The ways in which the industry can prevent fraud are evolving along with the nature of fraud itself, and the answer to preventing one of the latest waves of fraud appears to lie in finding new and better ways to track participants and their information in distressed home sales as well as in mortgage transactions.
Addressing the types of deceptions seen today is a very different matter than when the housing industry was booming early last decade, and mortgage fraud was not scrutinized and investigated by federal agencies as persistently as today.
Between 2005 and 2007, Interthinx conducted an origination study and found fraud in 13% of the sample. Traditionally, the industry is around 1% to 2%, said Ann Fulmer, vice president of industry relations for Interthinx, and that is why people did not pay attention to mortgage fraud during the boom.
In contrast—with unemployment rising, home prices continuing to fall and defaulting properties still at high levels—today lenders have decided to crack down on mortgage fraud by reviewing various mortgage applications such as income documents and appraisals more thoroughly. These changes in policies and practices have forced fraudsters to be very clever when thinking of their next scheme that preys on vulnerable homeowners.
According to mortgage fraud analysts, one of the prevalent trends that has developed in response to this situation has involved “flopping” a distressed property for a lower price than what the lender is owed. The property being “flopped” is usually owned by an underwater borrower that can't afford to pay their mortgage, is facing foreclosure or is considering a short sale in which a real estate agent usually values the property to be less than what can be earned on the open market.
The lender agrees to take the lower price and the agent then purchases the property in his name or the name of a straw buyer who then decides to sell the asset to a non-arm's-length buyer, typically an investor, that the lender is unaware of for an inflated price either the same day or very soon after the initial sale.
Frank McKenna, vice president of fraud strategy at CoreLogic, said fraudsters make between $50,000 to $100,000 for “flopping” a single property. He added that lenders lose more than $375 million a year alone on single-family residences when they sell undervalued houses based on the broker price opinions submitted to them by the dishonest real estate agents.
“This has gotten to be quite a big problem and most borrowers don't know about it,” McKenna told National Mortgage News. “Shady, manipulative people are taking advantage of borrowers that are distressed in their property. They are going out there saying there is money to be made and I know there are a lot of unfortunate people who cannot afford to pay their mortgages, so I will take advantage of them as well as their lenders.”
With less than one out of 50 homes being “flopped” nationwide, representing less than 2%, McKenna said this trend is common today because of the number of properties that are in trouble throughout the country.
“Flopping also hurts neighbors because when you have a property that sells for an artificially low amount, it affects property valuations in an entire community and makes the market that you are living in less secure, causing lenders to have more scrutiny,” McKenna said.
Fulmer said default-related fraud schemes, predominantly short sales, are so popular today because the “flipping” portion of the scam (the higher-priced sale or sales that occur after the initial “flop,” when a lender unknowingly sells the property to a fraudster for a lower-than-market price) is generally an all-cash transaction difficult to track.
Fulmer said Interthinx is currently developing a short sale solution that looks for patterns to identify the participants in a transaction more quickly. She added that limited testing is being done right now and there is no specific date when this product will be available for servicers and lenders.
“Fraudsters do not go into a bank thinking they are going to lie to get a loan on a house they can't afford to buy,” Fulmer said. “They are coached by somebody. About 99.99% of borrowers are not criminals.”
In order to catch fraudsters, Fulmer believes it is important for lenders to go beyond just using automated technology to verify the paperwork that is submitted during the mortgage application process. She thinks that underwriters should be trained to analyze the documents to notice any possible sign of fabrication or forged signatures.
“It is a lot more sophisticated now because fraudsters are not using white out anymore, but Adobe Photoshop,” Fulmer said. “Underwriters should have a 'does this make sense” kind of approach when reviewing the documents.”
According to Fulmer, the biggest misrepresentation in forged documentation relates to an individual's income, both in the origination and loan modification sides.
“Sometimes, the false records are so obvious where a bank statement on the first page says one of four, but the second page says two of six,” Fulmer said. “We have seen cases where they have been absolutely fabricated and one of the tricks they like to do is use a false bank name with a made up address. It is important for lenders, risk managers and quality control people to start thinking like a criminal to keep bad loans from closing and preventing fraud from taking place.”
McKenna concurs with Fulmer that the primary way to stop mortgage fraud is for lenders to take on more responsibility before approving a loan or allowing funds to be disbursed from one person to another.
“Typically, when you have fraud, you will see something about a person, whether it is a real estate agent appraiser, broker or internal loan officer, who is exhibiting a pattern in the data that looks abnormal,” McKenna said. “We can make fraud much less commonplace by really scrutinizing people and the transactions by getting rid of the bad ones as often as we can. That will make fraud less common.”
Courtsey of Sr Mortgage Officer
Gina Starr
NMLS# 227483
Red Rock Mortgage & Lending LLC
405-210-3900
