We know mortgage fraud comes in various shapes and forms. Catching it early is key if mortgage lenders want to protect their organizations from costly expenses associated with the crime.
There are several mortgage lending services that address mortgage fraud, and being proactive and savvy to the common ways consumers try to "pull off" mortgage fraud is necessary.
Watch out for these key indicators of potential mortgage fraud.
- LIABILITIES The applicant may have a second, undisclosed mortgage or may have inaccurately reported debt. Also, look out for any suspicious payroll deductions that could indicate additional obligations, such as a loan or child support.
- CREDIT Make sure the credit report reflects all accurate information on the borrower. For example, disputed items can be temporarily removed from the credit report, and give a false score. Make sure all disputed items are verified for accuracy.
- ASSETS Increased down payment requirements have made verifying bank statements a very important step in today’s purchase environment. Watch out for suspicious bank statements that could have been altered. When in doubt, validate and verify directly with the bank the accuracy of the statements.
- EMPLOYMENT & INCOME You have to make sure your borrower has the ability to repay the loan which makes verifying employment and income a critical part of the application and underwriting process. In addition to falsely increasing income, in some cases employment and income could be completely manufactured. When reviewing paystubs, W-2s or tax returns, look beyond the bottom-line income number. Conduct a more thorough review to ensure that the documentation makes sense. Verify income with the employer and verify their reported taxable income to the IRS using a reputable TRV provider, such as Data Facts, Inc.
- OCCUPANCY It’s difficult to proactively prove misrepresented occupancy intentions, especially on a purchase transaction; however, be aware of the red flags that warn of a potential misrepresentation, such as:
- Is the applicant’s employment greatly distant from the property?
- Is the applicant downgrading from a more expensive home?
- Landlords don’t qualify for homeowner’s insurance policies. Is the hazard insurance a “homeowner’s” policy (proactive check for a refinance; or a post-closing check for a purchase transaction)?
- APPRAISAL Value is a critical component to many fraud schemes. Manipulating value (and/or property condition) allows perpetrators to avoid making a financial investment in the transaction (increasing the lender’s risk position), and/or to siphon money out of the transaction. At the most sinister end of the spectrum, schemes that inflate the property value sometimes plan for immediate default, leaving the lender with huge losses after foreclosure. Watch for the following appraisal red flags:
- The purchase price is substantially higher than the predominant market value.
- Large positive adjustments were made to comparable properties.
- Comparables’ sales prices do not bracket the subject’s adjusted value.
- Comparable sales are not similar in style, size, and amenity.
- All comparable sales are located in subject development.
- Comparable properties are a significant distance from the subject, or located across neighborhood boundaries (main arteries, waterways, etc.).
- Map scale distorts the distance of comparable properties from the subject.
- Photos appear to be taken from an awkward or unusual standpoint.
- Significant appreciation in a short period of time since last sale.
- Prior sales are listed for the subject and/or comparables without adequate explanation.
- Do the addresses return the same property (ies) as pictured in the appraisal?
- Is the appraiser’s map scale skewed to make the comparables appear as if they are within the subject’s neighborhood, when they are actually in different neighborhoods?
- How did the real estate agent describe the subject’s and comparables’ characteristics and condition?
- Does the listing history make sense when compared to the sales price?
Remember, red flags are simply inconsistencies in the information presented in an application or a loan file that would cause someone to take a second look or be suspicious. Red flags should be explored; but they do not necessarily mean that fraud occurred.
And finally, if something doesn’t add up, it doesn’t automatically mean fraud, but is an indication that you should take a second and closer look.