Before 9/11, mortgage fraud was considered to be the fastest growing white collar crime. After 9/11, money earmarked to investigate mortgage fraud nationwide was reallocated to Homeland Security.
Reports of mortgage fraud in 2000 were 3,515. By the year 2006 mortgage fraud-related suspicious activity reports rose to 28,372 or an average of 78 separate acts of mortgage fraud per day. (Source: Mortgage Asset Research Institute MARI April, 2007. Link opens PDF.)
Fraudulent mortgage activities result in artificially inflated property values, increased foreclosure rates, significant institutional financial losses, and increased costs which are passed on to consumers. This blog series on mortgage fraud will be divided up into 3 parts:
Part 1 Mortgage Fraud Basics
Part 2 Case Studies
Part 3 Recent Mortgage Fraud Developments and Future Outlook
There are three basic types of fraud in the residential mortgage industry:
1) Consumer fraud, or fraud for property, is perpetrated by borrowers when they misrepresent information on the loan application in order to purchase a more expensive home than one for which they would normally qualify. Consumer fraud is relatively minor and does not usually result in significant losses to a financial institution. However, recent statistics are alarming: Ninety percent of stated incomes were inflated by 5 percent or more, and in about 60 percent of cases, incomes were exaggerated by 50 percent or more.
2) Commission fraud is defined by one or more industry professionals misrepresenting information in a loan transaction in order to receive a commission on a loan that would not normally be acceptable to a lender. Commission fraud is a more common practice in the industry and is a concern to financial institutions. It can result in harm to the consumer and losses to lenders and insurers. Some researchers combine numbers 1 and 2.
3) Fraud for profit consists of systematic transactions by industry professionals who are attempting to steal a significant amount of the funds associated with one or more mortgage transactions. This type of fraud usually involves multiple parties in various disciplines within the mortgage industry, such as mortgage originators, appraisers, real estate agents, closing agents, builders and title companies. Fraud for profit usually results in significant—if not catastrophic—losses to financial entities involved in mortgage loan transactions and is of major concern to the mortgage industry. A few examples of this type of fraud include HUD I Settlement Statement fraud, land flips, fictitious lien releases and diversion of funds at closing.
Common Mortgage Fraud Schemes
Illegal Property Flipping
Property is purchased, falsely appraised at a higher value, and then quickly sold. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, and so forth. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme. A home worth $300,000 may be appraised for $400,000 or higher in this type of scheme. In part 2, I’ll tell you about an illegal property flipping scheme busted in Bellevue.
Silent Second
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. The second mortgage may not be recorded to further conceal its status from the primary lender. In part 2, I’ll lay out the now textbook case that happened over in Spokane.
Nominee Loans/Straw Buyers
The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan. There’s a set of cases like this here in Seattle.
Fictitious/Stolen Identity
A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information and credit history are used without the true person’s knowledge. Washington State is on the top 10 list of states with identity theft problems.
Inflated Appraisals
An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.
Foreclosure Schemes
The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner. Watch for a recent Bellingham case in part 2.
Equity Skimming
An investor 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 investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
Undisclosed Seller Concessions
A home buyer and home seller strike up a side arrangement in which money from the seller is transferred to the buyer after the close of escrow. For example, a sales price could be increased to “cover” this arrangement, yet the appraiser and lender are not informed. Sometimes escrow or the real estate agents know about this; sometimes not.
Last month, in a keynote address (link opens PDF) to the Washington Association of Mortgage Brokers, Scott Jarvis, Director of the Department of Financial Institutions (DFI), concluded that “Washington State cannot afford to ingore this national trend.
sniglet and RCC over at seattlebubble explained that bubble markets can hide mortgage fraud and that we won’t see an increase in mortgage fraud but instead, as markets cool, past mortgage fraud will be exposed. It may also be true that in a cooling market, desperate sellers and commission-based sales people are more willing to do desperate things. Also, the fraudsters switch gears and hit homeowners in foreclosure. Local case studies will be presented in part 2.
