An Increase in Mortgage Fraud Is Being Reported
When you go to buy a home, there are typically two options, you pay in cash or you get a mortgage loan. Mortgages are loans specifically for homes and they are often for a large amount of money. Like with any other type of loan, there are people who want to misuse the system in the form of fraud.
At the end of every fiscal quarter, information about fraud during that quarter is calculated. During the second quarter of 2018, the real estate market saw an expected trend. The risk of fraud increased by 12.4% compared to the year before. Twelve percent translates into about one loan in every 109 having indications of fraud. This information comes from CoreLogic, a major financial services company based out of Irvine California.
A rise in the number of reported mortgage fraud cases was predicted by CoreLogic in 2017. With a rise in many other types of fraud and the rise in home prices, it isn’t that hard to believe that mortgage fraud increased. In addition to that, the cost of a home versus income has continued to increase, increasing the chance that people will feel they need to lie to get their mortgage.
Also found by CoreLogic was the fact that an original mortgage loan is more likely to be fraudulently abused. Refinancing and similar other real estate loans had less cases of fraud than original mortgages.
What Exactly is Mortgage Fraud?
Mortgage fraud takes several different methods but it all comes down to one general concept. People want to get mortgages no matter where they are in life. That often results in them lying in order to get a mortgage. Whenever you lie to get a mortgage, that is considered to be mortgage fraud.
For most cases of mortgage fraud it is as simple as someone telling a “white” lie to their mortgage officer in order to get their mortgage approved. They don’t go to any great extent to back up their lie or to get one over on the mortgage company. That lie though, often is used because they wouldn’t otherwise qualify for a loan so big. Which probably also means they won’t be able to pay it back.
What do people lie about when it comes to mortgage fraud in order to get a mortgage? CoreLogic, the company mentioned above, has identified six areas or “concepts”.
- Lying about the transaction
- Using someone else’s identity or an otherwise false identity
- Lying about property ownership, collateral, or similar aspects
- Lying about who will occupy the property
- Lying about their income
- Not properly disclosing any existing debt, especially real estate debt
These are just the six key areas that people hit to fraudulently obtain a mortgage.
Fraudulent lending may sometimes be done innocently but other times, people go to great lengths in order to obtain a mortgage. Recently, Fannie Mae issued a warning to financial institutions that there has been a rise in a detailed mortgage fraud technique that utilizes fake paperwork. People have been preparing paperwork that appears to prove employment and their income but it is all fictious. The paperwork appears to be legitimate to lenders, in fact, it appears so real that the lenders don’t dig any further into their employment.
This is further hindered by the perpetrator claiming that they were a student just before they started to seek the loan. Student tax transcripts are near impossible to pull and it makes it hard for a lender to verify the person’s statement either way.
In most cases the perpetrator also claimed that they were making above average income for people their age in their line of work. This makes them appear to be an even better candidate for a loan. All in all, their information makes them look like they are a great person to be given a loan because all of the pieces appear to fall into line.
Why Is Mortgage Fraud Bad?
We all know that most types of fraud are crimes. Mortgage fraud can be a crime too, meaning a bank can go after consumers that attempt to get loans illegally. Federal law does not have mortgage fraud specifically mentioned in it. Depending on the exact fraud though, it is prosecuted as any number of banking crimes such as wire transfer or bank fraud. Sometimes conspiracy is also used.
Lenders businesses can be at risk from fraudulent mortgages. The lender works as an originator for the loan, arranging it for the borrower. They then sell the loan to an investor. Investors often do their own investigation into the loan, including reading into the borrower. If something flags as fraudulent, the lender can be forced to buy back the loan. That loan is then the responsibility of the lender and cannot be sold again.
Sometimes the investor is able to spot the signs of fraud before they buy it. In that case they are lender is still responsible for the loan.
Fraudulent mortgage loans are also bad for the fact that many people commit the fraud in order to get a home that they can’t afford the payments on. The calculations and requirements for a loan are there so that the lenders know a borrower can afford to pay back the loan. That means eventually the person will more than likely get foreclosed upon.
Too many fraudulent mortgages can hurt lenders and can present the potential for the lender to go out of business. With that, loans will become harder to get. The less businesses offering loans and the stricter that their standards become, the less likely you are to be able to get one. That means the whole community will hurt too. Let’s take a look at how we can work to prevent mortgage fraud so no one gets hurt from it.
How To Prevent Mortgage Fraud
With mortgage fraud going up, that means that lenders will need to increase their scrutiny of mortgages. That all starts with reading through the mortgage application thoroughly. You need to make especially sure that everything is both accurate and filled out. Any gaps or missing areas may be a sign that something is wrong with the mortgage.
Like with any other application that someone submits, it is important that all references, including employment be contacted when a mortgage application is submitted. Just because something looks solid, doesn’t mean it is. There are plenty of ways to fake documents, even if you aren’t experienced in the area.
Further suggestions from mortgage experts include using more concrete methods of employment verification. Using income verification directly from the employer is one. That means from their database or from the mouth of the employer. That way you aren’t taking the word of the borrower at face value.
Direct deposit receipts from banks can also be used to verify income in the case that an employer won’t disclose how much someone makes. It isn’t often but it does happen where employers will refuse to release information to outside groups, this is why having alternatives can be helpful. One can also use the information learned from direct deposit receipts to double verify income in case there is a red flag on someone’s mortgage application.
Reporting cases of mortgage fraud in order to have it prosecuted is also crucial. Those who are committing fraud need to know it will cost them. Demotivating even a portion of offenders will help to save the mortgage industry.
To sum it all up, lenders need to make sure that they do their job right the first time. Not only right but thoroughly. Then they need to double check their work to ensure they got every t crossed and I dotted. Just like with any other job. All of this work will toward reducing mortgage fraud and keep loans available to people.
There is allot here to make any investor extremely cautious about buying mortgages. You should be cautious but that doesn't mean that mortgages are bad investments. You just need to do the same job that the lender did to make sure that you are making a good investment. Learn to do this before you start making investments into the mortgage industry, that will set you up to really succeed.
The current trend of mortgage fraud was predicted by CoreLogic pretty accurately. That trend is likely to continue upwards and if it travels too high, we might see changes to how mortgages are handled. Either way, mortgage investments can still bring you a great income.
Eddie LaRosa and Miami Real Estate Official of EWM Realty International are local specialists who work on providing the latest local information. If you would like to buy or sell in Miami contact us today at 305-968-8397 or send us a message here. We specialize in the Miami Real Estate market and our knowledge in the area has helped countless of our real estate clients.