Winning the Mortgage Fraud Game
JANUARY 2010 O
MISSOURI MORTGAGE PROFESSIONAL MAGAZINE
O www.NationalMortgageProfessional.com
By John Frank
32
Mortgage fraud continues to increase, The FBI clearly states that fraud is, despite the numerous news articles and “The intentional misstatement, misrepmedia attention that bring to light the resentation or omission by the applicant many schemes designed to take advantage or other interested parties, relied on by of mortgage processes. National banking, a lender to provide funding for, to purfinancial and mortgage trade associations chase, or to insure a mortgage loan.” invariably include, in their annual events, Government insuring programs and specific topics for fraud detection and miti- recent laws are now being designed to gation strategies. Individual state legisla- strictly follow the historical definition of tures are taking action in an attempt to sta- fraud, and not allow anything into the bilize internal economic facloan decision that has not tors; including property valbeen verified and validatues. Incidences of reported ed through independent fraud have increases so consources. On the heels of sistently that trending charts the demise of popular can be confused for those mortgage programs that measuring the popularity of were designed to “Trust” leading video games. With the word of the borrower, increasing pressure on it appears that the legislamortgage income streams tive pendulum has swung due to newly enacted legisin the opposite direction. lation, it is fair to ask if it Although in some cirwould have been less turbucles, the past programs of lent to have chosen a career “… the past programs NINA (no income, no asset) of NINA (no income, in politics. and SISA (stated-income, no asset) and SISA In July 2009, the Federal stated-asset), are rememBureau of Investigations (stated-income, statbered with fondness, most(FBI) released its mortgage ed-asset), are remem- ly for the ease of processfraud statistics for 2008. The ing and the profits they bered with fondness, report identified an increase generated, it can well be mostly for the ease of of reported fraud of 36 perargued that they representprocessing and the cent over 2007’s totals. profits they generated, ed the brink of disaster for Figures for 2009 were also the mortgage industry, it can well be argued reported as showing “signifespecially when allowed that they represented icant” increases. The FBI for the salaried borrower. the brink of disaster Web site categorizes mortWhat cannot be quesfor the mortgage gage fraud as either, “Fraud tioned is the demise of industry, especially for Property” or “Fraud for many origination compawhen allowed for the Profit.” “Fraud for Property” nies that relied heavily on salaried borrower.” entails the borrower misthese programs and upon stating income and/or debts ever increasing property in order to qualify to purchase a property. values and funding volumes. Many comThe borrower usually enters the transaction pany income strategies fell victim to the with the full intent of making payments, lure of easy profits and were crushed by although their plan may be short-term in unscrupulous borrowers who chose to lie areas where property values are rapidly or scheme their way through the mortincreasing. “Fraud for Profit” usually gage process. involves, “multiple loans and elaborate Mortgage companies can successfully schemes,” in order to gain large proceeds navigate these potentially dangerous from the purchase transaction. These waters by recognizing the changes in the schemes often leave the loan origination industry and responding with a strong company facing indemnification since any fraud policy that focuses quality control government insurance program (FNMA, (QC) resources heavily upon prevention. FHLMC, FHA, VA) would be withdrawn once Preventative audit and systemic controls fraud is identified. provide the ability to mitigate risk, while
managing large loan populations and large numbers of satellite branches, yet remaining flexible enough to meet each borrower’s individual financial needs. Although individual companies must set policies that best suit their corporate objectives, the prudent executive will be sure their policy includes these basics.
enables systemic review of values for the appraised property and the appraisal comparables with a comparison to current local market values. Identified exceptions can then be reviewed manually to ensure validity of the appraisal value.
Be aware of your environment
The Mortgage Asset Research Institute (MARI) produces a quarterly report on fraud and notes that the most common categories include misrepresentation of the application, income, employment, assets or debts, and/or occupancy. FHA processing requires independent validation of each of these critical loan elements. However, the need to provide immediacy for the customer in loan processing has pressured some lenders to take shortcuts that can lead to an unhappy ending where fraud is concerned. Many fraud schemes involve critical timing on the part of the borrower. For example, in an investigation of employment prior to funding, it is critical to perform a new validation rather than just initial the preliminary verification of employment (VOE), or mark it as, “same.” More than one potential fraudulent borrower has been stopped with a late stage VOE that was unanticipated.
With advancing technology, it is becoming increasingly difficult to combat those who intentionally work to defraud the mortgage lender. This enables the mortgage lender increased preventative controls without excessive additional costs. Mortgage industry leaders know that following the required Federal Housing Administration (FHA) Quality Control Plan offers only minimal protection against fraud for mortgage origination. Historically, it has been the standard to review 10 percent of closed loans to ensure compliance with the FHA postclose audit requirement and hope that fraud was never detected. This needlein-a-haystack approach often produced the desired result of finding nothing. Shifts in the market have required more vigilance on the part of the lender and a more comprehensive fraud net. The adage, “fight fire with fire,” seems to apply here as lenders have an arsenal of electronic measures available at the touch of a button, and the payment of a fee. Names such as Compliance Ease, Loan Safe, and Fraud Guard once thought of as luxuries are now becoming staples in mortgage processing. Technological advances enable the lender to review information from multiple databases that can provide critical data right up to the closing date. Although this may mean an increase in processing costs, it is a far more expensive lesson to learn after the loan has closed, that there are property valuation or borrower income related issues.
Obtain accurate collateral values “Fraud for Profit” schemes are attractive due to the lucrative payoff. Inaccurate property valuations are often at the root of such attempts where the property values have been exaggerated, frequently through manipulation of the appraisal. This leaves the lender or the insuring entity holding the bill when the scheme unravels. Again, use of industry software that accesses database information
Verify once, verify twice and then verify again
Follow the common red flags In November 2009, during the Fannie Mae Mortgage Fraud update, Senior Industry Relations Manager Amy Heinz stated that the published “Common Red Flags” could assist in fraud prevention. The red flag categories posted by Fannie Mae include key areas to monitor for the Mortgage Application, Sales Contract, Title, Employment and Income Documentation, and Asset Documentation. Including key red flag data points, such as unsigned or undated applications, same telephone number for applicant and employer may seem like obvious additions. However, postmortem examination of files gone wrong, often prove that elaborate schemes are the minority. It is more frequent that the simple requirements become stumbling blocks for even the giants of the mortgage industry. These common Red Flags form the foundation to a secure fraud policy.
Zero tolerance for fraud Part of the validation process may determine that internal documentation may be