Report mortgage fraud tips to the FBI by following this link.
Part 2 Case Studies
Part 3 Recent Mortgage Fraud Developments and Future Outlook
Given the tightening of guidelines and the almost 180 degree turn in underwriting standards, i think that mortgage fraud will drop off in the coming year. Appraisals will be looked at more closely, etc. Presently, i feel the majority of scams will involve the foreclosure side of the market. Beware of “rent to own” schemes.
Mortgage Fraud is ever changing with new ways coming up everyday. Mortgage Fraud is not the only thing inflating prices. The true cost of a home is the purchase price minus all the seller closing costs. Realtor Fees of 6% raise a $400,000 home $24,000 not to mention the 1.78% excise tax another $7,120. That inflation of the true value of $31,120! Another thing that drive home prices is the cost of the home per month. No wonder home prices we over valued, acutally they weren’t over valued they were too cheap monthy. Fraud is not even close to the reason why markets are over value, it was the type of loan and incredibaly cheap money!!! I would buy a $5,000,000 dollar house with a payment of $4,000 per month!!!
It amazes me that there were never stricter guidelines to begin with to alleviate fraud in the mortgage business. Not only should the people involved in the transaction be held accountable but the consumer at some point. There have been numerous times when the consumer was also aware that the transaction, and all details of it were fraudulent, but chose to continue. Everyone involved needs to be held accountable, including the lenders who did NOT enforce strict guidelines.
I feel the way the industry is today, mortgage fraud would be tougher do to the 2nd appraisal review with most lenders and the new requirement going into affect in 09 where the appriser is not chosen by the loan originator, stated income is no where and most lenders require full doc and form 4506 before closing.
I have always been a fan of 100% income verification when looking at loans. The trend away from this over the past to more relaxed standards has helped to bring on many of our current problems. It creates an avenue for the consumer and/or the LO to cheat the system. I welcome more regulation and stricter standards – even if those in the industry close fewer loans and make less money.
I believe consumer fraud was almost encouraged in some ways by the
reps of different lending institutions and many LO’S. With so many entrepenuers today self employment is high. People with good credit, and the ability to make mortgage payments, fell into the “just get it done” trap. These are not neccesarily the foreclosure crowd. Stretching the truth became accepted to many.
Amazingly Fraud of any kind seems to spread like a virus or organism adapting to the new conditions and reestablishing its self in the new scheme of things, the criminal mind always proves it can be ingenious and destructive at the same time, and only constant vigil and careful regulating barriers can hope to curtail it.
It dosent matter if its identidy theft, skimming, straw buyers, crazy appraisal schemes individuals,gangs or what, some how the fraud guys seem to get involved they always find an angle or loophole. I wonder if some of the new Government Fanny, Freddie, stop forclosure programs will actually invite scams like the recent proposal to renegotiate mortgages if you can show that your paying more than 38% of before tax income (should be easy to make the adjustment if your not) have missed 3 payments ( easy to do ) and where the bank gets 1K for every one it helps. Is this not an invitation to fraud the System or not?
There will always be fraud. The changes made in 09 will help. It is time for the general public to be more aware of the fraudulent ways of all parties involved. All parties should be accountable. I think we will see less fraud, but I agree watch out for the “rent to own”
Fraud is an interesting human trait – ‘how can I get over.’… Certainly most humans have had that fork in the road experience where they chooses between what’s obviously right and obviously wrong. And that’s fine at the cash register level but I know of LO’s right now that are churning loans because of the rate advantage and these guys have all attended their ethics classes etc.
You can take the boy out of the city…One comment posted is that you’ll always have fraud at some level. Sadly I agree – so what’s the solution? We all get policed to the point we are totally disgusted. Probably this will continue to be the trend.
