Real estate loan fraud 'pervasive and growing'

May 4, 2005

MBA panelists highlight ways to fight it

Janis Mara
Inman News

Mortgage fraud is "pervasive and growing" in the United States, but there are tools the industry can use to fight it, according to panelists at a national mortgage banking conference Monday.

"Mortgage fraud hurts borrowers caught in fraud schemes, potential homeowners impacted by inflated prices, originators who repurchase loans, securitizers and subordinated investors who absorb the losses," said panelist Pat Schwinn, chief financial officer with Strategic Decision Support, at the four-day Mortgage Bankers Association's National Secondary Mortgage conference in San Francisco.

Schwinn quoted an FBI report describing mortgage fraud as "pervasive and growing." She said more incidents are being reported to the Mortgage Asset Research Institute, which keeps track of mortgage fraud.

"All indications are that mortgage fraud is up," she told an audience of about 100.

One of the most difficult aspects of dealing with mortgage fraud is that it's hard to know the scope of the problem, according to panelist Arthur Prieston, chairman of the Prieston Group. George Kimmel George Kimmel, Standard & Poor's

Standard & Poor's Structured Finance Group estimated the annual cost of mortgage fraud in 2003 at 3 basis points, or $1.2 billion, on the record-breaking $4 trillion of mortgage originations that year, according to panelist George Kimmel, associate director of the group. The estimate was based on data from the Prieston Group.

"Though this is a preliminary effort, it's the most robust I've seen yet," said audience member James Croft, founder of the Mortgage Asset Research Institute.

Schwinn recommended four approaches to fighting mortgage loan fraud. "Strengthen pre-funding controls. Get expert help," she advised the audience. Loan officers should be trained on how to better detect fraudulent applications, she said.

"Start analyzing data and tracking information (on fraud) now. The sooner the better," Schwinn said.

Participating in industry efforts to establish a database of fraud incidence can help in tracking, measuring and correcting the problem, Schwinn said. The industry's recognized database for such reports is that of the Mortgage Asset Research Institute, MIDEX, the Mortgage Industry Data Exchange.

Finally, "evaluate the use of fraud insurance," Schwinn advised.

Schwinn also suggested three resources to the group: theMortgage Fraud Against Lenders Resource Center, sponsored by the MBA; the Mortgage Fraud Blog, run by The Prieston Group; and Quality Lenders Review. (Another mortgage fraud resource is a mortgage fraud blog run by Rachel Dollar, a California mortgage fraud attorney.)

Detecting fraudulent loans can be tricky, Schwinn acknowledged. "When you see a fraudulent loan you won't know right away because the applicant is lying," she said.

In answer to a question from the audience, panelists agreed that straw buyers – so-called home buyers who are either victims of identity theft or otherwise fraudulent – are one of the hardest forms of fraud to detect. "Contemporaneous flips are hard, too," said Prieston.

Flipping, or selling a property quickly for a large profit, can be legal. When done dishonestly, it often involves inflated appraisals from dishonest appraisers.

"The shorter the time from origination to default, the more likely it was caused by fraud," Schwinn noted.

Copyright 2005 Inman News

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