The wave of short sales expected to enter the market due to newly intensified government and industry efforts to avoid foreclosures is increasing the odds for short sale fraud risk.
And Fannie Mae is leading these anti fraud efforts.
Kimberly Ellison, Fannie Mae’s senior industry relations manager of the mortgage fraud program, told attendees at the Source Media Best Practices in Short Sales and REO conference in San Diego that Fannie plans to make changes to its short sale requirements in early 2011 that are specifically designed to prevent fraud.
Servicing fraud, including loan mod fraud, is on the rise. In addition, since the volume of short sales is expected to grow fraud risk may also increase. For that reason, Ellison said, Fannie is reviewing the whole short sale process, even though the number of fraud cases is decreasing. And at least in part, both industry and public awareness to the issue has helped.
She stressed that while fraud is not 100% preventable, prevention is more probable if loan processors pay attention to the information available. “Everything is in the file!” she said.
One priority is to validate the current owner of record by looking at the title work. “Make sure you know what’s going on.”
Guidelines require careful reviews of ownership transfers to determine whether a short sale of the deed should be enforced or not. “The key piece is knowing who the owner is. How else can you know who’s entitled to that property, or whether there was a transfer unless you pull title?”
Understanding who the parties to the transaction are, asking questions such as whether there are commonalities in the names, addresses, employment and so on has to be part of the loan processing routine.
Thorough reviews are necessary to make sure it is known who are the parties to the transaction, the fees being charged, or making sure the seller is not being charged any negotiated fees.
It has to be easy “to follow protocol” with Fannie transactions she says, since Fannie’s short sale guidance is explicit. It states that Fannie will not negotiate a short sale with a third party. So if that title has been transferred to a realtor or trust “under no circumstances” should a short sale be authorized. “But it happens. People are not looking at that part of the guide.”
It is equally important for parties involved in the short sale to have a list of all the times the property changed hands and also understand the whole listing history since there are important differences between cash purchases and buyers who qualify through a loan and are given a higher price. There has to be a careful review of all cash and other demand offers. “Don’t let realtors weed out the offers for you, request all of them and do your own weeding,” she said.
Servicers can benefit from extensive Fannie Mae resources available online about preventing mortgage fraud, including fraud propensity statistics. “Because that’s where we see our biggest fraud,” Fannie may add some servicing stats to the site, which is constantly updated with new information.
She called on servicers to report mortgage fraud by calling or emailing tips and information either on the record or anonymously.
“Please report anything suspicious in as much detail as possible. And don’t underestimate the value of that input because it can be one too many.” Fannie can add the data to existing complaints that together can help the GSE come up with a bigger fraud case.
“Don’t think that anything is too small. I’ve heard from many people: It’s only a $100,000 loss. But if we put together ten cases of the same than it reaches that over $1 million loss threshold that FBI agents look for before they build a case. Report and we’ll do the investigation.”
Rebecca Walzak, president of RJB Walzak Consulting Inc. agrees that all the red flags are in the file. The question is: Are the processors familiar with the title, do they know how to analyze the title?
“A lot of the talk today is about who should be doing what as servicers add staff. What kind of person does it take?” she said.
In Walzak’s view the idea of cross training and utilizing origination shop expertise has proven useful to most servicers who as a rule are not the originators of the loans they service. It means about two thirds of servicers may not have in file a full loan package from the originator, she said.
There are some key red flags to look at, Ellison says. The file available to the servicer may not always be complete or coming directly from the originator, but “it may have enough to get you going” until the originator’s package becomes available. Fannie starts processing with the servicer she said, “but we go back to the originator as well” to ensure the file is complete and authentic.
And once that file arrives and the servicer discovers origination fraud but everything else looks okay, Ellison says, Fannie will not turn down the short sale but after the short sale is closed, will review the deficiency and losses with the originator.
Servicers who hire some of the originators’ staff are advantaged especially if they have been underwriters or loan processors who actually have been looking at the title work. ”There’s a distinct skill set in reviewing title that not necessarily every person who has been doing standardized servicing is aware of.”
Fannie has added origination fraud investigations to its servicing fraud team “so they bring together the originations expertise with the servicing expertise in tandem to try to uncover what is going on,” she said. In addition Fannie is building its short sale team to include origination expertise.
“I don’t disagree with Bank of America implementing the same strategy,” she said, since although servicing is not the same process as originations, it utilizes “a skill set that is directly related to the issues at hand.”
