February / March 2020 Newsletter

What is Mortgage Fraud?
And Who’s Guilty of It?

With today’s interest rates scratching the surface of all-time lows, homeowners and new home buyers are flocking to their lenders in search of the dream mortgage loan. We all know, the right mortgage loan can make all the difference in the world. And often times the loan officer and/or borrower don’t go about obtaining the loan in the most orthodox way,
therefore committing Mortgage Fraud.

Mortgage fraud is an insistent threat despite the attempts taken to intercept the perpetrators involved. According to the CoreLogic Mortgage Report, 1 in 123 mortgage applications were reported as fraudulent in the second quarter of 2019; this is a marked increase of 1 in 109 applications in 2018. Mortgage fraud is an intentional omission of data or distortion of information to deceive a lender or underwriter associated with funding or insuring a loan. One should not confuse mortgage fraud with predatory mortgage lending, which happens when a consumer is deceived or cheated by the lender. However predatory lending can often be a part of mortgage fraud.

Mortgage fraud happens on two levels – ‘fraud for housing’ wherein a borrower can misrepresent certain important, pertinent information on a loan application to acquire ownership of a property. He or she can also join hands with an appraiser to manipulate the appraised value of the said property. The second and a more notorious level is ‘fraud for profit’  wherein industry insiders can use their specialized knowledge or position to commit a financial crime. They can be mortgage brokers, bank employees, loan originations, appraisers, attorneys; etc. The intent is not just to acquire property but also malign the system to steal money and equity on an ongoing basis from homeowners or lenders.

Types of Mortgage Fraud

Occupancy Fraud – This happens when the borrower has an intention to apply for the mortgage as an investment property but writes on the application that he/she wants the property to serve as primary residence or secondary home. This is because lenders typically offer lower loan amounts and levy a higher interest rate for investment properties
compared to owner-occupied ones. In other words, to get favorable loan terms, the borrower gives falsified information of risk to the lender.

Withholding information about liabilities – In this case, a borrower may not reveal information pertaining to other mortgage loans or new or additional debt, in a bit to reduce the debt information on the loan application. Since the borrower’s true debt picture is hidden, the lender may grant a higher loan amount to the borrower than what she/he is
otherwise qualified for, increasing the risk for non-recovery of loan amount.

Income Fraud – This is when the borrower exaggerates her/his income to qualify for a higher loan amount or mortgage.

Employment Fraud – This is a case in which a borrower may claim that she or he is in a higher post of a company or provide false proofs of being self employed
in company which may not exist.

Appraisal Fraud – This happens when a property’s appraised value is purposely overstated (to benefit from cash-out refinance programs) or understated (to get a foreclosed home at a lower rate). In many scenarios, it has been witnessed that such a fraud happens when the borrower is in cahoots with a dishonest appraiser or uses graphic editing tools to distort information on supportive documents.

Identity Thefts – This is a case wherein a borrower poses as another individual, uses his or her documents to get the mortgage and then disappears. The victim and the lender are both kept in the dark, oblivious to the con game. The fraud is only discovered when the lender is not able to recover the payments and finds out that that the mortgage was given to the wrong person.

Organized fraud (Fraud for Profit) – This involves coexistence and cooperation of multiple parties to defraud the lender of substantial amount of money. People involved in this kind of crime include fraudulent appraisers, scrupulous settlement agents and dishonest property owners. In various cases, it has been reported that investors have been lured into schemes by organizers wherein it has been stated that the house will be renovated, renters will come in, rents will be collected, mortgage payments will be done on a timely basis and upon sales of the property in future, the profits will be shared. Once the loan is disbursed, the organizer does the vanishing trick, no repairs are done, no renters are located, and the investor ends up paying up substantially on the mortgage on that property. This can have a cascading effect on banks too that lend millions of dollars against properties which are far less than what they are worth.

Air Loans – The air loan is a loan that is procured on a property which is non-existent or for a borrower who is also non-existent. Everything is fake about this deal – the title of the property, the insurance and the borrower; each of these are created by a group of professionals who work together to further their agenda of duping investors. From fake home addresses and false contact numbers to fake employment verification processes, the network is designed to put money in the hands of these scammers. In short, no property is bought or sold.

What’s being done to curb Mortgage Fraud?

It is time for the industry to come together and protect investor, borrower and their own interest. One has to go back to the basics and train their advisors and staff to check documentation thoroughly and keep an eye for discrepancies.

Proper technological supplementation in the form of code checkers, chip readers and MRZ (machine readable zone) can definitely help in weeding out incorrect information. Digitization is the key; one has to ensure that various standards of document checking and verification, are complied with and every officer is trained with the latest methods of data authentication.

The benefits of automation and using technology can be a boon to the mortgage industry. Once the relevant photo IDs and photographs are given along with personal details, the relevant technological processes get into motion, ensuring that all information is compliant, matching, true and factual. Not only is the process done effectively but also quickly, minimizing scope for error and discrepancies.

One should employ an integrated digital verification system where all interested parties can cross-check information to their satisfaction, easily, swiftly and in a seamless manner. What is important is a cohesive approach adopted by lenders and other stakeholders involved in the mortgage process.

Of course, there are, and will be instances of people with malicious intent to beat the system. However, it is commendable to note that in the view of rising incidence of mortgage fraud cases, states have pushed up monitoring applications with upgraded technical processes.

The impetus has been on licensing for loan officers and continual education to keep abreast of the system and cutting-edge developments in the industry.
Government agencies have been taking an active interest in monitoring the real estate and insurance industry.

In order to stick to compliant methods and abide by regulatory practices, many states have pushed for timely and regular auditing for mortgage companies. Suspicious, nefarious activities in the mortgage industries are being closely monitored by Economic Crimes Unit II of the FBI.

Mortgage fraud can be reduced on an individual level to a large extent by setting realistic expectations from the market. Industry professionals should also adhere to high levels of integrity and set credible profit goals and work closely with consumers to ensure that the market is lucrative, viable and just to all stakeholders.

Give us a call if you have any questions about your taxes and your mortgage. We’re here to help 248-524-5240.