. Often, the best method for fraud detection is to use plain old-fashioned common sense. An investors document requirements are only a guidelineasking for more proof means less risk. Anna DeSimone is director of mortgage quality control for Integrated Compliance Solutions in Arlington, Mass. and the former president and founder of Bankers Advisory Inc. DeSimone is author of numerous publications on the topic of mortgage lending and fair lending practices, and serves on the Quality Assurance Committee for the New Jersey Mortgage Bankers Association. She can be reached by e-mail at [email protected].
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