In the mortgage industry, we consistently hear that mortgage fraud is becoming more difficult to commit. What that really means is that traditional methods of mortgage fraud are becoming more difficult to commit, especially with improvements in technology and verification of borrower information.
Despite these improvements, fraudsters learn quickly and are always looking for new ways to get around the improvements the mortgage industry makes to protect lenders and borrowers alike. And history shows they will have success in some of their efforts. As such, we must remain vigilant.
What You Need to Know About Mortgage Fraud
With an increase in fraud risk, there’s a growing need for increased understanding of fraud among those on the front lines of detecting it. Whether you’re a loan officer, loan processor, or underwriter, you have the power to detect and report various types of fraud.
There are many factors that constitute mortgage fraud such as:
- Submission of inaccurate information or document falsification
- Alteration/forgery of documents
- Failure of loan officer/processor/underwriter to disclose pertinent info which could negatively impact the decision
- Identity theft
- Lack of due diligence by loan officers or others involved in process
- Acceptance of suspect or inaccurate info
- Inaccurate representation of current occupancy
According to CoreLogic’s 2018 Fraud Report, the greatest fraud risk increase has been in income-related fraud. Occupancy and transaction fraud are also reported to be on the rise. Not only are typical fraud schemers continuing to try to make money illegitimately; everyday borrowers might be driven to provide inaccurate information so they can purchase a house in conditions where inventory is tight and wage growth isn’t keeping pace with home price growth.
Types of Mortgage Fraud You Should Know
While there are many types of mortgage fraud you should be aware of, there are three you should be aware of in today’s market conditions.
How it happens: Occupancy fraud happens when borrowers misrepresent how the purchase property will be occupied. Underwriting rules are different for how properties will be occupied – primary residence, second home, investment property – as are mortgage rates, MI rates, and eligible programs. One of the most common types is reverse occupancy fraud (see Fannie Mae’s tip sheet) in which buyers state they will use the purchase property as an investment property and use the rental income as expected income to qualify for the mortgage. In reality, the buyer ends up living in the home as a primary residence.
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Red flags: Be on the lookout for appraisals that include expected rent payments, buyers who provide letters that they’re living “rent free” in their current residence, and large down payments.
How it happens: Income fraud occurs when a borrower misrepresents the availability, continuance, amount, or source of income used to qualify. Two common income fraud schemes are false stated income and misrepresentation of employment.
False stated income (see Freddie Mac’s resource) usually occurs when income information added to Form 65 (Uniform Loan Application) isn’t fully verified. The borrower may or may not be aware that they misrepresented their income.
Misrepresentation of employment (see Fannie Mae’s tip sheet) has been a prevalent scheme in California in recent years. This scheme involves borrowers providing false employment documents and pay stubs from fictitious employers.
Red flags: Be on the lookout for discrepancies in a borrower’s age/experience and their reported title and income. Other red flags include the previous occupation was “student,” the employer doesn’t exist/you can’t determine the company’s location, or the provided paystub looks like others in different loan files.
How it happens: This type of fraud happens when a transaction’s nature is misrepresented. It can occur when a buyer and seller have undisclosed agreements or a down payment is falsified. Some common types include non-arm’s length transactions and straw buyers.
Straw buyers (see Fannie Mae’s resource on fraud characteristics) specifically act on behalf of the true purchaser. Once the transaction is completed by the straw buyer, the property title is transferred to the real buyer. The real buyer might have bad credit or be trying to conceal other situations which would disqualify them from getting a mortgage.
Red flags: Red flags include the mortgage payments are coming from an entity rather than the borrower, no real estate agent was employed, no interaction with the buyer, and the property title is transferred after the sale.
If you suspect a transaction of containing elements of fraud, your first course of action should always be to follow your company’s fraud reporting policy. If for some reason you feel the response was inadequate or that you cannot follow those protocols, you have several other channels you can report to including the GSEs (Fannie and Freddie each have their own fraud hotlines), the Federal Housing Finance Agency Office of the Inspector General, FinCEN, the DoJ, or the FBI.
Loan officers, loan processors, and underwriters are all on the front lines when it comes to preventing mortgage fraud. The more you know about it, the better you are at detecting it. You can stay up-to-date on your mortgage fraud knowledge with our Shut the Door on Fraud courses.