Our Expert Q&A on Investment Property Schemes
July 20, 2016
Mortgage fraud schemes can be tricky in more ways than one. They prey on a victim's desire to act on an offer that is too good to be true. And they aren't all high profile. Some aren't splashed across the front pages of The New York Times. At least, not yet.
All the more reason for us to share the latest news with our Seller/Servicers so you can stay ahead of the curve and mitigate fraud as soon as you discover it.
Investment property schemes fall into this "on the rise" category. Often spread by word of mouth, which may keep the paper and digital discovery trail to a minimum, they typically involve individuals purchasing multiple investment properties with as little personal investment as possible. The borrower is promised rapid appreciation on the property and the opportunity to flip for a profit at a future date.
In the following frank conversation with Robb Hagberg, Director of Fraud Prevention with Freddie Mac's Financial Fraud Investigation Unit (FFIU), we explore how to detect, prevent and report investment property schemes.
Q&A with Robb Hagberg
Q: Robb, before we delve into today's topic, investment property schemes, what can you tell our Freddie Mac customers about the state of mortgage fraud in today's real estate market?
A: Since the financial crisis, we've observed a lengthy cooling down period of mortgage fraud in loan originations. Over the past two years, we've seen only mild upticks in activity. But now, old fraud schemes are being dusted off, given a fresh coat of paint and are hitting the market. These include investment property schemes.
Q: What specific factors are making it more conducive for people to commit fraud in today's market?
A: It's all about the environment: expanding credit policy, inexperienced home buyers, rapid increases in collateral value and a return of bad actors to the market.
Q: Now on to today's focus - what should our customers know about investment property fraud?
A: Investment property fraud involves luring inexperienced borrowers into purchasing rehabbed investment real estate with the promise of little or no money down and complete property management. Typical attributes of this scheme will include false down payments, inflated appraised values and refinances of hard money loans that are actually vehicles to create the illusion of equity. These types of schemes have also employed straw buyers.
Q: How did you and the FFIU team discover this rise in investment property fraud?
A: It actually started where it almost always does – a diligent employee who followed escalation processes. Based on a solid tip from our quality control team, FFIU identified what appeared to be an investment property scheme in which inexperienced, out of state buyers were acquiring investment property using a hard money loan and then immediately refinancing. The refinances were then sold to Freddie Mac. Closer inspection of the loans indicated that the appraised values were inflated and that the borrowers put little or no money down on the actual acquisition of the properties. Data analysis showed that this was not an isolated incident. We suspect multiple similar schemes, which appear to follow this pattern, are happening in other locations.
Q: What red flags should Seller/Servicers – and borrowers, too, for that matter – be aware of?
A: Common red flags that we've seen:
- Financing of out of state investment property;
- Borrowers may be renting their primary residence, but acquiring rental property;
- Borrowers are financing multiple properties;
- An appraisal indicates a prior property flip but offers no reasonable rationale for increase in value;
- Borrower is refinancing a recently originated purchase loan;
- Refinance is paying off what appears to be short-term/hard money financing.
Q: How are the fraudsters able to circumvent the controls this industry has in place to prevent investment property fraud?
A: It's really a matter of the fraudsters looking for guidance work-arounds and changes. For example, when a lender or investor doesn't have a seasoning requirement on refinances, they are more vulnerable to purchase as refinance schemes. The fraudsters will rationalize their staging of these transactions by claiming, “it meets your requirements.” But no matter how a lender/investor may write its guidelines, these types of transactions are not what they intended to fund.
Q: What best practices can lenders follow to detect or avoid investment property fraud – and other fraud – schemes?
A: Underwrite prudently and with common sense. Just because a loan file meets the investor's documentation requirements doesn't automatically mean the loan is a good risk or a reasonable underwrite. Focus carefully on the documentation in the file and the story it tells about the borrower. Ask yourself: are the collateral and transaction in sync and do they make sense?
Q: What should our customers who want to report fraud or suspected fraud to Freddie Mac do?
A: Don't hesitate. I would not only encourage our customers, but also remind them that reporting to Freddie Mac is a Single-Family Seller/Servicer Guide requirement. They can refer suspicious activity to Freddie Mac by emailing our fraud mailbox at firstname.lastname@example.org or by calling (800) 4FRAUD8. They can always give me or another member of the FFIU a call – we love to hear a story!
Q: Thanks, Robb. Any final thought to leave customers with today?
A: It's time for our industry to get back to the basics. We need to remember what we know about making good credit decisions. That means saying no to bad ones and knowing the counterparties with whom we interact. We are smarter than those who perpetrate fraud and we need to stand strong together in fighting it.
For More Information
- Read the Single-Family mortgage fraud mitigation best practices document and mortgage screening checklist.
- Visit the Freddie Mac fraud prevention web page and share our updated resources with appropriate members within your organization.
- Refer to Single-Family Seller/Servicer Guide Chapters 3100 and 3200 for our complete requirements on fraud prevention, detection and reporting.
- Contact us immediately if you suspect fraud related to any loans we're working on together. Call (800) 4FRAUD8 or email Mortgage Fraud Reporting.