Mortgage Fraud

Mortgage Fraud
Mortgage fraud is said to occur when fabrication or omission of important facts on the part of prospective homebuyers, lenders or sellers results in the approval of mortgage loans or terms applicants would usually not be entitled to enjoy. Mortgage fraud constitutes a major transgression, potentially prosecutable and resulting in incarceration for those found guilty. According to American state and federal regulations, mortgage fraud may cause an individual to end up paying as much as a million dollars in penalty, and as many as thirty years as a federal prison inmate (Robbins, 2005).
Mortgage fraud can take place outside as well as inside financial organizations, apparently only limited by criminals’ inventiveness and cunning. Third parties like real-estate brokers, agents, settlement agents, appraisers and others involved in mortgage origination largely contribute to mortgage fraud. Further, mortgage frauds are aided by insiders seeking benefits from diverse mortgage scams. Thus, mortgage fraud may manifest in multiple forms (Reich, 2006).
Of the mortgage-fraud practices reported, the commonly-occurring ones are identity theft, falsification of loan application details, misrepresentation of loan purpose, appraisal fraud, illegal property flipping, and loan-proceeds exploitation. Owing to the fact that multiple players are involved in mortgage lending, there are several chances and steps for abuse within transactions besides countless ways of perpetrating fraud, rendering its prevention tough (Reich, 2006).
The FBI (Federal Bureau of Investigation) states that two mortgage fraud forms exist. Fraud to gain profit is perpetrated by those on the inside who utilize their power or specialized skills for aiding, or themselves perpetrating, fraud. In numerous instances, this mortgage fraud variant involves bank loan originators, officers, attorneys, mortgage brokers, appraisers, and other insiders. This form of fraud revolves around misuse of mortgage lending for obtaining equity and cash from homeowners or lenders (O'Connell, 2018).
Housing-related fraud is the other class of mortgage frauds. It entails encouraging prospective homebuyers or borrowers to acquire a home or maintain a home’s ownership through, for instance, misrepresenting asset and income details on loan application forms or bribing appraisers to manipulate the appraised value of any given property. Such offenses can be further classified. For instance, occupancy fraud denotes purposeful misrepresentation of intended property usage by applicants (e.g., consumers might lie to lenders that they will use the place as a residence though their actual intent is renting it out). The reason for doing so is: applicants who plan to reside in the house normally have to pay lower down payments and interests as compared to individuals purchasing investment property (O'Connell, 2018).
Another kind of housing-related fraud is fake buyer fraud, where bogus/straw buyers let prospective homebuyers assume the identity of some other individual for acquiring mortgage loan approval. Straw buyers generally have better credit as compared to homebuyers, in addition to lower debt and greater income, thus enjoying a far better chance at acquiring approval as compared to the intended property holder. Following sale, the property deed can be shifted to intended owners. Fake buyers might be unaware that their identity, name, financial details and credit have been stolen and exploited for committing fraud (O'Connell, 2018).
Yet another form of housing-related fraud – home appraisal fraud – involves fraudulent inflation of home values above their real value. Increased home appraisal typically increases home prices, thereby brining more money to the prospective seller. This works to buyers’ detriment, potentially increasing debt burden linked to property purchase. Often, this form of fraud is associated with a few red flags, such as absence of important information from appraisals or false renovations mentioned on appraisals. When in doubt, opting for another appraisal is recommended (O'Connell, 2018).
Predatory lending fraud or predatory loans involve mortgage providers urging applicants or homebuyers to fib about facts like expenditure, earnings or down payment. Furthermore, a modified appraisal will be typically included, for selling the property for a higher price. Moreover, predatory lenders can deliberately lend borrowers a greater amount than they are able to afford whilst levying steep interest rates. Homebuyers might, for instance, take loans from kith and kin, thereby appearing to have less debt and more revenue. Cash gifts normally aid buyers in making down payments, thereby keeping major financial issues under wraps (O'Connell, 2018).
Debt management and mortgage foreclosure relief scams (also called foreclosure rescue or foreclosure scams) are highly common, costly scams involve scammers getting in touch with, and offering to help, homeowners unable to pay loans or failing to keep up (commonly via phone-calls). Prospective victims are found by scanning public foreclosure notices. Typically, they are promised lower payment or payments by the scammer in return for paying rents to the firm. But the firm fails to do so and the victim will eventually go into foreclosure (O'Connell, 2018).
Financial Income Frauds involve reporting of incorrect income for obtaining bigger loans or better deals. The motive is attempting to be qualified for mortgage loans they might otherwise be denied. Akin to home appraisal frauds, this involves red flags such as use of generic, rather than specific job title and mortgage lenders not being able to verify applicant employer. Further, the employment income reported by the applicant will not agree with bank statements or household assets (O'Connell, 2018).
Identity theft represents an especially ominous class of mortgage frauds, typically resulting in direct financial loss for the victim. For instance, identity thieves may steal the social security number of a victim or intercept their mortgage account number, utilizing the information obtained for taking out a HELOC (home equity line of credit) in the victim’s name, of the value of several thousand dollars (O'Connell, 2018).
The money reaches the thief’s fraudulent account, with the homeowner being left to pay the bill. Alternatively, the offender might take out another mortgage by employing the data stolen, abscond with the money, and leave the homeowner in further debt. Though all kinds of mortgage frauds are a grave offense, the loss of sensitive personal information to an identity thief may give rise to a monetary loss whose repercussions could carry on for years together (and include losing time and money, and missing the chance to buy one’s dream home owing to the need to restore one’s identity and settle one’s debts) (O'Connell, 2018).
Several protective tools for fighting fraud have emerged, including novel computer software as well as the electronic analysis of information through the use of AVMs (automated valuation models). Pre-financing quality-review processes incorporate various warnings; here, explanations can be sought for better identifying potential mortgage frauds. These signals include high REO (real estate-owned) property concentration, flip caution, appraisal predating loan application, several owners within the past 3 years, seller mentioned in contract though not in the title, payoffs mentioned in HUD-1 but failing to appear in preliminary titles, and an unoccupied investment property or a property owned for less than 12 months (Robbins, 2005).
Spotting any of the above signs can help put a stop to an ongoing mortgage fraud. Such tools may be integrated into organizational processes and systems without difficulty, facilitating improved identification and understanding of kinds of loans one must avoid. This constitutes a workable alternative to bearing the burden of fraudulent loans, which have to be subsequently repurchased. Enacting legislation for penalizing mortgage fraud as well as aggressive prosecution of fraudsters can assist in stopping or retarding its growth. Simultaneously, one must concentrate on implementation of processes for capturing offenders attempting to fleece innocent buyers (Robbins, 2005).
In addition, there is a drive calling for each and every lender to file reports to those filed by financial institutions. Known as the suspicious mortgage activity report (SMART) form, this FBI-created tool would be compulsory for every mortgage lender. At present, the FBI has been collaborating with the MBA Quality Assurance Leadership Subcommittee members for giving the final touches to the form, which would be presented by reporting source to the Bureau and kept by FinCEN (Financial Crimes Enforcement Network) for any required prosecutions. For ensuring the tool isn’t hoodwinked or abused, only the FBI and reporting source would be able to access data reported on SMART (Robbins, 2005).
Florida, New York, and New Jersey continue to be the leading states in the nation for mortgage fraud risks, maintaining their position from the previous year (i.e., 2017). Each of the top ten states revealed yearly risk growth, with those exhibiting highest yearly risk growth being New Mexico, Oklahoma, Illinois, Texas, and Mississippi. The current risk levels for the first three have risen above the National Index of 149 (an increase from the previous year’s 133). The figure shown below depicts the National Mortgage Application Fraud Index between the 3rd quarter of 2011 and the 2nd quarter of 2018 (CoreLogic, 2018).

