As published in Scotsman Guide's Residential Edition, May 2011.
The increase in foreclosures and distressed properties has brought about new forms of mortgage fraud. Ann Fulmer, a co-author of analytics-company Interthinx's 2010 Annual Mortgage Fraud Risk Report, tells us more about this shift, new trends in mortgage fraud and how originators can continue to help mitigate risk.
What were the key findings of the 2010 Annual Mortgage Fraud Risk Report?
While the overall fraud risk in originations has declined and the trends for occupancy-fraud risk and for collateral-valuation-fraud risk have remained relatively unchanged, there has been a significant spike over the year in identity-fraud and income-and-employment-fraud risk, which had been pretty dormant for awhile and now are coming back with a vengeance.
Why is there such a strong correlation between fraud risk and foreclosure activity?
Fraud is cyclical, and the people who commit it are criminal opportunists. They always go where the economic opportunities are. Right now, the money is in short sales and anything that relates to distressed borrowers, underwater properties and REOs because that's where all the economic focus is with the programs emphasizing foreclosure prevention.
What types of fraud are emerging with the distressed-property market?
Where you've got underwater borrowers, that's where the income and employment and identity fraud risk go up. In a lot of cases, people who are in financial trouble already are using friends and family to help achieve basically a loan modification. Or borrowers are approached by the orchestrators of a scheme who present it to the borrower as a rescue. There's an endless variety of ways they can get control of the property.
The report discusses "flopping," which involves short-sale transactions. What are some potential indicators of a flopping scheme?
Some of the techniques are getting really creative. It's a very serious issue because it is difficult to figure out how to spot this stuff ahead of time. A red flag would be if you have borrowers who have been paying their bills, and all of a sudden they stop, and you look at their credit report and they're still paying everything else. Another red flag would be if a borrower goes into default and immediately inquires about doing a short sale. A good practice is to always track all the parties in a transaction to look for patterns.
What else can originators do on the front end of a deal to mitigate potential fraud?
By raising their standards across the board, originators have done a lot to reduce fraud risk on the origination side. The biggest risk right now is to those lenders that are financing these properties after a short sale or an REO flip because they need to really be paying attention to collateral values. Also, run a title report or a sales history on a property and check to see if there are transactions within 90 days, 95 days or 120 days.
Ivanna C. Sukkar is the editor of Scotsman Guide.
Reach her at (800) 297-6061 or firstname.lastname@example.org.