Fraud and Prevention

Stories on this page:

• The Road Back to Growth and Profitability

• Rapid Reporting Sees 157% Increase in Income Verifications

• Jacksonville Man Sentenced for Mortgage Fraud Scheme

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The Road Back to Growth and Profitability

By Frank McKenna
March 5, 2008

It’s hard to escape the dim news, performance and predictions U.S. mortgage lenders and investors are facing every day. What a difference one year can make. A year ago mortgage originators were funding almost $3 trillion in new loans a year, and many were making record profits.

As we’ve now seen, there has been a persistent rise in mortgage fraud and EPD that, along with other economic factors, threaten this market. Origination volumes have dropped substantially, which adds to the profitability pressure for lenders both large and small. In addition, many investment banks have become more aggressive about monitoring for fraud and early payment defaults over the past year and kicking back loans to originators as allowed by their purchase agreements.

In addition, investment banks have scaled back or ceased buying mortgages for mortgage-backed securities all together. These factors drove many lenders out of business. The road toward rebuilding mortgage industry profitability requires getting back to the basics of a solid risk management strategy, a comprehensive fraud management and risk management organizational structure, and sound policies, processes and use of technology.

Now that we have experienced a crisis of profitability across the U.S. mortgage industry, there is a lot of discussion about what is needed to revitalize industry growth and how to rebuild the origination and secondary markets to better protect them from future risk.

New state and federal regulations, a "back to basics" underwriting approach, training and education, and more resources to investigate and prosecute mortgage fraud perpetrators are among the tactics being discussed. There is merit in many of these concepts. However, at BasePoint Analytics we see several key points missing from these discussions.

BasePoint supports an approach based on using fraud and risk management technology to its full advantage and building the right organizational structures, as well as the most appropriate policies and practices to profitably rebuild the market.

BasePoint believes the road back to profitability will require the mortgage industry to adopt the following changes:

1. Call a fraud a fraud and do something about it.

2. Realize all fraud matters.

3. Change underwriting goal to risk management.

4. Create a fraud organization and focus the risk management function.

5. Adjust guidelines appropriately, but realize that they will not eliminate fraud and early payment default.

6. Monitor brokers and appraisers systematically.

7. Use predictive scores like other industries to prevent fraud and early payment default.

8. Establish a standard fraud and credit risk review process.

9. Share data across the industry to catch more fraud and better identify early payment default risk.

While the mortgage industry redefines itself in the coming months, BasePoint believes a new approach to analyzing fraud and early payment default risk based on its characteristics will become the standard. It is sound science to build predictions based on data and the patterns within that data.

By applying science to the problem and making rational decisions based on data, the industry will undoubtedly make better risk-based decisions in the future.

This is an excerpt from Mr. McKenna’s white paper, "Rebuilding the Mortgage Industry – The Path Back to Profitability." For a copy of the full white paper, visit http://www.basepointanalytics.com/mortgagewhitepapers.shtml.

Rapid Reporting Sees 157% Increase in Income Verifications

By James Comtois
March 5, 2008

Rapid Reporting, a provider of income and identity verification products to the mortgage industry, said that usage of its income verification tool, IncomeChek, has increased by 157% between January 2007 and January 2008.

According to the company, this upsurge has come at a time when originations throughout the industry are fewer than in previous years, indicating that both lenders and investors are focusing on reducing mortgage fraud and generating higher-quality loans, while also recognizing the time savings and efficiency of receiving reliable income information electronically in data format.

IncomeChek is an online income verification process that provides borrowers’ income data directly from the IRS. Users receive tax transcripts in as little as 24 hours or less, and a summary report page can be customized to provide at-a-glance loan critical income information.

With IncomeChek, users may select which sources of income information they’d prefer to use, such as personal or corporate tax return transcripts, W-2s, 1099s or K-1s. For stated-doc and stated-income loans, IncomeChek can confirm that tax filings are reported by a self-employed individual, identify the source of income according to NAICS codes and can provide the Social Security number of the tax preparer.

