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Experts Discuss Preventing Fraud

Mortgage fraud schemes today tend to concentrate on REO properties in the short-sale market or in other situations dealing with distressed borrowers, according to panelists on a fraud detection panel at the SourceMedia Loan Modifications Conference in Dallas, Tex.

Fraudsters are moving into the loan modification arena, because historically, servicers have not had any training in fraud recognition, according to Ann Fulmer, vice president of business relations at Interthinx. "Fraud often morphs to take advantage of the current market, and states with high foreclosure rates are seeing the highest fraud risk because that is where the market is now." Most fraud is committed with the assistance of some industry professional in some form or fashion. "They know that. They know you are pressed, that you don’t have enough people to do the work that you are trying to do that’s legitimate, that you haven’t had that training, and they are definitely taking advantage of that,” Ms. Fulmer said during the panel. Interthinx screens applications and loan documentation in real time. The company is seeing numerous categories of misrepresentation when talking about loan modifications. They relate mostly to economic circumstances. Fraudsters are filing false tax returns, not just a false W-2, she said.

“They are actually filing it with the IRS. They know that on the origination side lenders are starting to use the 4506. There have been cases where people have filed higher income or lower income. In modifications, people are understating their income in order to get more of a favorable outcome or a debt reduction,” described Ms. Fulmer. “Then they go back after the loan has closed and they re-amend their tax returns.”

For its collateral values, Interthinx is noticing what it has decided to call “flopping,” which is the first step in the new “flipping” of real estate. Here, there is collusion on the part of the actors who are working to artificially depress the price of the property because they want to negotiate a better short-sale price.

“Everybody knows the profit in real estate is determined by how much you pay for it upfront. One of the unfortunate side effects of some of the efforts to streamline the process to help out all these distressed borrowers is the use of broker price opinions,” added Ms. Fulmer.

“It makes it very efficient and cheaper when you’ve got somebody who is honest. But it leaves bad actors sort of like foxes being in charge of the hen house. There are lot of real estate agents out there who have incorporated LLCs that are property investment vehicles, and you are going to them and saying how much is this property worth, and they say they only want to pay 30 cents on the dollar, it’s worth $30,000. They can fill out the BPO and you take it and don’t do any type of verification, when the property is really worth $90,000 or $100,000.”

Another problem with BPOs is there are no standards or training in how to do them, she added. “Brokers don’t think it’s really worth their time so they’ll pawn it off on whoever is the low man on the totem pole and that person may or may not go out and look at the property. They may look at other listings. We have also seen cases where agents are putting false values in the Multiple Listing Service because they know you might check that. They can sort of manipulate the whole process from the inside out.”

Occupancy is another big area in fraud. Investors who purchased lots of properties through an investment club told lenders this would be their primary residence when in fact it was going to be a property that would be rented out. One of the problems is some of these people are coming back and they still say this is where they live there but they have never lived there.

Second buyers who committed fraud in the origination of the loan are now coming back asking for modifications. Interthinx did a study that showed loans that are originated in fraud are eight times more likely to go into default and 20 times more likely to go into foreclosure within the first year.

“That doesn’t change just because you modify it. If you have someone that lied to get into the property and now they are lying about their circumstances, lying about the value of the property, chances are that is going to be another area where you have a lot of redefault. I would suspect the reason why borrowers who are not providing you a lot of documentation is because they lied about their income during the origination process and they are afraid of getting caught. That’s also true about some of these investors who said it was going to be an owner-occupied.”

William Brewster, director of the mortgage fraud program at Fannie Mae, said servicers need to look out for loan reduction abuse. Borrowers are trying to reduce their debt or improve their financial position. They will manipulate the system however they can to look like they have a default or impending default when they don’t, he said

These fraudsters will try to set up a short sale, which is usually a low bid, have a captive buyer who is often a friend, associate or relative purchase the property and then somehow get the property back. This is usually through a title transfer or a cash-out from the transaction.

“The lender is approving it. On these HUD-1s, the lender takes a big loss, maybe $100,000. It could be the second transaction back to the homebuyer or second liens that are paid that the first lender didn’t know about. The lender who is approving that short sale needs to get the final HUD-1 and make sure it’s the final HUD-1 and not the intermediate.”