The devious mind will always find away through the loopholes. I think the tightened guidelines will help to slow mortgage fraud, but unfortunately it also punishes otherwise qualified borrowers from realizing home ownership. The pendulum has shifted so far in the other direction that good people are being denied financing. Maybe it is time to go back to needing 20% down and 32% dti’s. I agree that the guidelines were crazy over the last three years and many took advantage. It is a same when some spoil it for the rest. I recently feel that I am down in the catagory of use car salemen. It is a sad turn for our industry.
I believe that in our country there are many different nationalities and in their own culture they handle money in different ways. I believe that there were programs to help them to purchase homes but not paying taxes to the IRS with their cash based business was wrong and unethical. I believe that altering any type of documents to own a piece of american soil is FRAUD!… In my years in the industry, I have seen fraudulant documents and walked away or stopped the loan and notified all parties that have been involved.
I do believe that fraud is identifiable in most cases, as so many hands are involved in the process (those honest people should see it) but the bottom line is, can the borrower afford the home!
Too many greedy people out there that look out for their OWN interest. One bad apple spoils the whole crop!
Lets face it, lenders and banks were in competition as there were so many of them and they would put up the blinders to close a loan.
The reps were structuring the loans to get a commission.
The buyer was happy to own a piece of the rock.
The industry was way too loose and like I always said, it was easier to buy a home than to buy a car.
Above is a long list of types of fruad, by this time next year
that list will probably be twice as long. I sure hope not but the fraud kings and queens will be out in force this next year. As mortgage individuals need to do our part to make sure that we police fraud and not expect the government to catch it all.
In 2008 I’ve seen the lenders quidlines tighten up extremely do to all the fraud I hear out there in the industry. Full doc loans are also followed up with the 4506 form being executed. Adjustments for credit scores and LTV, etc. Its about time we tighten the reigns on some of the loans that were available 2 years ago. The subprime industry created the monster and in return encouraged greedy originators.
Mortgage fraud is a by-product of the loosey-goosey attitudes in this industry that has been prevalent for a long time. How can anyone be surprised with all kinds of scams going on out there? It was too easy for people to get away with it because there was not enough people watching out and too busy making money themselves.
I think those days are long gone. Our Industry is changed forever. Those people who perpetrated these frauds are gone from the industry. With regulations getting tighter and tighter and more eyes out there watching we will get back to the kinds of Industry that we can be proud of once again.
It is unfortunate to say this but I’ve seen or heard of all of these common fraud schemes. As I read through these common schemes, I thought to myself that the stricter guidelines is a double-edged sword that really hits some well qualified consumers more so than the perpetrators on our side of the business. Although the rules and guidelines have tightened up to prevent mortgage fraud, it has also made it fairly difficult for those that play by the rules and qualify to obtain a loan. While there will always be those that will try to cheat the system, I think that overall, it is a good thing that the industry is responding to combat fraud. Also, thank you for providing the link to report fraud. Just one more tool we have to keep our turf clean.
In reviewing this article I was amazed of the many ways that fraud in mortatage industry is committed .I realized that all entities from the consumer to the lender and every body in between are potencial fraud victims as well as the ones that committ the fraud.
All ways of committing fraud is damaging to the victim . And there are many identified in this article ! One in perticular that I detest is the forclosue schemes. The invester , according to article, utilize a straw buyer and using fraudulant practices, from false income to false credit report obtain a loan . The investor profits while the victim is left holding the bag . In some cases the victim loses the property .
While I believe that fraud is not the rule I agree with the com ent by verna even with better laws and better polcing ,it is time for the general public to become more aware of the problem.
It doesn’t surprise me that mortgage fraud continues to exist, even though we’re under tougher guidelines in the industry. The ethically moral originators will continue to do the right thing, but immoral ones will take the classes and continue with their fraudulant business because it’s what’s best for their pocket book. I believe it will always be there unless the government takes the commission out of the equation and makes it an in-house, salaried position.
The message is clear!. Just by looking on all types of “schems” towards several types of frauds that can be possible done by inmoral profesionals (rats), even with our knowledge, each of us will need to excersice a detailed “due diligence” in our practice for the good of oneself and our consumers.
