Identifying Mortgage Fraud

October 11, 2016 / John Stoppler , Vice President— Investigations and Appeals

Identifying Mortgage Fraud


Mortgage fraud is an ever-evolving beast. As soon as investigators focus in on a method of fraud, practitioners shift their strategies to take advantage of changes in the housing market.

Thanks to fraud detection, tightened regulations, and ramped-up enforcement, the industry witnessed a significant decline in mortgage fraud in recent years. First American Financial Corporation’s August 2016 index for defects, fraudulence, and misrepresentation in mortgage applications was down 31.4 percent from its high point in October 2013. That being said, this downward trend has reversed—mortgage fraud is slightly on the rise and being watched closely by industry experts.

According to CoreLogic’s Mortgage Fraud Report, the second quarter of 2016 showed a 3.9% increase in fraud risk with .7% of all mortgage applications in the second quarter of 2016 containing fraud.

A few markets saw sharper increases in First American’s defect and fraud index over the previous year, including Maine (+19.2 percent), North Dakota (+13.6 percent), and Missouri (+8.7 percent).

Additionally, Fannie Mae reports that California, the Southeast, and the Northeast each saw significant increases in misrepresentation findings in its evaluation of 2015-originated loans. Kansas, Maine, Wisconsin, Nebraska, and Arkansas showed the highest year-over-year increases in fraud risk growth. Those increases underscore the need for underwriters to stay vigilant as the changing tactics of fraudsters include targeting specific cities or states.

Those tactical shifts also illustrate the importance of lenders and their partners examining every aspect of a loan through rigorous underwriting. It’s always best to discover fraud or misrepresentations before the loan closes. United Guaranty’s Investigations team develops and deploys a range of detailed statistical analyses to identify the red flags that can signal fraud attempts at the point of origination—rather than further down the road when fraudulent applications become costlier for lenders..

The second quarter of 2016 showed a 3.9% increase in fraud risk with .7% of all mortgage applications in the second quarter of 2016 containing fraud,” according to CoreLogic’s Mortgage Fraud Report.

To help loan officers, mortgage providers, and borrowers be able to recognize the most common types of mortgage fraud, we’ve outlined some of the red flags to look for:

Reverse occupancy schemes
Reverse occupancy schemes have been on the rise over the last couple of years. In order to qualify for a mortgage, the borrowers will represent that they are purchasing an investment property and include the rent proceeds as income. Rather than renting the property, the borrowers will occupy the home as their primary residence.

Fannie Mae lists several common characteristics of reverse occupancy schemes to assist with identifying such practices. Some of the traits are first-time home buyers with minimal or no established credit, large down payments, appraisals that include a comparable rent schedule to indicate expected rental income, and buyers providing “rent-free” letters showing they are living rent free in their current residence.

Foreclosure rescue and straw buyers
This type of fraud occurs when an unscrupulous “foreclosure rescue” company—or even a family friend—buys a struggling homeowner's property and rents it back to the original owner without disclosing the new arrangement to the lender.

These companies and individuals seek to buy the homes of struggling owners with the promise the family can stay in the home, but then add fees onto the deal that make it even harder for a borrower to stay on top of payments.

Red flags for foreclosure rescue/straw buyer schemes include a borrower purchasing several rental properties in a short timeframe or buying a property at a price significantly below his or her current residence.

Short sales and flip sales
Another common type of fraud involves artificially driving down a home's value—sometimes by blaming structural concerns or damage—for the purpose of gaining approval for a short sale. Then, the house is immediately re-sold at a much higher value in a pre-arranged transaction not disclosed to the original lender or servicer.

In some cases, appraisers participate in these fraud attempts by undervaluing a property and then justifying it by selecting comparable properties from the lowest end of available comparable sales.

Red flags for short sale/flip sale fraud may include any of the following: multiple same-day transactions on the same property (multiple transactions within a short period may be suspicious as well); a deal's sales contract identifying a seller who was never identified as the owner at the deal's closing; and title transfers to a business before a short sale (which may or may not be recorded).

Affinity fraud
Affinity scams are often operated from within a church or social community. This type of fraud involves misrepresentations of the buyer's income or employment—with false or altered bank statements, bogus verifications of employment, or fraudulent gift funds.

These groups sometimes establish phone banks to distribute false verifications of employment or income.

Red flags for affinity fraud may include a borrower with a higher income than would be expected based on his or her education, age, or job experience. This type of fraud is sometimes detected by underwriters who determine that the borrower’s earnings seem out of sync with his or her assets, debt levels, and credit history.

United Guaranty leads the mortgage insurance (MI) industry in the quantity and proportion of full-file underwriting we do. With the most experienced underwriting and independent validation team in the industry, our SecureCertSM program provides the maximum rescission relief available. Lenders trust us to make the MI decision and eliminate the risk of their making an MI underwriting error.

John Stoppler

John Stoppler is Vice President, Investigations and Appeals. He has been with United Guaranty for six years and was previously with Safeco Insurance, managing the specialty claims unit. An attorney licensed in California, he is a graduate of the University of San Diego School of Law and earned a bachelor’s degree from California State University-San Bernardino.

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