The national Mortgage Fraud Index is 144 (n=100), which is essentially unchanged since Q3 2009...
The generally accepted definition of mortgage fraud is any material misstatement, misrepresentation or omission relied upon by any individual associated with the mortgage transaction to fund, purchase or insure a real estate loan.
Material misrepresentations and omissions often involve:
False and/or misleading information on the loan application (1003) and/or financial statements
Borrowers, who are upside down on their properties, buy another house whose value has also declined and let the old house go into foreclosure. The borrowers calculate that they can stay in the new house long enough for the foreclosure's "hit" on their credit scores to diminish.
In order to get the loan for the new, cheaper house, the borrowers tell the new lender that they intend to rent out the old house and submit bogus leases for the old property to support that claim. This misrepresentation inflates the borrower's income and skews the debt-to-income and total debt ratios. While the new lender is the direct target of the active fraud, the old lender suffers a loss when it is forced to foreclose.
These schemes involve short sales, which arise when desperate homeowners owe more on their mortgages than their homes are worth. When performed legitimately, the home owner sells the home for the lower market value, and the lender agrees to accept that amount. In an illegal turn, fraudsters fake very low appraisals for the homes and use those appraisals to justify low short-sale prices - well below true market values.
If mortgage companies don’t inspect appraisals closely, they may agree to sales of homes that should be worth thousands and thousands of dollars more in individual values.
The buyers - in collusion with the home owner - then flip the house for a large profit.
The Employment/Income Fraud Index has climbed 23% year-on-year, including a sharp quarter-on-quarter increase of 11%.
In the past, many borrowers misrepresented their income and/or assets with “no-doc” loans otherwise known as “liar loans”, approved on the basis of good credit scores with no documentation.
After the credit crisis hit, no-doc loans disappeared. But creative criminals have not. The new liar loans are fully documented loans with near perfect fraudulent documents thanks to advanced technology and photocopying equipment. Documents such as income statements, savings accounts and tax returns can easily be fabricated.
A lot of people are facing foreclosure today, and these schemes prey upon them. What they have in common is that the “rescuer” is the only person who benefits.
Equity stripping: In this scheme a desperate borrower is contacted by a “rescuer” who promises to provide the money needed to pay the overdue mortgage and bring it current. The borrower is told to make all mortgage payments to the “rescuer”, who promises to forward them to the bank. But hidden in the paperwork is a deed that transfers title to the rescuer. Once the “rescuer” gets the title, he pockets the borrower’s mortgage payments and then either refinances the property --and doesn’t pay the new mortgage-- or sells it out from under the borrower in order to take whatever equity was left in the property. In either case the borrower loses the home.
Straw buyer re-finance: This scheme involves borrowers who are in foreclosure who can’t qualify for a re-finance. The borrower “sells” the property to a relative or a close friend, intending to remain in the home and make the mortgage payments. This is mortgage fraud because the friend or relative lies about his/her intent to occupy the property.
A variation of the straw buyer re-finance involves borrowers who are trying to sell their homes to avoid having a foreclosure on their credit report. The “rescuer” in this scheme offers to buy the house for more than the asking price but requires the borrower to kickback the excess money to the “rescuer” or a company controlled by the “rescuer.” This is mortgage fraud because these kickbacks are illegal and because the property value is artificially inflated in order to generate the funds for the kickback.
These schemes are concocted by developers and builders who are stuck with homes or condos they can’t sell in today’s market. To entice buyers, they offer “concessions” which are added to the purchase price but not disclosed to the lenders. The concessions may include a car with purchase or a promise that the developer/builder will pay the mortgage for the first twelve months. This is mortgage fraud because the price of the home is artificially inflated in order to cover the developer/builder’s cost for the concessions and because the concessions are concealed from the lender in order to avoid questions about how much the property is really worth.
A variation of the builder bailout involves the borrower’s down payment. The loan application shows that the borrower is using his/her own funds for the down payment, but in reality it’s made by the developer/builder. This is mortgage fraud because the price is inflated to cover the developer/builder’s payment and because the source of the borrower’s down payment is misrepresented.
Artificially inflating market value (or income) in a specific area by the selling & continuous reselling of property(s) at increasing prices based on fraudulent appraisals. Goal is to obtain larger loans and to “skim” the equity (or falsely represented equity) off of the property.
