Mortgage Fraud – Don’t Forget about the Classics
July 9, 2014
When it comes to mortgage fraud, what's old often becomes new again and the "classic" instruments used to perpetrate origination fraud are back. While appraisal fraud, falsified income and asset documentation, and straw buyers may not be as prevalent today as they were five years ago, there is plenty going on to indicate it's time to get back to the basics of fraud detection and prevention. Some people just have no shame.
Mortgage professionals who are familiar with the basic elements by which fraud is perpetrated are best equipped to protect their companies from the larger fraud schemes as they emerge. The following elements of fraud are among those with which you should be familiar:
Property Valuation Manipulation
Inflated or deflated appraisals may contain fabricated or altered values and supporting information or use inappropriate comparable sales, which may also contain false values and information.
The loan application and supporting documentation may contain misrepresentations of documentation, such as employment, income, occupancy, down payment or equity contribution, source of assets, undisclosed consumer or mortgage debts, undisclosed incentives the use of straw borrowers, alternative credit documentation, and invalid social security numbers.
Rapid Transfers of Title
The property seller should be the owner of record on the contract, appraisal, and title documents on a purchase transaction. On a refinance transaction, make sure the borrower on the loan application matches the owner of record on the title documents and adhere to any applicable seasoning requirements. If the property seller or the borrower is not the owner of record, the loan needs to be investigated to ensure the circumstances of, and parties to the transaction, are legitimate.
Unusual HUD-1 Payouts
Payouts may be made to unknown entities, often the ones profiting from the scheme. Payouts might also be made to cover phantom liens, repair allocations, referral fees, and non-lien disbursements.
One item of note: As mortgage professionals uncover something that doesn't make sense, or is inconsistent with expectations, it is considered a "red flag" requiring further research. Red flags are not proof of fraud; mortgage professionals needs to dig deeper for clarification and to confirm or exclude fraud, especially if multiple red flags are identified. Visit Freddie Mac's website for more elements of fraud as well as larger schemes and their associated red flags. We'll continue on the topic of fraud in a future newsletter.