Preventing Mortgage Fraud
March 19, 2004
Companies help lenders identify fake files
By Coco Salazar
Mortgage fraud can cost a company millions. It happens before the loan is closed, and it happens on mortgages that were funded years ago. And while all mortgage crimes cannot be prevented, a few companies say their services help reduce the fallout from fraud.
Mortgage Asset Research Institute Inc. (MARI), which says it provides risk management data and solutions to the mortgage industry, recently reported about an alleged lien release scheme in the Pennsylvania area.
The scheme involved people who were buying Pennsylvania properties by the hundreds in tax upset sales, said MARI general manager William Matthews in a phone interview. The buyers then filed quiet title actions to transfer or change the ownership structure on the titles of the properties, in hopes that the actions would go unanswered by the lien holders.
According to Matthews, whenever a change in ownership is filed in court, the servicers or lien holders have a certain amount of time to respond to the change after they are notified. If servicers do not respond in the given time frame, a judge could potentially issue a default summary judgment, which releases servicers' liens on the property and can "wipe out" all the debt owed on the mortgage.
"Where there is money, people will be creative," said MARI founder D. James Croft in a written statement. "That is why the mortgage industry needs to be diligent in its efforts to detect and spread the word on new types of schemes being perpetrated in the industry."
MARI became aware of the alleged scheme when it was submitted to its new cooperative service that reportedly addresses, identifies and alerts the industry about mortgage fraud issues at the time of detection to its subscribers, said Matthews. The subscribers agree to contribute data in order to receive data.
By reporting on the alleged Pennsylvania scheme, servicers were alerted to respond to quiet title actions and avoid a default judgment filed or ruled against them, Matthews said.
"If someone is having problems in their portfolio, the likelihood that somebody else has had problems or will have problems is fairly significant," said Matthews. "A lot of fraudsters are not discriminatory fraudsters, they don't care who they perpetrate against. They're opportunists."
Matthews said it was "too early to tell" just how much fraud could be prevented with MFAS because its a new service and has not received feedback from its subscribers on whether its reporting has prevented anything or not.
Diligence is also needed to detect potentially fraudulent loans that can result in serious losses, according to Mike Ela, president of C&S Marketing, a Sacramento, Calif.-based company that says it provides knowledge and informational tools for quality control, appraisal review and underwriting process support.
"The most common misconception lenders have about mortgage fraud is that it can't happen to [them]," said Ela.
Through the years, he added, lenders have relied far more on creditworthiness than they have on the collateral value and have accepted a certain amount of loss by not focusing on having good screening mechanisms in place.
"[Lenders] get loans that are all packaged up and they look beautiful -- the credit looks good, the valuation looks good but the reality is they're not all good," said Ela. "If you don't do a certain amount of due diligence, don't run them through certain screening methodologies or you do less due diligence than other companies, you're eventually going to be a victim of adverse selection."
Ela gave the following scenario to describe adverse selection: When a mortgage broker packages questionable quality loans and tries to sell them to several wholesale correspondents or lenders, those with good quality control and collateral screening tools who perform screenings on a regular basis can avoid buying potentially bogus loans. However, wholesalers that have a review process severely lacking in the ability to detect fraud, or those who review loans randomly, are wide open to be "adversely selected" by the broker. Because brokers get paid when they close on the loan sale, brokers select lenders who do not screen on the front end and thus fail to discover potential fraud.
Collateral assessment or collateral review are the basic processes lenders diligently need to perform to "significantly" reduce losses, said the executive. The basic technology lenders need to have in place are collateral valuation, collateral assessment and review tools and identity fraud checking tools, all of which C&S provides, said Ela.
The Mortgage Network says it uses identity verification, as well as income verification products, on every loan to fight fraud. The preventative measures also help the Denver-based lender avoid being discriminatory. In addition, this type of due diligence reduces the chance of having to buy back a loan if an underwriter finds discrepancies in the file.
The company uses Texas-based Rapid Reporting Verification Co.'s products. With one service, the borrower's information is compared to that in the Social Security Administration database resulting in a match or no match. One of the companies pre-funding tools verifies borrowers' income within 24 to 28 hours through a relationship with the Internal Revenue Service.
"Fraud levels in Colorado have escalated during the past couple years, and we wanted a way to protect ourselves against that threat," said Jaxzann Riggs, owner of the The Mortgage Network.
According to MARIs latest analysis based on reported mortgage fraud, Colorado ranked ninth in the top 10 geographic areas with a high percentage of mortgage fraud relative to population density. The District of Columbia was first, followed by Florida, California, Maryland, Georgia, Nevada, Utah, Illinois and the tenth was South Carolina.
"When we used credit report data, we had some challenges," added Riggs.
According to the company owner, loan production employees would spend about three weeks processing the loan and gathering all the relevant data, and occasionally, just before the loan closing, the originator would find out the borrower had provided false Social Security information. With Rapid Reporting's products, however, they are able to identify the borrower and his or her income before too much time is invested.
Although Riggs could not quantify how effective the products have been, she did note her company "has been called upon to buy back three loan transactions that were originated and closed more than two years ago due to a disparity between the income the IRS stated and what the borrower had claimed -- something Rapid Reporting would have discovered.