Part I of III in a series
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain.
Unlike most common forms of financial fraud, mortgage fraud takes a long time to present itself, and as a result can lull lenders into a false sense of security. This leads to statements like the following:
“We’ve been in business a couple of years and we haven’t had any fraud.”
“Our delinquency rate is low, so we know we don’t have a fraud problem.”
“We haven’t had a large loss, so our current controls must be working.”
All true—until the day it isn’t.
Here are five reasons why you should be wary when everything seems fine.
- Mortgage fraud is a relatively rare event. Less than 1 percent of mortgage applications have material misrepresentations. Most fall under the heading of fraud for property: borrower misrepresentations of income, assets or liabilities in order to qualify for a mortgage. More serious fraud schemes – fraud for profit – often involve multiplayers, such as appraisers, loan officers and straw buyers, and are even rarer. But the potential for large losses, particularly with fraud for profit, makes fraud a serious problem.
- Many mortgage frauds are undetected. In a strong economy with home prices appreciating, borrowers who committed fraud-for-property can probably stay current on their loans. However, as the economy slows or home prices top out and go through a correction phase, fraud-for-property loans are more likely to default. The difficulty in identifying these loans as fraud is that they are most likely being treated in loss mitigation as a credit loss and not as origination fraud.
- Types of mortgage fraud can be cyclical. Falsified down payment sources, inflated income, and straw buyers were some of the more common issues leading up to the housing crisis. In the aftermath of millions of foreclosures, fraudsters shifted to loss mitigation fraud, such as short sale schemes, REO bid rigging, and loan modification scams. Fraud moves with the market and current opportunity.
- No one likes to air their dirty laundry. When fraud is an “inside job,” financial institutions are very cautious about disseminating information about operational fraud issues. Insider fraud involving employees or agents can heavily damage your brand. And senior managers may not be aware of the issues as investigations involving internal parties may be shielded under attorney-client privilege.
- The lag between fraud activity and its discovery can be lengthy. Other types of consumer fraud tend to be “fast moving.” Stolen credit cards are almost always used immediately. Check kiting is usually discovered in a matter of days. Mortgage fraud is much more insidious. Sophisticated schemes take measures to delay discovery, making payments to keep the mortgages current, and even ensuring false employment reverification requests are responded to appropriately. This enables the scheme to continue.
Summary
It is easy to create a false sense of security when it comes to mortgage fraud. The truth is that for financial institutions, the risk of fraud is always there. It shifts over time and can be operating right under your watchful eye. Understanding more about types of fraud and developing an ongoing process to monitor your operations is necessary for loss prevention. I will share more about current market trends and potential best practices in my next couple of blogs. Until then, be safe and aware.
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