Fraud for housing is growing faster than fraud for profit as “rates have moved up and put homes out of reach” for more people, according to a mortgage banking panel session this week.
But the greater sophistication of techniques now used by perpetrators of fraud for profit makes this fraud harder to detect, although the fraud schemes themselves have not changed, explained Jacqueline Dreyer, managing director, The Prieston Group.
“With the technology that’s out there, fraud can happen anywhere,” Dreyer told attendees of a fraud session at the Mortgage Bankers Association’s 93rd Annual Convention and Expo in Chicago.
Technology is being used to create pay check stubs and 1003s and to handle verifications of employment, she pointed out. But because of technology, the mortgage industry has “significantly more data on incidents and losses than we’ve ever had before.”
Dreyer estimates that at least 60,000 fraudulent loans will close this year at a loss of $4.2 billion, an amount that will grow to $5.4 billion when the cost of fraud prevention efforts, attorney help and other expenses is included.
“Fraudsters are evolving,” agreed Steve Halper, CEO, DataVerify. “Some are coming up with unique tools and techniques” to create “flawless” appraisals and other documents. “So if you see a loan that looks perfect be very cautious.”
And fraudsters often will make mortgage payments for “a year or two to hide the fact it’s fraudulent.”
Fraud for housing most commonly involves misstating income, the two experts agreed.
“Occupational misrepresentation,” Halper added, “also is a big one. It’s been on the rise the last few months.”
Fraud rings are the “most catastrophic” for lenders and now can operate in more than one area at the same time, making meaningless the term “hot spots” for mortgage fraud, although the number of hot spots have been increasing, he said.
Fraud by professional rings, explained Sonya Faivre, risk manager for warehousing lending at Washington Mutual, involves many different aspects of loan applications and so many different people at a mortgage company should review suspicious applications “because there’s something for everyone to identify. A single loan application will provide multiple opportunities to detect fraud.”
“There is,” Halper agreed, “a lot of different types of fraud on a single loan.”
But inflated appraisals are no longer a “primary” problem, he said. “We’ve given so much attention to appraisals we’ve put a dent on that.”
Although subprime is “a hotbed for fraud these days,” according to Halper, mortgage fraud involve full-documentation, “A-paper” prime loans as well as nonprime, stated-income loans.
“The majority of fraudulent loans we’re seeing,” he noted, “are full doc loans.”
And all of them, he said, create problems, work and effort to salvage relationships, for CFOs, processors, underwriters and secondary-market managers.
“Professional fraudsters know more than you do about fraud,” Faivre warned, “and once they know your weak spot they will keep coming back.”
Defeating mortgage fraud, said Dreyer, requires a combination of great technology and great training, and continually updating each of those.