According to the 3Q 2012 Mortgage Fraud Risk Report produced by Interthinx, Florida properties purchased as investments have a higher overall risk than owner occupied or second home properties. More strikingly, investor properties in that state are over three times as risky for employment/income fraud as compared to owner occupied properties.
Lenders have always known that investment properties carry a higher risk of default—that’s why many lenders limit the number of loans to any one investor, and why interest rates and downpayment requirements are higher than those for owner occupied properties. While at the national level this risk has remained essentially flat over the past two years, the Mortgage Fraud Risk Report revealed that in Florida, the risk is particularly high. Furthermore, the report illustrates that there are markets throughout the country where investors are willing to misrepresent their intended use of properties—and their incomes—in order to obtain a mortgage.
To mitigate these risks, lenders should focus their attention on identifying investment properties and verifying the borrower’s employment/income. Automated tools on the market today can help identify the red flags associated with undisclosed investment properties and efficiently point lenders to those loans where the risk is greatest and further due diligence is needed. The identification of other properties owned by the borrower is needed in order to minimize risks, and the “best of breed” tools can also alert lenders to instances where the borrower has failed to disclose the existence of other owned properties.
Verification of income/employment with investment transactions provides lenders with peace of mind and ensures quality loans while staying compliant with industry guidelines. This can be a difficult function to perform, given the plethora of Internet websites that offer to easily and cheaply fabricate any tax, income, or business record that a borrower would need to qualify. Automated technology can cut through the picture perfect fakes and allow lenders to see the borrower’s true income level.
Best of breed risk mitigation tools can perform a nationwide search for properties owned by the borrower and use exception-based alerting to identify other properties owned by borrowers. An interactive ownership timeline assesses the borrower’s ownership history and clearly displays when properties are simultaneously owned, highlighting potential ownership issues with investment properties. These tools also integrate the ability to request employment and income verification as well as to analyze related issues. Additionally, fully integrated 4506-T processes in these tools systematically analyze tax transcripts to quickly identify additional risks that may be associated with a borrower’s income and employment.
Despite the contention of many in the industry that fraud risk was eliminated with the demise of stated income and no-doc, layered risk programs, there are still plenty of participants in the market who are willing to do whatever it takes to get loans. A lender’s best defense is a well-trained underwriting staff with access to today’s powerful automated technologies. It’s an investment that results in quality loans and reduced buy back risk –a no brainer in today’s challenging market.
Ann Fulmer is vice president at Interthinx.