Business News

Industry Voice: The Beat (of Fraud) Goes On

By Kevin Ludden | June 14, 2016


Industry Voice: The Beat (of Fraud) Goes OnIn the 1980s, I was office manager of a small mortgage lending shop in Washington. At a production meeting, I advised our bank manager that one of her applicants had insufficient income to qualify for his loan.

Without hesitation, she began digging through her purse and pulled out a paystub belonging to her husband. “Here, use this,” she said, passing me the stub. It took a moment to register. I looked at her, and she winked. (Back then, the boss could sometimes get away with things like that.)  

At that moment, with absolutely no discretion – in front of the entire sales staff – she made her direction clear: Commit fraud.

It was my first professional moral dilemma.

After a day of anxiety and discomfort, I took this issue to upper management. The manager was fired. 

As for me? In some obstinate way, I felt noble. But after more than 25 years investigating mortgage fraud, I can justly reckon one thing: The more things change, the more they stay the same. 

30 Years Later

These days, we’re seeing less REO/default/servicing fraud, and some lenders and investors may be breathing a collective sigh of relief. 

But it won’t be for long.

New scams will replace the old. Complex cases of foreclosure bid-rigging, buy and bails, questionable non-arm’s-length deals, and a litany of other creative fraud schemes are on the rise. 

Competent fraudsters now know the window when documents are recorded within their jurisdiction. Liens, deeds, mortgages, satisfactions, quit claim deeds, and more can be chronologically positioned, manipulating title transfers to achieve disbursement of large, ill-gotten profits at closing. 

Over the past three decades, mortgage fraud experts have honed in on the repetitive “cycle” of schemes. Once we think we’ve seen it all, fraud reaches a pinnacle or tipping point, and it tumbles back down to its loan-level roots: origination misrepresentation.

Fannie Mae’s Mortgage Fraud Program (MFP) monitors fraud tips as a barometer of fraud activity in the marketplace. Fannie Mae receives tips from a wide variety of sources. Lenders have recently contributed a significant proportion of these tips. The blue line represents all the lender tips that MFP received. The red line represents all origination tip sources – including, but not limited to, consumers, regulatory agencies, law enforcement, Fannie Mae’s Loan Quality Center, and various internal business areas. Both lines demonstrate a dormant or declining tip volume from 2013 through early 2015. However, evidence of an uptick begins halfway into 2015, continuing into early 2016. This coincides with a decrease in REO/default/serving fraud activity.

Origination Tip Volume

Same Old Fraud?

Today, there’s a new generation of underwriters, closers, and quality control specialists. Or, in a nutshell, fewer pre-Desktop-Underwriter® (DU®)/Automated Underwriting System staffers are occupying industry cubicles. Those dinosaurs – like me – can now offer “back in my day” advice sans tobacco smoke, bell-ringing phones, and a nearby tremor from a dot-matrix printer. 

To be fraud smart:

  • Know the red flags.
  • Understand the schemes.
  • If it doesn’t make sense, don’t approve the loan!

If there’s little or no logic to a tale-telling loan file, it’s most likely false. Such is the case with a current fraud scheme: reverse occupancy.

In reverse occupancy, a borrower buys a home as an investment property and lists rent proceeds as income to qualify for the mortgage. But instead of renting the home, the borrower occupies it as a primary residence.

In most cases, the borrower – who may sometimes be a straw buyer posing as the actual purchaser – has little or no debt. That, combined with the rental income, scores an “approve eligible” recommendation in DU.

How to Spot Reverse Occupancy Fraud

Loan files that are part of a reverse occupancy scheme contain several red flags and common denominators:

  • The homes are investment properties.
  • Purchasers are first-time home buyers with minimal or no established credit.
  • Purchasers have low income but significant liquid assets authenticated by bank statements.
  • Purchasers make large down payments – creating low loan-to-value (LTV) ratios.
  • The appraisal has a comparable rent schedule, to show expected rental income from the property.
  • Purchasers present “rent-free” letters stating they are not paying rent to live in their primary residence.

Misrepresentation? So What?

This reverse occupancy scheme reverses the kind of misrepresentation the industry has traditionally monitored:

  • The industry is watching for a borrower out to get a higher LTV and better pricing by misrepresenting that they will occupy the property.
  • Instead, the reverse occupancy borrower misrepresents that the property will be an investment – with a lower allowable LTV and less favorable pricing – but actually moves into the home.  

Should we be turning a blind eye to reverse occupancy? After all, who cares where the borrower lives, as long as the loan is performing and we collected a non-owner-occupied fee? Certainly, the low LTV will keep everything under the radar of the investor, right?

“It’s not just occupancy fraud misrepresentation,” notes Amy Heinz, Fannie Mae’s Mortgage Fraud Program managing director. “Misstating intent to occupy an investment property likely eliminates an income stream – rental proceeds – required to qualify.”

Due Diligence

What we have addressed here should not govern your credit decision. But it should reinforce the importance of practical due diligence.

To protect your business:

  • Know your third-party originators/brokers.
  • Educate your staff.
  • Have zero tolerance for fraud.
  • Share Information. 

These days, traditional origination fraud – income out of line with assets, questionable assets, no credit, and bogus gifts – seems almost quaint.

Today’s fraud schemes are evolving with the times. And that means we must stay diligent.

Kevin Ludden is the fraud industry relations manager at Fannie Mae. Go to, keyword “fraud,” for more information on reporting fraud, fraud alerts, red flags, and anti-fraud partnership training.