|Interpretive CommentsSomething each of has an obligation and responsibility to report whenever encountered, or even suspected, is fraud. Originators are on the front line and can spot this behavior more easily than operations. When armed with the right information and knowledge, they can help wipe it out.
The temptation to ignore even the most innocent-looking fraud (yes, it can appear to be innocent) can be difficult at times, especially when you think that there is no harm involved. That sometimes is the fraud that many get caught participating in.
It is the type of fraud that seems to be harmless. You know, that loan you have originated where you recognized something that doesn’t look right, but you are willing to ignore the warning signs because it is not egregious. Or, if you bring it up, the borrower or Realtor has a reasonable explanation and you are afraid that if you push the topic you will lose the loan, or in some cases the relationship with the Realtor. You may justify this by thinking that they will just take the loan down the street and close the loan with someone else. Easy to justify, right? Unfortunately, this is a way too familiar and regular theme in our business.
Fannie Mae released a Reverse Occupancy Fraud fact sheet.
Here is how it works:
A borrower buys a home as an investment property and lists rent proceeds as qualifying income so that they can meet ratios. Instead of renting it out, they move in and occupy it as a primary residence. Seems harmless, right? Some may justify that the borrower has to put at least 15% down, so it seems like a good LTV risk. However, the cost to you if you are caught facilitating this scheme is a loss of your license and possible jail time. You may play the innocent victim role, but the cost to defend your position will outweigh any benefit earned by participating in the fraud.
Why would a borrower do this? Some of the reasons are limited credit, first-time homebuyer, not enough income to qualify with a primary housing obligation, just to name a few.
The borrower shows on the application that they live with family and so they are living “rent free”. There is no housing obligation ratio and the income from the subject property, when shown to be an investment property, helps to keep the debt ratio in line.
Here are some ways to detect Reverse Occupancy Fraud:
- Large down payments (as is typically required for investment properties)
- Large asset base and an income that doesn’t match those asset values
- Applicant does not have primary residence housing costs (rent free) either before or after loan closes
- Non-arm’s-length transaction
How did Freddie Mac combat this type of fraud? They limited the total amount of rental income that can be used for a borrower that has no landlord history to 30% of total income.
If Fannie Mae cannot stop this type of fraud through awareness, they may take same approach as Freddie.
Other types of fraud to look for are:
- Short payoff fraud
- Condo conversion bailouts
- Investment property schemes
- Affinity fraud
- “The builder bailout”
- Illegal property flipping with cash-out purchases
- Foreclosure rescue schemes
Look for the links below to explore these types of fraud and others.
There seems to be an increase in fraud propensity when the market slows or rates rise and the loans get harder to do, or during fall and winter months when there are fewer loans out there.
In another article that MortgageCurrentcy™ published, I made these comments – and it is a good time to review them again, as a gentle reminder.
There has been a steady trend into the realm of individuals that are willing to once again misstate facts on the loan application or fabricate documents to support the misstatements on the loan application. There is also a steady trend towards omissions that mislead or misinform the operational support teams, because without knowledge from an originator or real estate agent to inform the support staff, it is more likely whatever was omitted would not be found out.
Whatever the fraud, the simple truth is that once it is found, there are true hard costs and financial losses that a lender or broker may have to absorb, which hurts the whole industry over time.
One key to these fraud schemes is that there is a higher propensity for the fraud to be committed on loans that include first-time homebuyers and those borrowers that need affordable lending products (low-moderate income borrowers). There is of course the issue of affinity fraud where an unscrupulous real estate agent or loan officer may abuse individuals from their own race, religion or ethnicity.
Both agencies are increasing their data base on these types of transactions by receiving a deeper and richer set of loan level data from their seller/servicers. Also, more lenders are acting as their own watchdog and actively reporting this back to the appropriate agency when discrepancies are noted at loan level.
Both agencies have whole sections on their websites dedicated to Fraud resource tools, including best practices, checklists, talking points on various topics, and training opportunities to name a few. Additionally, both agencies have reporting requirements that lenders must follow.
This is a serious topic, and we must treat it as such. Taking it seriously typically starts from the top and trickles down to the masses. It is my opinion that it should start at the point of sale and should not be a lesson after the loan closes. Not only are lenders’ reputations at risk, but so is yours if you don’t take it seriously. All of us are skilled enough to detect anomalies in a mortgage transaction, but there are many times borrowers are abused through lazy or greedy originators or Realtors, or borrowers are motivated through market challenges into homeownership or accessing equity in properties owned.
Continue to remain diligent in looking for trends in your branch and with your clients. Use the resources from the agencies for fraud awareness and educate your borrowers to be cautious of an overzealous real estate agent that may coach them to participate in actions that may seem innocent on the surface. An example of this is as simple as rounding up employment to two years when they have only been on the job for 1 year 7 months.
Here is a statement from Fannie Mae that I really like – “If the loan doesn’t make sense, don’t do it!”
Loan Originator/Processor/Closer Interpretation
It is good to stay current with this topic. You should review so that you can know what to catch at the interview stage. This information may help you ask questions that are at times difficult to address when “things don’t make sense”. Let’s work together to eliminate misrepresentation at every level and in every relationship so that we can be rid of this behavior. It costs money and could cost you or your company your reputation, which we could argue is more costly than a real financial loss. If we are in the business for the long haul, then we owe it to the industry to stamp out fraud anywhere we see it.
This can be very useful to you and is something you should review. The agency fraud resources page has excellent tools and information that can assist you in those loans that have questionable characteristics.
I suggest you share this during a staff meeting. It is good to keep this topic at the forefront of your entire branch/company. Share with your QC department as well.