Mortgage fraud isn’t confined to one area: it’s a common practice throughout the entire U.S., and it’s getting worse.
At the end of May, Fannie Mae delivered a warning to local mortgage lenders and servicers that fraudsters in Los Angeles were claiming employment at 34 fake businesses. It’s not clear how many misleading applications slipped through the cracks, but the odds are good that people who received loans without verifiable employment do not intend to repay what they borrowed.
As mortgage fraud becomes more common, so do the techniques that fraudsters use. The same month that Fannie Mae outed nearly three dozen nonexistent employers, Joseph DiValli was sentenced to 18 months in federal prison for his role in a mortgage fraud scheme that cost lenders more than $6 million. DiValli and his companions used straw buyers to apply for loans, fudging applications with false appraisal reports and backdated deeds to push the loans through. As the loan officer, DiValli facilitated many of the loans himself.
All these fraud ties back to one common factor: fake applications are getting past the brokers who should catch them. This isn’t an indictment on brokers in general, however. Mortgage brokers are some of the most overworked people in the lending business. They would love to catch every fraudulent application, but often, they simply don’t have the time to investigate questionable applications or double-check applications that appear to be legitimate.
The appearance of legitimacy and verifiable truth are not the same thing, though. Brokers are the gatekeepers of mortgage fraud, and they cannot continue to let fraudulent applications slip through. If the mortgage industry wants to turn the tide against fraud, the responsibility lies with the brokers.
Mortgage fraud is silently expanding
Research from CoreLogic found that 0.82 percent of mortgage applications submitted in the second quarter of 2017 contained an element of fraud. By comparison, that figure was 0.7 percent in the second quarter of 2016. Dishonest applicants are successfully submitting more applications, and brokers are struggling to keep up.
These bad loans might happen on a small scale, but they cause big problems. In 2015, one Maryland developer pleaded guilty to a scheme in which he and a partner falsified closing cost information to swindle nearly $2.5 million from a lender via wire transfer. More recently, a man in Florida concealed sales incentives to secure private loans from Wells Fargo, stealing almost $1 million.
The U.S. Attorney’s Office highlights several new cases like these every year. Unfortunately, mortgage fraud is common enough to provide the government with several options to spotlight. A million dollars here, a million dollars there, and the collection of small-time schemes paints a picture of a mortgage fraud epidemic in America.
If the mortgage industry wants to stop the bleeding, application fraud cannot continue. And although mortgage brokers already feel the pressure, they must be even more diligent to identify fraudulent applications.
How brokers can stop rising mortgage fraud
Tempting though it may be, brokers cannot look briefly over the information applicants submit—even if everything appears to be in order. Instead, they should do real research alongside the underwriter to verify everything about the applicant.
Fortunately, social media makes that process quick and easy. For example, brokers can check LinkedIn to see whether an applicant works at a real company. If that fails, brokers can simply perform a quick Google search to find the business. And if a company doesn’t exist on the internet, brokers should proceed cautiously. Some operations don’t require an online presence, but any business that claims to employ more than a few people should at least have a website.
Brokers should also check the quality of employment communications. Are employment letters on professional letterhead? Do they contain grammatical errors? Do the numbers from the employer match the numbers submitted by the applicant, and are those numbers rounded? In some cases, absolute uniformity of round numbers can be just as suspicious as mismatched information.
Another thing brokers should watch out for are inconsistencies regarding financial information. Banking documents should match the information from the applicant’s income. If bank records indicate that the down payment is a collection of multiple cash deposits, the broker should treat the application with extra caution. Some applicants fake entire accounts, but brokers can solve that issue with a quick call to the bank to verify the account’s existence.
Brokers don’t have it easy. In the face of rising mortgage fraud, they stand as the lending industry’s first line of defense. Double-checking applications takes a bit longer, but every fraudulent application caught under the magnifying glass saves a lender thousands of dollars. If brokers begin to investigate applications more thoroughly, would-be fraudsters will have their work cut out for them.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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