"There certainly is not the level of fraud we experienced during the no-doc era,” says Becky Walzak, president of Walzak Consulting in Deerfield Beach, Fla. "That's not to say it's gone away. Underwriters still have to look out for it. You can't just assume we learned our lesson and it's never going to happen again."
But according to Interthinx's Mortgage Fraud Risk Report, the National Mortgage Fraud Risk Index increased to 159 in the fourth quarter of 2012, up 16% from the previous quarter and up 9% from a year earlier. The index has been trending higher since the beginning of last year and is now at its highest level since the company began the report in 2009.
"That's troubling, but I think we've seen some positive trends of late," says Bill Garland, executive vice president of strategic relationships and business development at Decision Ready Solutions in Irvine, Calif. "I think the industry has reacted positively to the unacceptable level of fraud we had several years ago. At most lenders I talk to, it's in the front of their minds and they're taking a lot of action to try and combat it. It's in everyone's vernacular."
Walzak says she's seeing more of the "old-fashioned kind of fraud" involving forged documents to make someone's income and assets appear larger than they really are. That has been made easier by the internet, where people can download forms to create their own W-2s and other documents. Indeed, it's possible to find realistic-looking forms online to create your own bank statements—or even your own bank, which can then "verify" your purported deposits.
The use of Form 4506, a request for a copy of the applicant's tax return directly from the Internal Revenue Service, has helped in fighting income fraud, Walzak says, but notes that it does have limitations. The most recent tax returns available are for 2011, so there is a gap of more than a year between the applicant's current income and what the IRS says it is.
"It does help, but not as much as it would if I had the previous year's income. You still have that gap," she says.
One current popular scam to commit asset fraud is the use of "mule" bank accounts. In this scam, applicants are able to "rent" money from a provider—usually located outside the U.S.—who agrees, for a fee, to put money in their bank account long enough for the mortgage application to be approved, after which the money is returned. Generally the money has been stolen from someone else's bank account electronically.
According to Walzak, providers of these mule accounts are widely available on the Internet.
But industry experts say mortgage fraud today often isn't as sophisticated as that. Often it involves nothing more than doctoring paper documents.
"Data integrity is still a big issue," says Walzak. One of the ways to combat that, she says, is by performing income and credit checks upon application but again right before closing to make sure the borrower hasn't taken on any new debts just prior to the closing.
Brent Chandler, founder and chief executive officer of FormFree Holdings Corp. in Johns Creek, Ga., says the most effective way of circumventing fraud is to not rely on the loan applicant or the loan originator for financial information and get it directly from the source, such as the borrower's bank or employer. His firm gets real-time, automated digital data from those sources to verify the applicant's claims.
"With the use of technology and direct source data, you remove the reliance on the borrower and the lender," Chandler says. When you do that, he says, fraud will decrease.
While anti-fraud technology is certainly important, Decision Ready's Garland credits a return to more stringent underwriting by originators.
"The amount of due diligence that is going on in underwriting is at a very high level," he says, adding that the use of analytics to root out fraud is becoming more prevalent. "Most lenders only want to make loans to people who are going to pay them back. That wasn't the case a while back. It's back to basics."
George Yacik has been covering the residential mortgage business for more than 20 years and writes frequently for industry publications. He can be reached at firstname.lastname@example.org.