No matter what the guidelines are, mortgage fraud, just like any other type of crime – will always be present. It is a constantly evolving process. The implementation of stricter guidelines will eliminate certain types of fraud, we will see a decrease for awhile before another loop hole is discovered. The problem with any sort of governing control is that those who would follow the guildelines aren’t the ones needing the control… Ultimately people need to held accountable for their actions – with enough of a penalty to make the crime not worth the risk.
It takes a very big guts to do mortgage fraud. Scare me to death. Somehow I think we need to study God’s word from time to time. So we’ll know our limitations in life.
I gotta say, if my Dr., auto mechanic, CPA, investment counselor, kids teacher, or anyone else I deal with in business or life acted the way our industry has for the past decade, I would amputate that part of my business/life dealings. I do believe in stronger, more thurough regulation in our industry, but I do not believ in mor Gov’t regulation. I do believe that we as professionals need, and must regulate ourselves stronger.
There is no longer any room in this industry for those that do not have a brain and heart. If you or I see the souless zombie tearing through our market, communities, or industry than it is certainly not everyone elses job to police them. We need to regulate, report, contact, and educate. If you want to make sure you end up at the correct destination than make sure you tell the cab driver where to go and dont just let him take you where he feels like going. If we do not regulate us than believe this: you will no longer be in an industry that allows you to succeed, rather you will be in an industry that allows you only to do as you are told.
I’m amazed how inteligent and creative people can be. If they only use their brain for good things the world will be a better place! Too bad that that people is using their talents to take advantage of others!!
I hope that now with the new regulations people will get discourage to commit fraud, even to think about it.
I think only time and a close watch will tell whether or not fraud will continue to be as prevalent in the mortgage industry and there are so many different ways and combinations of ways to be fraudulent, the conversations and brainstorming sessions could be endless from both sides of the coin.
I think that in a time of rapid appreciation it is much easier to conceal certain fraud. I also agree with sniglet and RCC that in a time of a cooling market leading to desperation on the part of people making their living in the industry as well as sellers in a really though spot.
Even right now it is a difficult time to establish a true value of some homes being refinanced. When a potential borrower who has no interest whatsoever in selling his/her home is looking to refinance. In some cases they are faced with having to stack up and comp out with other homes in the immediate area being sold as forclosed properties and shortsales. The state of the current market has left even more questions surrounding some property’s values in my opinion. That is probably fine for most people since so many either have a ton or barely any equity, but there are some gray areas where it can make a big difference for a re-finance.
Mortgage fraud starts with greed, whether it be the loan officer, the processor, the appraiser, the mortgage rep, the mortgage company or even to Wall Street. There is bad in all business’s and there always will be. I understand a human mistake but not a way to make a living at the costs of others.
With many lenders now ordering their own appraisals and the loss of stated, NINA and SISA programs I think fraud will drop drastically. I think the lenders that are still open for the most part have good underwriters. I also think that the brokers that are left are being more careful…. if they want to keep their business going that is.
Obviously the fraud that is happening will be reduces significantly – if there are funds available to appropriate to looking into these things. However, in any industry, there will be people dissecting the process and figuring out schemes to illegally steal. The best way to avoid the spread of fraud is to turn people in to the proper authorities when you see something funny. More often than not, we as humans tend to want to believe that all people are trying to do good. Even if it is obvious that they are not. Be proactive to help your industry is the bottom line!
Unfortunately, loan fraud is a part of our business. Our goal should be to educate the people in our industry to recognize the most common schemes so that we can better identify the problems.
I personally had a borrower provide false income documentation that looked legitimate. It wasn’t untiol the lender pulled a 4506 at closing that we found out about the discrepancies. I think most of us are honest in our business practices, it does not pay to give up our careers over 1 or 2 loans!
