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CSI: Mortgage Fraud

Greg Holmes
May 31, 2011

Many experienced mortgage lenders are skilled at spotting a number of tried and true mortgage fraud techniques like veteran crime scene investigators looking for tell-tale clues. But, today’s fraudsters are developing increasingly complex schemes that exploit changing market conditions. Mortgage professionals need to respond and keep pace by utilizing all the resources that are available to help them detect and prevent costly fraud. It was a run-of-the-mill mortgage application. All the documentation was there: Employment verification, pay stubs … W-2s. Everything seemed to be in order—until the lender looked beneath the surface. Armed with all of the available evidence, the mortgage professional could only reach one conclusion: Mortgage fraud. And the only question that remained was, “What made the applicants think they could get away with this?” Comparing information on an applicant’s mortgage application with IRS data can reveal glaring discrepancies that don’t pass muster as “honest mistakes.” Grossly overstated wages, exaggerated employment history, and unreported losses are just a few issues that can leap out in a side-by-side comparison. They demand an explanation—if one is possible—and should bring the loan approval process to an immediate halt. Unfortunately, spotting mortgage fraud is usually not an open-and-shut case. Unlike the crime scene dramas on television, mortgage fraud investigations don’t get resolved in 60 action-packed minutes. They are tedious, time-consuming, costly and aggravating distractions for lenders. Worse yet, perpetrators are employing increasingly elaborate schemes and technological weapons—like phony phone centers staffed with co-conspirators—to commit their crimes. Fortunately, the mortgage information services industry is keeping pace, providing lenders with a sophisticated arsenal of tools to detect, prevent and combat fraud. These tools put critical information in mortgage professionals’ hands quickly, inexpensively, and in a form that allows them to take necessary actions immediately. This kind of knowledge is the best defense against the bad guys and their bad intentions. Old favorites die hard People who commit mortgage fraud generally have two motivations: To purchase a property they otherwise could not afford or to make a profit. Those who commit fraud for housing usually inflate their income so that they can get a home loan. Fraud for profit—also called industry insider fraud—generally involves several people who work together to defraud a mortgage lender or seller and then benefit financially from the sale of a property. Many of the schemes that are used to accomplish this illegal activity have been used for years. Some of the most common types of fraud involve applicants who submit false employment information, lie about occupancy, or deliver phony W-2 forms or pay stubs. Improperly disclosed income information can sometimes be accidental, but in many cases, a closer examination reveals intentional misrepresentation. Another familiar fraud operation involves people who conspire to purchase a property for a low price, obtain a dishonest appraisal that inflates the property’s value, and then quickly sell it for a profit. Fraudulent property flipping was common in the sub-prime heyday, but new regulations that require an independent appraisal and a third-party review for appraisal accuracy have made a significant dent in this type of scheme. New areas of concern Unfortunately, increased regulation and tightened lending practices in one area can lead to increased illegal activity in other sectors where standards and safeguards are still being developed. Foreclosure short sale real estate-owned (REO) properties are transactions that have attracted a high incidence of fraud, as have high-volume programs designed to aid the distressed real estate market, like mortgages insured by the Federal Housing Administration (FHA). Mortgage professionals surveying the market have also noticed the emergence of a number of new scams and schemes. These include: ►Bailing out the builder: Facing a stagnant market, some developers resort to inflating the value of their properties to cover the cost of buyer incentives like cash back at the closing. ►Dishonest “repayment:” Perpetrators of credit-enhancement fraud will sometimes file amended tax returns for prior years, sending the IRS checks for supposed back taxes to give the appearance of higher income. Other applicants try to get around underwriting requirements by adding themselves to the bank accounts of family members and friends. ►Fee for fraud: A number of scammers have offered to help homeowners facing foreclosure to negotiate with their lenders under the terms of the Emergency Economic Stabilization Act (EESA) and Housing and Economic Recovery Act (HERA). The perpetrator tells the homeowners that they must pay an upfront fee, when in fact no such fees are required to participate in a loan modification program. ►Reverse mortgage rip-offs: Senior citizens are the targets of fraud involving home equity conversion mortgages (HECMs), commonly called reverse mortgages, which are available to those 62 years of age and older. A typical case could involve an unscrupulous investor—or, even more distressingly, a family member or caregiver—purchasing an inexpensive bank-owned home and selling it at an inflated price to a senior straw buyer. ►Short sale scams: Homeowners facing foreclosure may be contacted by a con artist who promises to help them stay in their home if they deed their property to the perpetrator in a land trust. The homeowner is listed as the trust’s beneficiary and a real estate agent working with the perpetrator is named the trustor. A short sale is negotiated with the lender, but without the lender or the homeowner’s knowledge, the real estate agent quickly sells the property for a profit to another buyer. ►Victimized twice: Some fraudsters have contacted homeowners with offers to help them stave off foreclosure. The homeowners are conned into sending their house payments to the perpetrator, who files for bankruptcy on the owners’ behalf, but without the owners’ knowledge. The foreclosure is postponed because of the bankruptcy petition, giving owners a false sense of security, but the process restarts when no one attends the bankruptcy hearing. Data: The best defense Facing this daunting array of creative malfeasance, mortgage professionals need to remain vigilant even as they keep their day-to-day focus on closing good loans and growing their business. The most efficient way to do this is to use all the applicant information that is available in a systematic way that helps uncover attempted mortgage fraud early in the application process. An excellent first step is for lenders to tap into Tax Return Verification (TRV) reports and other reports that enable them to confirm income and screen applicant information against national databases. Suspicious information and discrepancies in employment history, Social Security numbers, addresses and phone numbers are highlighted so they can be investigated. TRV reports offer a streamlined method of verifying a borrower’s tax information by electronically comparing the income-related lines of the borrower’s tax return with the same lines on file with the IRS. Mortgage professionals also can tap into a comprehensive identity verification and application analysis service that compares application data to multi-source databases. This includes: ►An identity investigation report that identifies risk factors associated with an applicant’s name, Social Security number, address and phone number. ►An employment report that verifies the company address, phone number and year established, and conducts a reverse telephone look-up. ►A MERS system report that verifies the Social Security number associated with property lien information to identify potential misrepresentations. ►A subject property report that identifies a property’s current owner and provides its prior sales and refinance history, a brief legal description, and property characteristics. ►A mortgage participant report that verifies the identification, licensing and certification of each person or company involved with the transaction. ►An occupancy and bankruptcy report, gathered from multiple third-party sources, that determines occupancy, length of time at the address, and whether the applicant has filed for bankruptcy. A savvy mortgage professional’s arsenal also includes running automated valuation models (AVMs) on all loans, and ordering a field review appraisal on properties. Additionally, files should always be reviewed for quality control before and after funding. Anti-fraud measures are, without a doubt, increasing the expense and time burdens shouldered by mortgage professionals. But today’s most technologically-advanced mortgage information services allow mortgage professionals to take the quality control and compliance steps necessary to catch fraud early, minimize its impact, and prevent it from being murder on your bottom line. Greg Holmes is national director of sales and marketing for Salisbury, Md.-based Credit Plus Inc., a provider of credit and mortgage information services since 1928. He may be reached by e-mail at [email protected]
May 31, 2011
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