First American Data Solutions recently released a report indicating that mortgage fraud has increased almost 6% in the first quarter. The rise in fraud is tied to the recent shift from refinance business to primarily purchase money mortgages. As everyone knows the purchase market is much riskier than rate and term refinance transactions. Whenever the market adjusts, rates increase, and home sales spike, then fraud rears its ugly head.
What type of fraud are First American and others seeing? : Unfortunately the same kind of fraud that has plagued the mortgage industry for years. These schemes continue seemingly impervious to the adoption of front end borrower fraud deterrence and detection tools. It seems as long as there is money to be made, criminal schemers, working with or fooling loan originators, have an unending stream of weapons available to cause havoc within a mortgage lender’s operations.
Fraud generally takes two forms: fraud for housing and fraud for profit. Fraud for housing involves efforts by an applicant with or without loan originator assistance, to fudge income, asset and employment numbers to qualify for a home purchase they otherwise would not be able to afford. The applicant intends to occupy the premises and pay the mortgage. Fraud for profit is far more insidious and usually is coordinated in an organized conspiracy involving multiple parties that may include a seller, buyer, settlement agent, attorney, real estate agent, appraiser and others. Motives are typically foreclosure avoidance and outright intent to steal the mortgage proceeds.
According to the FBI the most prevalent schemes they see, which have not changed in a decade, include: loan origination fraud, foreclosure rescue fraud, equity skimming, short sale fraud, illegal flipping, builder bailouts and straw buyers. At the lender level these schemes are fueled by income and employment misrepresentation, occupancy fraud, undisclosed transactions, undisclosed third parties, appraisal inflation, title policy substitution (fraudulent removal of actual liens) and wire fraud.
They key for lenders?: Training, diligence, full-time quality control staff, pre and post-closing audits, and well documented accountability for aiding, participating or willfully ignoring fraud at any stage of the mortgage process.
Mortgage fraud is not a victimless crime. It causes financial harm for lenders through non-saleable loans, loan repurchases, first and early payment defaults, and foreclosure costs. For honest consumers it can mean delays, transactions unwound, clouds on title, as well as legal fees and expenses. As costs increase for a lender, consumers may also feel those through higher rates, higher loan costs and more stringent underwriting guidelines.
At Secure Insight we have a motto, “Trust, but Verify.” Feel free to use it!