Involves at least two conspirators
Property(s) is sold back and forth between conspirators in a brief period of time
Sales price is increased with each transfer
Mortgage payments made until desired inflated value is obtained
Two or more closings occur almost simultaneously
Conspirators default leaving lender with significant loss
Often involves Straw Buyers to conceal identities
Can involve unknowing buyer who is left with huge payments, inflated value and unmanageable repair bills
An individual used to serve as a borrower when the real borrower either does not qualify for the loan or wants their identity disguised. Sometimes solicited and paid for their services to qualify for a mortgage.
A person applying for a loan on behalf of an investor
Parents applying for children or other relatives
A person applying for illegal aliens
A person applying for a loan because the original borrower did not qualify – usually involves resubmits on the same property within a short period of time
Can be “friendly”, i.e. relative or friend; actual liability/consequences often not understood
Applicant has no intention of owning or occupying property
Personal information about applicant may or may not be accurate
The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed money. The second mortgage may not be recorded promptly to further conceal its status from the primary lender.
A credit back to the borrower from the seller listed on the HUD I
1) A property owner applies for home equity loans with multiple lenders at the same time. As lenders don't all report into the same credit bureau, they may not be aware the same owner had simultaneously applied to multiple lenders.
2) Multiple sales of the same house. In this case, the same `owner'-- who may not even be the rightful owner -- sells the same property simultaneously to several unsuspecting buyers with same day or next day closings.
Non-existent property loans where there is usually no collateral. An example would be a broker invents borrowers and properties, establishes account for payments and maintains custodial accounts for escrows. They may set up an office with a bank of telephones each one used as the employer, appraiser, credit agency, etc. for verification purposes.
Related to reverse mortgages and abuse of the elderly. Usually involves a family member who poses as the owner of the property and obtains a reverse mortgage without the knowledge of the rightful owner. Most of the time a POA is involved.
While many real estate investment clubs are legitimate, some are not. Fraudsters behind investment club scams may know nothing about real estate or know a tremendous amount and, therefore, every which way to pull off a fraud scheme. They leverage credit and manipulate collateral values to extract money from victims and leave lenders with overvalued and foreclosed upon properties.
Perpetrator identifies homeowners who are at risk of defaulting on loans or homeowners who are already in foreclosure. The fraudster misleads the homeowner into believing he can save their homes in exchange for a transfer of the deed and upfront fees. The fraudster profits from these schemes by re-mortgaging the property, pocketing the fees paid by the homeowner, or selling the property and pocketing the equity in the home while evicting the original owners (victims).
Fraudster may use a straw buyer, false income documents and false credit reports to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The fraudster does not make any mortgage payments and rents the property until foreclosure takes place several months later.
Equity skimming can take many forms. For example, Cash Out refinances - where the property owner never intends to pay the lender. They are simply skimming the equity out of the property. Or, when a fraudster files a fraudulent release of mortgage, then deeds the property to themselves or a partner, then obtains a Cash Out refinance around or under 50% so there is no appraisal required. The real homeowner is not aware of anything going on.
The Occupancy Fraud Index decreased by 7% from the previous quarter, and over the last year has decreased by 13%.
The borrower wishes to obtain a mortgage to acquire an investment property, but instead the borrower claims on the loan application that he will occupy the property as his primary residence or second home. If undetected, the borrower typically obtains a lower interest rate than was warranted and is required to provide a smaller down payment than normally required. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction.
Appraisals based on lists of repairs to be done, or repairs that have not been completed on a property; create an inaccurate and inflated value of the property.
The established value is based on the property with all repairs/upgrades completed. Typically loans based on these appraisals are cash out refinances. When an inspection is done after closing, or in the instance of an EPD (early payment default), the inspector then discovers the property repairs/upgrades were never done.
No receipts provided to indicate the repairs were done
Appraiser does not site repairs completed to property
Pictures of the property do not reflect the repairs
The square footage or room count in public records do not match appraisal
The property owner’s signature is forged on a deed and presented for recording. Typically this occurs on vacant land or homes that are owned free and clear and involves a straw borrower. If there is an existing mortgage, the fraudster will simply file a fraudulent release of mortgage at the same time they file the deed.
A recorded quitclaim deed or grant deed with cash out refinance soon following
One or more transfers of title in a very short period of time
Signature on new deed does not match when compared with deed on record
The unauthorized use of a person’s signature. Loan file forgeries may occur on any document with a signature. Signatures are forged as a matter of convienence or to improve the likelihood of loan approval or closing.