The Conforming LTV ?80 purchase segment depicts highest growth in risk based on loan type. Furthermore, income fraud risks increased the most from one year to the next, with Transaction and Occupancy fraud occupying second place. Undisclosed Real Estate and Property Debt risks experienced a decline. In 2018’s 2nd quarter, roughly 0.92% of mortgage application forms (1 out of every 109 forms) were found to be fraudulent. In comparison, during the previous year’s 2nd quarter, the figure was 0.82% (1 out of 122 applications) (CoreLogic, 2018).


The threat of fraud encountered by payments organizations and banks has risen drastically of late, as the figure shown below depicts. Estimates of the effect of fraud on financial institutions and consumers differ considerably, though losses borne by banks alone have been predicted to rise above 31 billion dollars, across the globe, by the year 2018. A number of converging trends fuel the increased scope, complexity and variety of frauds perpetrated. Payments service vulnerabilities have grown with the rapidly-increasing move towards mobile and digital customer platforms. Additionally, novel solutions have resulted in swifter execution of payments transactions, leaving hardly any time for processors and banks to detect, counteract, and initiate recovery of underlying funds whenever necessary. Lastly, fraudulent activities have become ever-more sophisticated, partly owing to increased collaboration between offenders, including stolen information interchange, novel, advanced methods, and dark web expertise (CoreLogic, 2018).

Prior analyses reveal that mortgage origination frauds may be detected rather late; moreover, different kinds of frauds will probably manifest at distinct times. Consequently, by the time of identification of an issue, it can have grown out of hand. For avoiding such scenarios, it is imperative to understand the loans most susceptible to frauds, for targeting preventive efforts or gauging changes in trends and risk levels. CoreLogic, with its enormous consortium-based loan application population and countless examples fraudulent loans, can create predictive models which encompass the most highly predictive aspects on the basis of examinations of more than 2000 information points pertaining to borrower, property, and loan elements. The output takes the form of a 1-999 risk rank. As a reference point, the score counts 60% of fraud within the highest 10% of scores. Score trends are employed by clients for monitoring their respective fraud risks across time and benchmarking against the whole consortium (Berg, 2017).

References
Berg, B. (2017, August 15). Want to Prevent Future Mortgage Fraud? Then Look Backwards. Retrieved December 6, 2018, from http://www.mortgagecompliancemagazine.com/legal/want-prevent-future-mortgage-fraud-look-backwards/
CoreLogic. (2018). 2018 Mortgage Fraud Report. CoreLogic Mortgage Fraud Report,2-10. Retrieved December 5, 2018, from https://www.corelogic.com/downloadable-docs/mortgage-fraud-report-sept-2018-screen-091118.pdf.
John Reich, Director, Office of,Thrift Supervision. (2006). Open forum: Fraud threatens lenders ; mr. reich's remarks to the recent joint conference of the ohio bankers league and illinois league of financial institutions in colorado springs, colo., are presented as our open forum. National Mortgage News, 31(5), 4. Retrieved from https://search.proquest.com/docview/198354589?accountid=30552
O'Connell, B. (2018, April 17). Here's Everything You Need to Know About the Risks of Mortgage Fraud. Retrieved December 5, 2018, from https://www.experian.com/blogs/ask-experian/heres-everything-you-need-to-know-about-the-risks-of-mortgage-fraud/
Robbins, John M. Jr. (2005). Fighting mortgage fraud. Mortgage Banking, 66(2), 20-20,22. Retrieved from https://search.proquest.com/docview/234919463?accountid=30552