"Our clients are using IncomeChek with much higher frequency. We’re definitely seeing higher per-client usage," said Jay Meadows, CEO of Rapid Reporting. "Some of our clients, including most of our large lenders, have increased their use of IncomeChek almost twofold."

According to Mr. Meadows, lenders are becoming aware that more than 60% of mortgage fraud involves income or identity misrepresentations and that they know matching a borrower with proper loan terms is more effective when income is confirmed.

Additionally, lenders understand that law enforcement is becoming increasingly reluctant to take action when lenders fail to take necessary precautions to protect themselves from fraud.

"Lenders are securing reliable, third-party verification of income as much for prevention as they are for due diligence," he added.

"It’s not only lenders that are using income verification these days. Wall Street, secondary market investors and servicers are looking for explicit reassurance of loan quality as well. Our clients use IncomeChek for new loans as well as during the loss mitigation and loan modification processes. Lenders, investors and servicers have realized that it’s simply too risky to rely solely on income information provided by anyone other than a neutral third party."

Mr. Meadows added that the surge in IncomeCheck usage could be a sign that the industry is on its way towards proactive self-regulation.

"With all of the difficulties we’ve had in the industry, lenders and investors have gotten proactive. They’re no longer limiting verifications to certain marginal cases. They’re applying scrutiny to a wider array of loans. This is a great sign of the industry’s steps toward self-regulation."

Jacksonville Man Sentenced for Mortgage Fraud Scheme

By James Comtois
March 5, 2008

After pleading guilty to conspiracy to commit wire and bank fraud on Sept. 24, 2007 as part of a mortgage fraud scheme, a Jacksonville, Fla., man has been sentenced, according to the Jacksonville Field Division of the FBI and the U.S. attorney’s office for the Middle District of Florida.

U.S. District Judge Henry Lee Adams Jr. sentenced Justin D. Barker of Jacksonville to seven years imprisonment followed by five years of supervised release for his participation in a mortgage fraud scheme.

At his sentencing, Barker was ordered to pay restitution in the amount of $2.35 million and to forfeit $4.42 million jointly and severally with other conspirators.

According to court documents, the scheme operated in 2005 and 2006. Barker negotiated the purchase of residential real estate properties, either on behalf of himself personally, on behalf of an entity he controlled, or on behalf of a third-party buyer.

Barker, the entity, or the buyer entered into a purchase and sale agreement with the seller of the property. Barker then retained a licensed real estate appraiser to appraise the property at a significantly inflated price.

The appraiser would appraise the property at the price that Barker requested, using inappropriate comparable properties and other fraudulent methods to obtain the price requested.

At the closing on the property, Barker or an entity he controlled would receive the difference between the loan amount, which was based on the inflated appraisal and the actual purchase price, usually described with terms such as "assignment fee" or "payoff of second mortgage" that did not exist. This difference was the proceeds of the fraud.

Robert W. Hulbert Jr. also of Jacksonville, was a co-conspirator with Barker. Hulbert, as the manager of the Jacksonville branch of Nations Title Agency of Florida, operated as the closing agent for the transactions. At the closings, Hulbert would disburse funds from the lenders, providing the sellers with checks in the amount of the original sales prices and providing the remainder of the loan funds — the proceeds of the fraud — to one or more of the conspirators.

During the course of the scheme, fraudulent loans totaling about $17.7 million were obtained on more than 40 properties. These loans would not have been approved but for the fraud. Barker received approximately $4.4 million in gross proceeds from the fraudulent transactions.

To recover some of these illicit proceeds, the government seized from Barker a 2004 Bentley Continental, a 2007 Cadillac Escalade, a 2002 BMW 745Li, a 2005 Chaparral 330 Signature 36' boat, a 1997 19' Wellcraft boat, a 2006 Yamaha motorcycle, a 2001 Yamaha motorcycle, a two-carat loose diamond, a one-carat diamond necklace, a half-carat diamond necklace, diamond stud earrings and two Movado watches.

Hulver also pleaded guilty to conspiracy to commit wire and bank fraud on Sept. 24, 2007 and is awaiting sentencing.

The FBI conducted the investigation. Assistant U.S. attorney Arnold B. Corsmeier prosecuted the case.