Mortgage Fraud

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As with any full documentation, mortgage products such as FHA, VA or Conventional financing, documentation standards are a major consideration, more particularly the validity of the documents contained in the mortgage file. Demonstrating a borrower’s willingness and ability to repay the mortgage debt is critical for long term asset performance as is valuation verification where overall collateral assessment is concerned.

It is more important today than in the past that we thoroughly document each and every loan file to not only determine overall loan quality but to conform to the increasingly tighter credit and appraisal standards which are now the norm. It is also for this reason that we must be more aware of mortgage fraud red flags then ever before.

Mortgage fraud has always existed in the mortgage industry however over the past 7 years several programs were available which allowed borrowers to simply state their income or better yet, provide no income at all. Needless to say things have changed drastically over the most recent two years and instances of mortgage fraud are now on the rise and it is something that mortgage professionals need to take seriously.

There are two basic reasons that individuals will try to perpetrate fraud, these being “Fraud for House” and “Fraud for Profit” with one being no less harmful than the other. As foreclosures increase, so does investor activity and the potential for things like flipping and equity theft. As credit standards tighten so does the potential for individuals who might consider fraudulent pay stubs in order to qualify for the property of their choice.

Fraud is defined as the deliberate deception perpetrated for unlawful or unfair gain and where mortgage lending is concerned generally involves material misrepresentation or omission of information with the intent to mislead a lender into extending credit that otherwise would have not been extended.

“Fraud for House” schemes usually include misrepresented income and/or assets as well as occupancy fraud. False or forged employment verifications as well as false pay stubs, W-2’s or tax returns may be provided by the borrower. False bank statements or loans represented as gifts may also be provided. Review the file for inconsistencies and compare documents to each other to find other potential red flags.

“Fraud for Profit” schemes can include things like foreclosure rescue scams, equity theft, property flipping as well as affinity fraud. When trying to identify these it is important to know who you are doing business with as well as understand what potential fraud schemes individuals can perpetrate. Look for information and documentation discrepancies as well as things like significant cash proceeds on transactions as well as what appears to be a non-arms length transaction.

In general loan application red flags to consider are: Significant or contradictory changes from handwritten to typed application, employer information that is not consistent with documentation contained in the file, commutes that are significantly unrealistic, downgrading property, lack of accumulation of assets compared to income or visa versa, years of schooling not congruent to profession or unsigned and undated application, low year to date income or significant changes in the application throughout processing.

Needless to say these are not the only indications of mortgage fraud so use a common sense approach to reviewing the documentation contained in the mortgage file. Fraud is easier than ever to perpetrate do to internet tools as well as other software now available to the general public. If you are reviewing a file and something does not seem right then chances are you are right so keep looking. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)