Written By: Jane Harford
In our 4th week of reviewing current trends in loan fraud, we will review the basic purposes of fraud schemes and general types of fraud. We will also appraisal basics that may be changed to reflect greater value or better comparables used to push property values higher than they really are. It is prudent to be able to catch the “fraudulent” practices before loan closing so that the loan does not wind up in a default. It is prudent to be able to catch the “fraudulent” practices before loan closing so that the loan does create millions in losses for the lender, investor, agency and others.
Fraud schemes are generally broken into two types of intent:
Fraud for property – This is usually done by buyers who are interested in obtaining a property for which they do not fully qualify in one or more aspects-such as income, assets, credit score, overall credit history, purpose of the transaction, etc. In this situation, the borrowers are aware of the fraud being committed-they are active in the intent to defraud. For them, it is a means to their goal-owning this home in any way possible. They don’t think of what the consequences might be if they get caught. Often, the fraud occurs in the areas of overstatement of income, assets or intent to occupy the property.
Fraud for profit - This form of fraud scheme is more complicated to detect since the folks making $$$$ from the scheme often are the professionals who are conducting the business on these transactions-loan officer, realtors, appraisers, title agents or lawyers. As the trends are detected, they change the “methods” used to conduct the fraudulent transactions. Often, these transactions are not detectable for many months and years. By that time, the schemers have moved on and may not be able to be caught.
Either way, the honest folks that conduct their business in a legitimate way are the ones who are bearing the cost of the schemes and their losses-heavy losses per year.
Some of the many types of fraud schemes found today are:
-Occupancy intent-very common-this is as simple as the borrower’s stated intention to occupy when they plan to use the property as an investment property or are purchasing for a family member or friend that can’t qualify.
-Pre-packaged loans-loans documents that come from a third party source not normally involved in the loan paperwork, such as the realtor.The borrower has very little contact with the mortgage lender.
-Multi state lending-the parties-loan officer, borrower and property found in 2-3 different States. There is minimal control in this type of transaction since the loan officer is “out of the area”. It is best to keep the parties to transaction close to that location.
-Non arms length-parties that are involved in some way taking part in the transaction. This often occurs when a family member purchases the home of another family member to save the property or bail out the person in trouble. Often these properties do wind up in default again.
-False documents-false income, assets, collateral etc.
-Excessive seller incentives-fees, payees and high dollar amounts that are not consistent to the transaction-indicating third parties making $$$$ on a purchase. Fees usually appear on the HUD 1(not the HUD1 approved by the lender).
Builder bailouts-Builder will “do anything” to sell homes-desperate to get out of properties.
Appraisal schemes-excessive use of poor comps, inaccurate information provided by an appraiser involved in kickbacks to overstate property values, stability of the market, zoning and highest/best use of property locations.
Buy and bail-borrowers are purchasing a smaller property in the same general location. They don’t have their current property sold and don’t/can’t provide their property lease. The intent here is to move into the smaller/affordable property and bail on the existing property-defaulting on the mortgage and letting the home go into foreclosure.
There are several more general types of fraud schemes, but these are the top types of fraud schemes. We will cover these in more detail when reviewing review of contracts, closing documents, etc in the next few weeks.
The specific types of things that are often found in the body of the appraisal are as follows:
- Differences in the names of the seller from sales contract, appraisal and title work.
These all must be the same and reflect the correct information.
- Details of the sales contract must be disclosed correctly. The terms of financing, detailed closing help/any excessive allowances or credits must be reflected on the top of the appraisal page #1.
-Predominant value of the area is often lower than the property value. The zoning information is not correct and must be further explained. Many times the zoning will not allow for reconstruction of the property as it currently exists. The appraiser must coordinate that information with local zoning offices.
-The property type and details on page 1 don’t match the sales comparison grid.
-Location of the comps used is of a greater distance that is the “norm” for the type of area-urban, suburban or rural. This may indicate that the appraiser felt that they had to increase the neighborhood boundaries to support a higher value.
-Dates of the closed comps may be greater than the 90 days that is currently required by the investor and secondary market guidelines. Often, it is necessary to request additional comps after doing the due diligence to show that other comps are available in the market area-they may well decrease the property’s market value, but must be used.
-Transaction history of the subject and comps may not reflect the most recent transfers or sales-the dates that documents are recorded can sometimes take up to 6 months. Unless the UW is also reviewing the title, that information would not be available.
There are many more detailed situations that we will review in further detail in an upcoming blog. Until then, conduct good business free of fraud!
About The Author
Jane Harford - As an NAMP® staff writer, Jane brings 30+ years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP® , please email us at: email@example.com.