When the Bough Breaks, The Fraud Schemes Will Fall

Mortgage fraud rises when volume drops after a sustained period of financial growth as we are experiencing now.

It is safe to state that mortgage lenders may have never had it so good. Despite the tremendous negative effects of the COVID-19 pandemic on most of the economy, low interest rates and a shift in demographics from cities to urban and rural areas have fueled lending business at levels not seen since the heady days of 2002-2005.

The effect of this boom on business, besides an increase in revenue, profits and demands for more operations staff to handle the high volume, has caused some lenders to avoid adopting any new technology to enhance their quality control and risk management obligations lest it disrupt the gravy train. To a degree this is certainly understandable because while everyone is drinking from a fire hose it is very difficult to pause and take a breath let alone prepare staff to onboard a new process or procedure. In addition, there is a tendency which I noticed during the last boom period, to treat the risk of QC and fraud losses as a “cost of doing business” when a few bad loan losses can be easily made up with more volume.

The problem occurs when business starts to slow down, which it will, and those who are profiting greatly from this period of high volume realize that they may not be able to sustain their current lifestyle. As we saw in 2005-2009, the drying up of pipelines can often lead to creative ways to keep the business going. This includes creative ways to make loans work (fraud for housing) and criminal efforts to take advantage of relaxed origination and lending practices (fraud for profit).

Some of the scams we saw in the past included straw buyers, fake title companies, fake settlement firms, undisclosed parties at the closing table, valuation fraud, renovation fraud, and if the economy turns sour, short sale and foreclosure fraud.

Having been around the mortgage industry for more than twenty years I have recognized that our business is cyclical. There are periods of lows followed by periods of highs. Right now we are at the highest peak, however inevitably that will change. Because fraud is always just around the corner, lenders are encouraged to avoid the inclination to put off adopting new or improved quality control and fraud prevention tools internally so that they are better prepared when the time comes, and it will, when the fraud boom follows the mortgage boom.

What are you doing now, today, to prepare for an increase of fraud tomorrow?

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