Written By: Joel Palmer, Op-Ed Writer
Mortgage underwriters and processors should be extra vigilant during the lending process due to the increased potential of mortgage fraud.
CoreLogic, which provides information intelligence to several financial industries, including real estate and mortgage finance, has estimated that one in every 122 mortgage loan applications this year contained fraud. That’s a higher ratio than a year ago, when one out of 143 applications was fraudulent.
CoreLogic’s Mortgage Fraud Application index increased by almost 17 percent from last year and reached its highest level since it was created in 2010. The total number of applications containing fraud is higher this year than last, despite there being a lower volume of applications. In the second quarter of 2017, CoreLogic estimated more than 13,000 mortgage applications had indications of fraud.
According to CoreLogic, the highest incidence of mortgage fraud occurs in New York, New Jersey and Florida. The greatest growth rate of mortgage schemes is happening in Iowa, Indiana, and Missouri.
The reason for the increase in fraud is two-fold, according to CoreLogic. This year has seen a greater share of purchase loans than refinances. Plus, there are more originations coming through wholesale channels.
In addition to investigating and enforcing action against mortgage fraud committed on the lender side, the FBI also warns against fraud committed by borrowers and their accomplices as a means to procure housing illegally. Borrowers may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.
Some of the common mortgage fraud schemes listed by the FBI include:
Illegal property flipping. This involves the purchase of a property that receives an inflated appraisal and then quickly sold. In addition to fraudulent appraisals, this scheme may involvefalsified loan documentation, inflated buyer income, or kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees.
Builder bailout. Builders who need to unload excess inventory may use a bailout scheme to offset losses. According to the FBI, builders find buyers who obtain loans for the properties but who then allow the properties to go into foreclosure.
Equity skimming.In this scam, an investor uses a straw buyer with false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. After closing on the property, the straw buyer signs the property over to the investor in a quit claim deed. The investor does not make mortgage payments, and instead rents the property until foreclosure.
Silent second. This occurs when a home buyer borrows the down payment from the sellerthrough a non-disclosed second mortgage.
Air loans. This is a nonexistent property loan with no collateral that involves a broker who invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows.
Freddie Mac’s Fraud Mitigation Best Practices reference guide lists several elements of mortgage fraud that mortgage underwriters and processors should be on the lookout for, including:
• Inflated property values and appraisals using fabricated or altered values, or inappropriate comparable sales.
• Loan-levelmisrepresentations, including information about employment, income, occupancy, down payment or equity contribution, source of assets, undisclosed consumer or mortgage debts, undisclosed incentives, and other invalid information.
• Rapid title transfers, in which title documents may show the borrower on a refinance or the seller on a purchase loan is not the owner of record.
• Unusual HUD-1 payouts, which include excessive amounts and/or to unknown entities to cover phantom liens, false invoices for repairs, referral fees, and non-lien disbursements.
• Straw borrowers, whose name, social security number, and credit history are used to hide the identity of the actual borrower. Straw borrowers are chosen for their ability and willingness to qualify for the loan.
CoreLogic also noted in its report that it will be closely monitoring cash-out refinances and home equity loans. With rising home prices and greater available equity to homeowners, fraud risk will likely increase for these types of loans.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.