Well,here we are again, it’s always a balancing act. We need to get the economy going again, but lenders are tight, values are down, maybe unfairly, but comps are hard to find. I worked for a bank with “Godlike” underwriters. {show me beyond a shadow of a doubt that you don’t need the money and we’ll give it to you”}. If it’s going back to that era, maybe we do need a US BAILOUT BANK owned by the US Gov’t. It’s probably better than the gov’t having a hand in all the business’ in the country. Look at the track record, everywhere socialism has been tryed, it failed. By the way, the bank sold just before it failed, guess thats a form of bailout too.
I think eliminating stated income, SISA, NINA loans and reviewing all apprasials will help reduce mortgage fraud. Tougher guidelines for all involved will be a start. Like any business there will be good and bad people. So its up to us to help make this industry better.
I am a one person operation so it is much easier to keep my operation free of fraud. After 18 years, I have not participated in this type of activity nor will I allow a client to submit this information to me. I was trained to underwrite files the old fashioned way when we had a “red flag” list and have made it a standard op to scour my files for any type of this activity.
I’m not convinced that there is really that much more mortgage fraud now as opposed to previous years. I believe a great part of the increase in numbers is that the media has helped make people more aware of their rights, and the problems that do exist in the industry. In addition, with all of the finger-pointing, more people are looking into their loans and questioning the ethics of loan originators. Fraud should never be tolerated, and any company not dealing with problem loan originators needs to be dealt with very strictly.
I also suspect that the great problems of our immediate future will be with (1) distress properties, including pre-foreclosures and short sales. We constantly are getting approached with different twists that will supposedly allow LO’s to make more money, but that are also somewhat shady. (2) Undisclosed seller concessions, including silent seconds; and (3) over-inflated appraisals. The appraisers need transactions to close just as much as the realtors and lenders do. There are some that will do most anything to make that happen.
Its amazing that multiple people (brokers, appraisers, title company reps) are involved in a lot of the mortgage fraud schemes. One would think that a natural “checks and balances” system would come into play… that someone would sound an alarm.
Its clear that some quantitative measures of character need to be identifed… to be used when determining whether to issue a license. One obvious measure would be no criminal record, with no exceptions… doesn’t seem too strict to me.
I feel that preventing fraud has already been set by the bigger banks these days where the appraisal has to be ordered by one their approved appraisal management companies, giving the LO no control of the appraiser. On the other side, this is an opinion market of value and appraisers will have their certain types of adjustments and opinions based on their inspection. There is a line to draw on getting value and pushing value. I use a great title search tool so I can do my own comp searches to save everybody’s time. I believe this may put our clients uneasy especially when we are doing the 97% LTV rate term refinances for homeowners who’s ARM is about to adjust because that is a large portion of the homeowners I speak to.
Fraud has always been an issue where money is involved. With the loosing of underwriting guide lines, “misrepresentation” became much easier. Requiring people to have income documentation to qualify for a mortgage loan will in itself help eliminate fraud. I believe part of the problem was due to the fact that the industry was just so busy and everyone was working at full speed; that many safety checks where ignored just to try and stay a float of the work load. I work for a small company that has been together for a long time. We all check each others applications just as an in house saftey check.
One would hope that with the new requirements set forth by DFI regarding loan originatiors it will help in reducing the mortgage fraud. Also the tightening-down of underwriting reqirements and appraisals to be reviewed more closely should help as well. It was very disconcerting to read that so many parties were involved in this fraud. It seems that greed was a great motivator for most of the fraud. Hopefully in the coming 2009 we will not see as much fraud due to new laws, but it will not go away overnight. We all need to do our part.
Mortgage Fraud is devastating in so many ways and affects so many people. It will take continued education and training to help reduce the amount of fraud – though I’m sure some will always remain. The schemers develop new schemes. I do believe that the new licensing procedures will help, along with the elimination of some of the riskier loan programs that were available. We must be made accountable for our actions. Raising our industry standards.
The mortgage industry with there revamped underwriting guidelines, stricter standards for appraisal’s new licensing requirements should help reduce the devastating results of mortgage fraud. It has hit home (literally) for everyone!
