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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2013

Be on Guard Against Fraud

Protect the industry by knowing the common types of mortgage fraud

Every year, mortgage fraud costs a lot of people a lot of money. It costs the mortgage lenders and originators who have to buy back loans. It costs the borrowers who must pay for increased expenses passed on from lenders. It costs managers and executives more time and money in developing quality-control procedures. Perhaps most of all, however, it costs the mortgage industry its reputation.

That’s why it’s so important for mortgage brokers and originators to stay vigilant and well-informed when it comes to fraud. For mortgage professionals who are relatively new to the industry, that vigilance begins with a thorough knowledge of the types of fraud often encountered — and how you can combat them.

Types of fraud

Although there are many different kinds of mortgage fraud, there are several types that occur more than others. The following are four of the most common types of mortgage fraud:

  1. Application fraud: This occurs when consumers intentionally misrepresent certain aspects of their mortgage applications, including income, liabilities, credit history or employment information.
  2. Real estate value fraud: This type of fraud consists of a property’s value being intentionally misrepresented by an appraiser or other party.
  3. Real estate title fraud: This occurs when a title company intentionally misrepresents liens, judgments, lis pendens or other information on a property’s title.
  4. Transaction fraud: This kind of fraud involves an individual — or multiple individuals — participating in an organized plan to secure a loan by intentionally misrepresenting facts.

Regardless of the type, all of these instances of fraud are motivated by one of two things: housing or profit. In other words, fraudsters invariably are seeking either to get a home or to get a fraudulent profit via a mortgage transaction.

When it comes to fraud for profit, mortgage brokers and originators should be aware that a fraudster often has the help of several other entities involved in the transaction. A strawbuyer, for instance, is someone who purchases a property with the intent to hide the property’s true owner. Strawbuyers frequently are used by unscrupulous investors who want to get better interest rates, builders who want to get more working capital or even by sellers themselves who are looking to get money from their own properties illegally.

Another common fraud-for-profit scheme is what’s called a land flip. This is when a property is purchased below market price and then quickly sold at a price that’s higher than market value, thereby allowing someone to get a higher mortgage amount. Not surprisingly, land flips necessitate the cooperation of at least one dishonest appraiser.

Whatever the specific fraud-for-profit scheme may be, it likely will involve misrepresenting information on many of the documents involved in a mortgage transaction. With that in mind, mortgage professionals should be wary of suspicious-looking information on application documents, appraisals, credit reports or income verifications.

Industry assistance

Mortgage brokers and originators also should be aware of the various ways in which their own organizations help them combat fraud. For instance, most banks and brokerages will have a quality-control department that implements procedures to detect fraud in applications, canceled checks, sales contracts, third-party verifications and Social Security number usage.

In brief, with the help of computers, lenders now have more control of their companies’ raw data, and with that, more control over the integrity of their data, as well. Make no mistake: Although fraudsters have developed new schemes and methods, so have industry professionals looking to catch up with them. With more automation of the mortgage process — including appraisal automation, direct bank verifications, mortgage credit scoring and the increased use of certain information databases — many underwriters now can detect and reduce fraud before a loan is closed.

Even so, it’s essential for everyone in the mortgage industry to have their own safeguards for detecting and reducing fraud. Spotting potential red flags early in the process can help you stop a fraudulent transaction in its tracks, long before it ever reaches the underwriting stage.

Act as a gatekeeper

Mortgage brokers and originators should never underestimate their role in preventing mortgage fraud. After all, in many ways, the first line of defense that the industry has against fraud is the mortgage originator.

In many ways, originators are essentially the gatekeepers for lenders and bankers. Many lenders are removed from the markets that they serve, and similarly, an organization’s underwriters, processors, managers and quality-control personnel don’t work as closely with a local market as originators themselves. Successful originators are familiar with — and avoid — any and all suspect professionals and transactions.

Moreover, good mortgage originators won’t be a party to a real estate scheme itself, whether directly or indirectly. Remember that the future health of the mortgage industry lies with you and the way in which you conduct your business. Fraud not only hurts an individual company — it also hurts the entire housing market.


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