When mortgage fraud occurs, there are always clues left behind. But like in the popular television forensic thrilled CSI — the clues aren’t always easy to find.
In 2001, a Denver mortgage brokerage called Amerifunding submitted loan documents that listed tax and other information about the borrower’s employer.
But in a federal criminal investigation into Amerifunding’s practices revealed that employer’s listed address and tax identification number were fakes, according to an FBI affidavit.
Gerald Small, who ran the company, was indicted in April by a federal grand jury in Colorado on charges of falsifying loans. He faces 30 years in prison and $1 million fine.
Could the fraud have been detected earlier if the bogus employer information was uncovered during a review of the loan? It was, after all, right in the loan applications.
A cottage industry of loan scrubbing software and systems have hit the market, giving lenders new defenses in battling fraud.
These companies mine red flags or past problems by evaluating loan data to determine “total loan quality,” the industry buzz phrase for the process.
There are also products that delve into the background of brokers and brokerages to help assure lenders and investors that they are free of past misdeeds or major mistakes.
Sysdome, a mortgage fraud prevention technology company based in California, sells a product called BrokerScore. It evaluates, or “scores,” brokers after searches on licensing, bankruptcy records, regulatory action and other areas.
“If you run an incredibly clean shop, and you’re really focused on your work … and you are making sure you are not committing fraud, you love us,” said John Stockham, VP of broker services at Sysdome.
A good record helps draw business, Stockham said in a phone interview.
“But if you don’t do that, you probably do not like us very much,” he said.
Sysdome has been marketing its loan “scrubbing” technology to the exploding secondary mortgage market.
“Loan quality is of increasing interest to lenders that are selling loans to the secondary market,” Sysdome said in a written statement. “It is also of interest to lenders that are selling to correspondent.”
Mortgage Backed Securities (MBS) grew from $367 billion in 1981 to $3.3 trillion by the end of 2001, an amazing 800 percent increase, according to the William Mills Agency, a public relations firm.
To boost investors’ confidence Fannie Mae, the nation’s largest source of mortgage financing, has begun providing more detailed information on MBS issues.
In a statement, Fannie Mae CEO and Chairman Franklin D. Raines said the added information will prove useful to investors in “evaluating their investments” while “providing the market a great degree of transparency.”
The new criteria includes evaluations of mortgage servicers, the type of property backing the securities, the credit scores of borrowers and loan-to-value ratios.
Mortgage fraud is a $15 billion to $25 billion a year illegal business, estimates Mike Ela, president of C&S Marketing, also in California.
“It’s a big number,” Ela said.
C&S tries to head off fraud with products that perform quality control on collateral valuation. Ela said most of the nation’s top lenders use technology provided by the seven-year-old company.
C&S derives its data through a variety of sources — the public domain, property recordings, government and private documents — to assign a collateral risk for a piece of property.
“The lending community is asking for it,” Ela said in an interview. “They want to go even farther in terms of identifying potential risk.”
