Written By: Stacey Sprain
“Mortgage Fraud” is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to approve, close, fund, purchase, and/or insure a loan. Generally, fraud involves a willful or deliberate act with the intention of obtaining an unauthorized benefit, such as money or property, by deception or other unethical means. Such fraudulent acts may be illegal, unethical, improper, or dishonest and include but are not limited to:
False statements on a loan or credit application
Falsification of documents provided to substantiate credit, employment/income, assets, personal identity, occupancy status
Mail or wire fraud
Alteration of 3rd party documents
Misrepresentation of occupancy status
Omitting data that could have a negative affect on loan approval
Advising/coaching borrowers to state untruthful data on the loan application
Authorizing or receiving payments for goods not received or services not performed
There are two main categories of mortgage fraud: "fraud for property" and "fraud for profit."
Fraud for property is most often associated with a single loan transaction and is committed by embellishing income and/or concealing debt. The borrowers on these types of transactions generally intend to repay the loans they obtain but in some cases, lender oversight can lead directly to lender losses when data and details are not reviewed or verified as carefully as they could and should be.
A common type of fraud for property includes falsifying stated income/low doc/no doc loan details in order to get borrowers approved. Several states are in the discussion stages of passing legislation or have already passed legislation that will demand higher scrutiny and place more responsibility on lenders who offer stated income, low doc and no doc loan program types. Lenders in such states will now be held accountable for assuring that their programs require a borrower's repayment ability to be evaluated even when direct verification of the qualifying income is not a requirement of a loan program. States like Ohio, Minnesota and Colorado are leading these movements with many more states expected to follow suit.
In fraud for profit schemes, often there are multiple parties involved in numerous transactions with the common goal of shared financial gain and monetary profit. These transactions often involve inflated property values, straw buyers, property flipping rings and may include multiple representatives such as the realtor, buyer, seller, originator, appraiser, processor, underwriter and closing agent.
The effects of fraud for profit schemes can be far reaching and may go beyond lender losses. These schemes may also lead to consumer losses. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When property values increase, property taxes increase as well. Legitimate homeowners may find it difficult to sell their homes as surrounding properties affected by fraud deteriorate creating comp issues for legitimate appraisers trying to justify property values of true properties in the immediate neighborhoods.
In part 2 of this continuing series we will take a closer look at industry losses in order to understand how it affects mortgage processors specifically.
About The Author
Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: firstname.lastname@example.org.