Stamping Out Mortgage Fraud – One Transaction at a Time
By Cathie Ericson | March 15, 2016
“Mortgage fraud doesn’t just impact one party. Whether it’s buyers of REO properties, servicers, investors, guarantors, insurance companies, homeowners in distress or other stakeholders – fraud impacts us all. It can result in inflated values driven by deceptive transactions, unintended depreciation in our communities and vacant properties sitting in disrepair or stuck in litigation.”
Those are the words of Cory Turner, who manages Fannie Mae’s Single-Family anti-fraud team. They are the cornerstone of why the company is so committed to combatting fraud.
Fannie Mae’s ongoing tactical reviews analyze data and identify trends to determine where fraud is likely occurring and who’s behind it. The company has developed a number of countermeasures to help its partners identify and root out trouble spots.
Following are some of the most prevalent schemes that Turner is seeing:
- Property Flipping
When a property is listed lower than its value, the opportunity for earning a spread surfaces. This isn't always a bad thing. The spread gives an investor an incentive to absorb properties that others cannot or will not buy. The investor can then rehab and sell them as move-in-ready properties. However, a resale in less than 30 days with a significant price increase can be a warning sign. The transaction may not have been completely above board. With flips, look for evidence of manipulation. This may have influenced the property’s value (see reverse staging) or impacted its marketability.
- Reverse Staging
Real estate agents have shown that staging with lovely furniture and fresh landscaping often sells a home faster and at a better price. Reverse staging takes the opposite approach to prompt a lower initial sale price. Instead of beautifying the home, fraudsters trash it – to a point. They remove cabinet doors, strew debris or even resort to strategic demolition. It all depends upon the investor’s strategy. In any event, the home sells at an artificially depressed price. Then the cabinet doors return, along with the reinstallation of appliances and fixtures and rehanging of doors. Even without significant rehab – new paint or carpet – it’s surprising how much appearance can influence value.
- Rescue Schemes
Distressed homeowners are vulnerable to companies defrauding them by claiming to have an inside track with their servicer. These are often referred to as foreclosure rescue schemes. Their success hinges on the fraudster convincing the borrower to allow an outside party to act in their “best” interest. Pitfalls include transferring the owner’s deed for a promised workout, false liens and excessive negotiation fees. The owner can’t make an informed decision when the company conceals parties to the transaction, engages in contingent transactions or gives false information.
Know the Red Flags
Turner confirms there are many steps that every vigilant observer can and should take to help avoid fraud. It’s for everyone’s sake, including their own.
Fannie Mae has compiled a comprehensive list of common red flags. Lenders should watch for them with each and every transaction. In addition, here are three steps lenders should take:
- Conduct appraisal verification. Fannie Mae’s Collateral Underwriter® (CU™) system captures valuation data from multiple sources. Lenders can use this data to help confirm if an appraiser is working with an investor to inflate or deflate the value. “See what values CU is assigning for like properties to make sure they correlate,” Turner says.
- Know the parties. Identifying mortgage fraud often comes down to just feeling there is something “off” about the buyer. The same person may have recently listed the property, removed the listing and then relisted it at a wildly different price. The purchaser may seem overly vague. There may be no real estate agent. Be vigilant about the parties. Always.
- Be in the know. The Obama administration established StopFraud.gov to identify all forms of financial fraud, including mortgage fraud. Servicers can use the site to report suspected fraud. They can also find links that help them identify the type of fraud. And from site information they can learn how to educate and protect their borrowers.
The bottom line is that fraud impacts all the parties down the line. The servicer who is left with a fraudulent loan. The buyer who ends up paying more than a property is worth because of fraudulent transactions before they purchased it. The neighborhood where a house goes into disrepair because a fake investor pocketed money and then abandoned the home. Or the taxpayers who ultimately pay the price.
Speaking at the Mortgage Bankers Association’s National Fraud Issues Conference, a subject matter expert may have put it best. “Any attempt to conceal or deceive (may be) fraud.” If something looks suspicious, she advised, simply use Google and see what you find.
The best defense? A good offense, says Turner. “It’s amazing the information you can find out there if you go looking for it.”
Cathie Ericson is a freelance writer for online and print publications such as The Oregonian, Learnvest.com and Forbes.com and has been writing for Housing Industry Forum since its launch.