As we start 2011, the industry needs to review, change and implement Quality Control plans that can prevent mortgage fraud and reduce defaults in 2011. All origination platforms need to take the proper steps with quality control that ultimately will provide and support liquidity through all types of market cycles, thus benefitting all the mortgage industry stakeholders for years to come.
Mortgage fraud opportunism has been on the rise because the conditions have been riper than ever. The FBI has identified a many factors, which include “a decrease in loan originations, increased unemployment, increased housing inventory, lower housing prices, and an increase in defaults and foreclosures,” which have generally made borrowers/homeowners more desperate, and hence more vulnerable to being defrauded.
The Financial Crimes Enforcement Network (FinCEN) reported in December that suspicious activity reports (SARs) indicating mortgage loan fraud increased 7 percent in the first half of 2010.
According to FinCEN, at least part of the increase can be attributed to increased attention to older loans. From January to March 2010, 78 percent of SARs involved loans more than two years old. Banks and thrifts filed 35,135 mortgage-related SARs from January to June 2010, up from 32,926 in 2009 during the same period. Unfortunately, it seems that all of these conditions will persist in the immediate future, which means consumers (and regulators) need to maintain a high level of vigilance.
The West and Southeast are the two most problematic regions. The regions which were affected the most by the housing bubble/collapse and/or by deteriorating economic circumstances also experience high incidences of fraud. In 2009, “The top mortgage fraud states for 2009 were California, Florida, Illinois, Michigan, Arizona, Georgia, New York, Ohio, Texas, the District of Columbia, Maryland, Colorado, New Jersey, and Nevada.”
Under current regulations only banks and insured depository institutions are required to file suspicious activity reports (SARs). FinCEN says SARS are a critical source of information for law enforcement in investigating and prosecuting mortgage fraud related crimes, and that it believes new regulations requiring non-bank mortgage lenders and originators to adopt AML programs and file SARs would be consistent with those businesses’ due diligence. FinCEN has proposed regulatory changes that would require non-bank residential mortgage lenders and originators to also report suspicious activity to the agency and establish their own anti-money-laundering programs to curtail losses.
“Our industry needs to do what it can to help prevent mortgage fraud,” said Brian Montgomery, former FHA Commissioner and Vice Chairman at the Collingwood Group in Washington, DC. “This can be accomplished through a variety of processes including analyzing the borrower identity, application information, and property valuations.”
“The Collingwood Group can assist mortgage bankers as they work to detect and stop mortgage fraud by helping them customize strategies in their business operations and regulatory compliance framework,” Montgomery added.
The FBI's "Operation Stolen Dream," whose preliminary findings were announced in June resulted in hundreds of arrests and convictions related to 1,215 criminal defendants who allegedly swindled $2 billion through mortgage-related schemes. But FBI Director Robert S. Mueller cautioned that there is still much work to be done. The Bureau is currently pursuing more than 3,000 mortgage fraud cases, he said, which is almost double the number from the last fiscal year.
“The staggering totals from this sweep highlight the mortgage fraud trends we are seeing around the country,” Attorney General Holder said. “We have seen mortgage fraud take on all shapes and sizes—from schemes that ensnared the elderly to fraudsters who targeted immigrant communities.”
Prevention begins not with millions, not with thousands, not with hundreds, but with one: one loan officer, one loan office, one mortgage company, or someone involved in the transaction – one person – at a time.
A few 2010 "Operation Stolen Dream" examples:
• In Miami, two people were arrested for targeting the Haitian-American community, claiming they would assist them with immigration and housing issues. Instead, they used victims’ personal information to produce false documents to obtain mortgage loans.
• In California, a prominent home builder used straw buyers to sell his houses at inflated prices. The scheme inflated prices on other homes in the area, creating artificially high comparable sales and affecting the overall new-home market.
• And in Detroit, FBI agents arrested several individuals in a $130 million scheme orchestrated by the local chapter of a motorcycle gang. The conspirators posed as mortgage brokers, appraisers, real estate agents, and title agents and used straw buyers to obtain around 500 mortgages on only 180 properties.
