The Most Common Mortgage Fraud Classification By Tommy A. Duncan
The most common fraud classification in the first through third quarters of 2008, as reported by the Mortgage Asset Research Institute (MARI) by all states in mortgage originations is application fraud. Application fraud represented 61 percent of all mortgage misrepresentation in originations. Tax return/financial statements followed second at 28 percent, appraisal/valuation at 22 percent, verification of deposit at 21 percent, verification of employment 15 percent, escrow/closing documents at 10 percent, and credit report at four percent. 2008 mortgage fraud types Mortgage origination year (all states) Fraud classification: 2008 Application......................................61% Tax Return/Financial Statements ....28% Appraisal/Valuation ........................22% Verification of Deposit ....................21% Verification of Employment ............15% Escrow/Closing Documents ............10% Credit Report ....................................4% Below is a list of the top three states by each fraud types for 2008: Application Misrepresentation 61% (all states) New York ........................................74% Michigan and Florida......................67% Illinois ............................................66%
Appraisal Valuation 22% (all states) Colorado and Rhode Island ............38% Georgia............................................31% Missouri ..........................................29% Verification of Deposit 21% (all states) California ........................................37% New York ........................................27% Maryland ........................................26%
Escrow/Closing Documents 10% (all states) Michigan ........................................18% Maryland ........................................16% Illinois and New York......................15%
Current appraised valuation: (all appraisals performed by nationally recognized appraisal companies). current $5.9 million (April 2009), $6.3 million (November 2008) $6.1 million Property info: 6400 SQ FT home on 4 1/2 acres in estate back-country area. Separate guest house, small barn, pool, pond. World-class neighborhood. CLTV: as low as 40%. Client Credit score: 800 Borrower has perfect employment, career and un-affiliated mortgage history spanning 30+ years. Client has cash reserves of 8-10 months I&P. Client seeks stated loan with verified assets. Assets verified through notarized bank verification of deposits forms or letters. Client will accept short-term commercial note, private lender note. Title has been held for ten years in a family trust. Client (borrower) will guarantee mortgage, and, in addition, the Trust will guarantee the mortgage. Trust has verifiable income (2005, 2006, 2007). Client WILL NOT pay application fees under any circumstances. Appraisals, plot plan, tri-merge credit, 1003, photos available to bona fide lenders.
O The credit report historical mortgage payment only showed one month’s payment and not 12 months where a payment or two was missed. Twelve months of mortgage history is needed.
Home can be used for primary residence, OR, used for rental income (which has been its use in 2005-2008).
Contact Trust representative at: 202-489-9292 (Washington, DC) or by email at greenwich@usa.com
O AUGUST 2009
Credit Report: 4% (all states) New York ........................................12% Michigan ..........................................9% Rhode Island ....................................8%
Specifics: Prefers Private Investor/Hard Money Lender
MORTGAGE PROFESSIONAL MAGAZINE
Verification of Employment 15% (all states) Missouri ..........................................25% Florida and New York ....................21% California and Maryland ................14%
NEEDED residential refinance for Greenwich, CT. estate property
www.NationalMortgageProfessional.com O IDAHO
Tax Return/Financial Statement 28% (all states) Maryland ........................................42% Georgia............................................34% New York ........................................32%
The MARI report collected its data from industry collaborative sources where only federally-insured financial institutions and their affiliates participate. Therefore, the reporting is limited. As far as I know this does not include all lenders with pre-funding quality control (QC) and post-closing QC support. Nor does it include government agencies such as the U.S. Department of Housing & Urban Development (HUD), the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA), who may be responsible for underwriting or funding loans. Because of the limited reporting base, there may have been different trends due to the change in the market if the Suspicious Activity Report (SAR) had a broader reporting pool. After being involved in a number HUD audits, I see a shift. The loans that for which I am referring to was not privy to SAR during underwriting or after funding. The trends I see appear to be mostly refinances and the bulk of the problems occur in credit underwriting. However, after in-depth investigation the findings go as deep as the lack of proper integration of QC plans and sound underwriting practices. Additional discoveries found management also failing in preparing written responses to QC reports or tracking findings from the QC reporting. There are many lenders performing cash-out refinances as a form of loan modification in order to buy homeowners more time because the homeowners are delinquent in credit payments. When all is said and done, the servicer is stuck with servicing a loan that was used to pay off other delinquent credit. In the grand scheme of things, it appears to give truth to the age-old cliché, “Rob Peter to pay Paul.” Regardless of the fraud type, scheme or fraud category, without a solid QC or quality audit (QA) program, there will continue to be mortgage fraud. A QC/QA program is only as good as the leadership of a mortgage operation. The stronger the leadership, the better the loans and the opposite applies to the weaker leadership and the lack of implementation of a strong QC program resulting in more problematic loans and increased financial risk to the mortgage operation and the economy. Some of the common discoveries in refinances include:
was continuously delinquent in the O The credit history, despite adequate previous 12 months and the payoff income to support obligation, letter showed unpaid late and nonreflected continuous late payments sufficient funds (NSF) charges withand delinquent accounts. out adequate explanations. O The file failed to demonstrate the borrower had established acceptable I could go on and on with examples credit for a considerable time period. of poor underwriting and O The borrower’s collecpre-funding QC. These tion accounts, includloans had well-prepared ing delinquent taxes applications; however, it totaling $63,297, were was the failure to substanpaid at closing. The tiate creditworthiness and letter of explanation history. In the majority of stated that the credit the HUD audits, there was problems were due to no identity theft … Red loss of income; howFlags Rules, no collateral ever, based on the or valuation problems … borrower’s tax return; the Home Valuation Code his annual income of Conduct (HVCC). It was had increased by “Regardless of the poor underwriting and $7,366 for the respecfraud type, scheme or pre-funding QC. I strongly tive tax year. fraud category, withbelieve if the underwriter O The HUD-1 indicated collection accounts totaling out a solid QC or qual- had placed a condition or stipulation on these refiity audit (QA) pro$15,637 were paid at nances, the processor or closing. The credit report gram, there will conloan officer would have indicated the borrower’s tinue to be mortgage mortgage was over 60 fraud. A QC/QA pro- met the request of the days delinquent three gram is only as good as underwriter or the loan would have been denied times in the previous 12 the leadership of a for the lack of creditwormonths of closing withmortgage operation.” thiness. The underwriter out adequate explahas to be the watchdog nations. and is the source of the longevity and O The HUD-1 indicated collection accounts, including delinquent utili- survival of the mortgage company. The next question I must ask myself ty payments totaling $3,320, were paid at closing. The credit report continued on page 10 indicated the borrower’s mortgage
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