Experts Call For More Short Sale, Mod Fraud Checks

Speakers at the MBA National Mortgage Servicing Conference in Dallas called on servicers to move further up in their agenda fraud checks on loan modifications and short sale transactions this year and beyond.

What is lacking among lenders and servicers is “a needed sense of emergency,” said Edward Gerding, senior fraud and risk consultant at CoreLogic, even after data not only proved but also quantified short sale fraud related losses. (CoreLogic published its first such report last year and is now regularly updating its short sale fraud data report.)

In Gerding’s view lack of sense of emergency is at the root of the fact that many banks do not provide adequate short sale personnel training or have a separate department to monitor these transactions to weed out potentially fraudulent activity.

Gagan Sharma, president and CEO of specialty servicer BSI Financial Services Inc., said his firm works with distressed loans that may range in delinquency from 30 days to 270 days or more delinquent.
And judging from demand, “fraud is a major concern” for lenders and servicers.

The best strategy is prevention by putting in place a combination of well trained people and customized processes that have check points built to add another layer of data screening, he said, so “if one person misses an issue, there are multiple sets of eyes looking at a file to catch it.”

BSI relies on a single point of contact loss mitigation approach that starts from the first contact with the borrower to pursue collections and until loss mitigation is completed with a modification, short sale, deed-in-lieu or other workout options.

Since bank representatives are familiar with borrowers’ hardship it is easier for them to see potential fraud red flags.

The single point of contact system also is supported by internal processors who are in charge of all loan document processing and data reviews adding a second layer of scrutiny to the whole process.

Plus both individuals are given incentives if they ensure the loss mitigation process follows investor guidelines, as well as when a trial modification becomes permanent.

Loss mitigation compliance can be independently reviewed following investor or lender guidelines to add another layer of inquiry.

“Depending on the size and scope of the program,” he said guidelines may be automated into the system or approved on a loan-by-loan basis.

Both executives say the most important aspect of this fraud prevention process is to engage experienced staff and provide continuous training that informs loss mitigation specialists about how and where to look for red flags and updates their knowledge with recent occurrences and changes in the fraud scam landscape.

Updates of the short sale information are more in demand because short sale fraud represents a higher risk for banks.

Gerding’s take away from the servicers in the audience during the panel discussion about fraud risks was that when asked whether they had “a fraud monitoring process established in the servicing side of the house, to be looking for these loan modification and short sale scams,” and not one person, from about 100 industry attendees, had a positive answer.

“To me that was alarming,” he said, because fraudulent activity is growing.

Barriers to that may be different, he argued, as such operations need additional resources especially if servicer shops decide to create a specialized team that focuses on short sale fraud, or other types of foreclosure alternative fraud.

“They would probably have to hire some fraud investigators to deal solely with the servicing side for the house, because right now everybody still primarily focuses on their fraud control on the origination side of the house.”

His solution, for servicers who cannot add or divert resources specifically for servicing fraud control activity: “The best option is to train underwriting negotiators about short sales, deed-in-lieu, to be able to create awareness about what types of red flags to look for.” It is important to discover what fraud case scenarios are active and make these practices part of the screening process for future transactions to ensure fraudsters cannot pass un noticed.

He warned that market realities are bringing forth new and unprecedented fraud scams. It is important to have all fraud cases referred over to experienced fraud investigators and their teams so that they can be addressed in a timely fashion, he said, “rather than having that burden of proof fall under the underwriting investigator who may not be skilled in fraudulent activity and fraudulent investigations.”

BSI staff training materials outline several fraud indicators on short sale transactions.

It starts with checking for valuation fraud red flags by ordering independent broker price opinions. Next come reviews of sales contact information and contracts to make sure the home is not being sold to a relative by checking for named buyers, appropriate fees to charge for services such as realtor commissions or any unnecessary “junk” fees, and ensuring that no funds are assigned to “undisclosed parties.”Check the purchase contract to see if it has an option clause to resell the property and check if there is a difference between the sales price on the HUD form and price on the sales contract, which “could be proof of multiple contracts.”

As to loan modification data reviews, the specialty servicer said using methodologies similar to origination underwriting help improve loss mitigation results. For example, data checks similarly include income verification, reviews of bank statements to see spending habits, comparisons of annual earnings, job changes, and credit reports that show whether debts are paid on time. Fraud prevention is not an easy or cheap endevavor.

Short sale monitoring tools can become costly, Gerding says, but lenders and servicers need to keep in mind that ultimately the return on that investment will justify every penny spent and very early on during the fraud monitoring process.