The Mortgage Asset Research Institute (MARI), whose subscribers represent 70% of the mortgage finance space, reported appraisal fraud is taking a larger proportion of trickery alleged in suspicious activity reports (SARs) filed with the Financial Crimes Enforcement Network (FinCEN).
"In 2010, regulatory officials and law makers recognized that collateral valuations play a critical role in fighting mortgage fraud. The use of BPOs in a secondary position to an Appraisal has proved to be an important double check on fraudulent loans in addition to providing multiple perspectives of collateral value. This will greatly aid fraud detection in 2011 and beyond”, stated Kevin Marshall, President, Clear Capital.
“The new interagency appraisal and evaluation guidelines do not make judgment about the relative usefulness of the two valuation approaches, nor do they judge the professionals who create them. Rather they introduce a system that allows the top professionals of both Appraisal and Real Estate professions to better contribute to a more healthy lending industry. When looking at the big picture of mortgage fraud, this is a win for everyone except those wittingly committing fraud.” Marshall added.
Hands down, no bones about it, fraud is an illegal act perpetrated by individuals and on an individual level, each of us has the power to resist doing something illegal. The power of pre-funding audits and reviews or as I call them "Clear to Close" is that they make the individual who might be tempted to commit fraud pause, even if just for a minute, and gives him or her time to change the course of action.
Most authorities will agree that the most effective method in preventing mortgage fraud is consistent regulation and licensing enforced by the appropriate authorities. You should want your company to rely on a very strong company quality control plan that includes both pre- and post-closing loans. After all, it is your business or income whether you are an owner, loan officer processor, or being paid to be involved in the transaction. Without proper enforcement of your own quality control plan, current regulations are of almost no consequence to your company.
Remember, fraud often starts small. A fudged figure here, an incomplete loan application there, an over-generous appraisal, but little do employees know that these “little lies” are actually fraudulent information and, in fact, possibly criminal.
Loan fraud is typically committed with intent; it is not normally requested or asked for by the homebuyer, but by the originator or real estate professional, or both in partnership along with other insiders in order for the loan to close and make a profit.
Lenders tend not to notice loan fraud unless the loan is going into or in default. The patterns of recent FinCEN filings have been reported that the detection of suspected fraud is after the mortgage had been funded. With the increase in mortgage fraud detection products in connection with mortgage purchasers, they are sending more loans back to originators for repurchase, which is very expensive.
I firmly believe that prevention is the key to finding a cure for this industry-wide “disease.” If we can spot the warning signs and stop a fraudulent mortgage loan before it goes through funding, we are halfway to beating the fraudsters at their own game.
Furthermore, every loan officer, loan coordinator, or loan processor should be required to sign the Quality Control Plan or version of it before they ever log a single hour working. This signed, legal document will assist in the various liability issues resulting from the employee’s actions, but I feel it is a strong deterrent to acting improperly in the first place.
You need to budget the additional time and expenses in order to have a detailed Quality Control plan implemented for 2011. We all need to be working together to adopt Fannie Mae’s LQI principles, then we can improve loan quality, provide more certainty about repurchase exposure, and reduce funding or pooling delays due to delivery issues. The LQI is focused on four basic objectives:
1. Clarifying business and credit policies.
2. Capturing critical loan data earlier in the process.
3. Validating certain data quality, eligibility, and pricing primarily before, but also during, and immediately after loan delivery, and
4. Monitoring loan quality performance and providing feedback through quality control (QC) reviews, training, and collaborative consultations.
When we believe in the existence of fraud could affect us individually, more will then start taking active steps, every day, to combat against it. It may be an everyday battle, but the longer we fight the stronger we get, and once something becomes a habit the less difficult it is to achieve; and the harder it is to forget.
We must be vigilant against fraud, recognizing its signs and taking proactive, definite, and realistic steps to not only prevent it but also punish it.
May this New Year bring many opportunities your way and may your resolutions for the days ahead stay firm, turning all your dreams into reality and all your efforts into great achievements.