Documents signed at the same time have different colored ink
Evidence of white out or correction film
Signature looks traced, use window test
Lines (cuts) around signature on copied or scanned documents
Significant variances in the signature for the same individual on documents signed at different phases of the lending process
With today’s technology, it is possible to create or alter any document in a loan file. Using Microsoft’s Office products Excel and Word, the fraudsters can create just about any document required by a lender.
Key Characteristics of created douments:
Typing errors – misalignments
Misspelled words on professional documents, i.e. SSA cards, bank statements, title commitments, appraisal forms
Documents that are too clean, too clear, too crisp.
Key Characteristics of altered douments:
Evidence of white-out or correction film (Dinosaur Fraudster techniques)
Mail Drops are used to divert otherwise legitimate mail for the purpose of creating an aleternative form of verification. The intent is to make the mail appear to be coming from a legitimate third party source.
Company addressee may be legitimate name or fictitious name
Drop boxes are from private companies
Drop box number may be formatted to look like a street address with the box number as a unit or suite number
Verifications from drop boxes are generally inflated with high account balances, income or length of employment
Borrower with low credit score intentionally misrepresents his credit worthiness to a lender in order to obtain more favorable loan terms or to obtain a loan he would not otherwise be qualified to receive. Borrower pays a third party for the temporary use of a stranger’s credit history to “boost” his credit score.
In general – without documentation – such as in regards to occupancy. The borrower says he will occupy the property but actually intends to rent the property. This is very prominent and a major cause of repurchase from the agencies, but there is not a true forgery or document alteration. Lying can occur on any piece of data within the loan file.
Disobeying anti-predatory lending/high cost laws. Nationwide proliferation of changing laws and regulations challenge mortgage companies and brokers to remain 100% compliant. Costs of non-compliance can be significantly reduced by education and automated loan level compliance controls.
The practice of a financial representative deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend themselves.
1. Truth-In-Lending Act (TILA) Violations — Inaccurate reporting of APR and finance charge calculations on borrower disclosures. Calculation errors may occur as a result of failing to include one or more prepaid finance charges in the calculations, incorrect disclosed funding dates, or last-minute changes made to the loan by the settlement agent at the closing table. If understated, the lender is in violation of the federal Truth-In-Lending Act as well as many state laws prohibiting such actions. Lender required to reimburse borrower for the difference, and may be subject to statutory damages, administrative sanctions, loan buy-backs, and lawsuits. In addition, the rescission period may reopen, creating additional risk for the lender.
2. Anti-Predatory Lending Violations — Consumer protection laws, regulations and guidelines exist at the federal, state and local levels, and function by placing strict but varying limits on the rates and fees that can be charged to a borrower. Violations typically occur because of the vast misunderstanding of how they work. Examples of violations include failing to include fees such as yield spread premiums in the calculations or using an incorrect loan amount value to perform the calculation. Penalties for violations are as varied as the laws that govern. Typical costs include borrower reimbursements, statutory and punitive damages, attorneys’ fees, administrative fines and penalties, loan buy-backs and reformation, and class-action lawsuits.
3. State Law Violations (Non-Predatory) — Failing to maintain adequate safeguards in loan origination systems and well as document software systems results in loans containing illegal terms or provisions. Examples include illegal prepayment penalty clauses, rates that are usurious, or fees that are not allowed to be charged. Typical penalties include actual damages and costs, attorney’s fees, administrative fines and penalties, loan buy-backs, and class-action lawsuits.
4. Reverse Mortgage Violations — With an expected 55 million Americans turning 62 in the coming years, the “next big thing” will almost certainly be reverse mortgages. Common violations include failing to adequately disclose the APR, which is different than that of forward mortgages, and providing incomplete or improper disclosures. Because this is such a new segment in the industry, penalties are less clear than with forward mortgages. As these types of mortgages affect senior citizens, class-action lawsuits are a real and serious threat.
5. Real Estate Settlement Procedures Act (RESPA) Violations — RESPA prohibitions place limits on a lender’s or broker’s ability to charge or pay fees that are hidden from the borrower. Common violations include accepting kickbacks or referral fees, upcharging for services provided by third parties, and charging for services not actually performed. Penalties include actual damages, administrative fines and class-action lawsuits.
Others: Lending without providing borrowers a reasonable, tangible net benefit, state-specific disclosure errors, servicing violations, Fair Lending violations