It’s amazing to me the different tacks that people will take to get themselves in to trouble. I can see where some one would overstate their income by 5% but 50% is a little incredible. People who are working together to scam banks and lending institutions are dangerous to everybody. It makes it hard to have trust in any part of the mortgage process from the appraisal to closing. As we see now everybody will come under closer scrutiny to make sure the facts are correct. I really hope that this will help the good people in the different industries rise and weed out scammers.
I believe that whenever you have an industry that involves large amounts of sales generated income, you are going to have individuals that will figure out ways to abuse their roles for personal gain. It is sad, but money can bring out the worst in people, especially when the industry is as unregulated as ours was. Licensing should help, along with tighter underwriting and greater oversight of all parties involved in the loan process.Unfortunately, there are good people that suffer because of all this. I still believe there is a need for stated programs and hopefully after all of this gets figured out we will see some of these programs return for those borrowers that truly do qualify.
Wow! “60 percent of cases, incomes were exaggerated by 50 percent or more.” I believe it. I think many people bought properties they couldn’t really afford on speculation that the value would increase drastically and the buyer could make a profit. Prices of homes were sky rocketing and Stated or NINA loans could help these investors purchase homes. In regards to the Inflated appraisals, I think we should implement a more complex system that would make appraisal more accurate and not easily inflated. I think determing a value on a home is very difficult since markets fluctuate and home value changes. All the other fraud issues I believe can be easily tackled but appraisals are very complex and am interested in future reforms on this matter.
The relaxed standards were only part of the problem. Simply put, the types of loans originators were putting the consumers into produced more commissions.
I just think back then fraud was easy but know its been look into more so its not as easy as it use to be and im glsd for that.
But even know days there is still alot of fraud going on its just not as easy as it was back then more people are more aware of things and are watching for them.
Mortgage fraud is here to stay! However, with new and upcoming regulations, it will become a more difficult task. Most people don’t relize how many different avenues of fraud there are and it’s about time that the regulators and government start cracking down on violators. Hopefully with stricter penalties, we will see a decline in fraud.
I think now with tougher education requirements as well as licensing requirements fruad may not go way but we will see less people (crooks) flooding the industry. Before, you could be in the industry with no out of pocket expenses, now it is pretty expensive to be licensed and to take pre licensing and continuing education. Also with the economy in the state it is in, I think most of the bad will be weeded out. (Maybe I am naive) I still want to believe in people and that there are people who have good in them and still have a moral fiber in their being.
I hope that has Originators, if we do see wrong doing in our workplace we report it immediately and eliminate those doing fraud.
This is a well defined document to disclose the unethical and unscrupulous side of our industry. But when do we start definining the more positive attributes? Right now because of the state of things these regulations and rules are good for letting the public know that this is the direction of our continued work in definining this industry. One good action does not make an individual continue to be good, contiuing to do good as an individual for others makes us all good.
I believe that most of the fraudulent practices, Lenders and Loan Originators have been taken care of with our stricter guidelines the HVCC and other loan documentation regulations. The programs that formerly made fraud easy have gone away. but I also believe with our current economic crisis this will change and a new type of criminal may rear its ugly head in our industry if it hasn’t already, criminals always seem to find a new way.
Unfortunately there are self employed consumers who I know are honest with their income on their tax returns and qualified for loans out there previously because the PI was so low that deserve to get out of these horrible loans and have no recourse, as their income has decreased over the past two years. I feel sad for the innocent people affected by all the bad loans that were previously offered unscrupulously by the large investors who pushed on small brokerages to sell them.
Fraud is definately an “intentional misrepresenation ” of facts to gain financial ground. This case exploits unprofessional people who take advantage of a system that is proven within the mortgage profession to be most of the time a majority proven tracking system? Some people think because it is very simple that no one will figure out there analytical brainless way of cheating the system and when it works once here we go with mulitple temptations the will lead to there demise, SORRY we have choices and some take the low road home costing all of us effectively to have to do more than is needed, that’s Ok if youcan do it correctly?