Dallas — Mortgage bankers meeting in Texas for an educational conference were joined by the FBI in a discussion about mortgage fraud and how to prevent it.
Speaking at the recent Texas Mortgage Bankers Association’s educational seminar in Dallas, panelist Bruce Morris, vice president of quality control for Saxon Mortgage Services Inc., talked about paying attention to stated income applicants.
“More times than not on a stated loan, we’ll pull it out and look at it,” he said, adding that a recent application for a 72-year old waitress in New York stated she was making $6,000 per month, while another had a 20-year old student in Denver claiming wages of $5,000 per month.
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Saxon said it performs fraud investigations on the first 10 loans closed by new salespeople — severing the relationship if a problem is detected. The same goes for appraisers because overvaluing properties is “still the largest single problem we have in the mortgage industry,” according to Morris, who believes “that every loan in every portfolio in this country is overvalued by a minimum of 15%” and that this scenario will worsen as rates rise.
Additional prevention techniques at Saxon include investigating every Georgia purchase-money loan application; careful attention to credit scores in the high 600’s and 700’s because an intent for flipping may be at hand; and prioritizing education amongst underwriters. “The best thing you can do with your people is train them, give them constant training,” he said.
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Morris also advised the mortgage bankers to report to authorities when they are victims of fraud. Saxon made a loan in 1997 for a California property that was flipped and cost the company approximately $650,000 in losses. Despite reporting the incident at the time, it took about two years to get a call from the FBI asking for records of the loan. But Saxon is now within $40,000 of being made whole on that deal, the executive said.
Panelist Kellee Casebeer, who oversees the FBI financial institution fraud and economic crime squad in Dallas, also encouraged mortgage bankers to report fraud — but emphasized that bankers must be diligent in policing their own industry because resources to stop offenders are limited.
“As tragic as attacks on our economy through the mortgage industry are, unfortunately, at this point and time, based on the size of the FBI, we’re not going to be able to expend resources there,” she said.
Before the 9/11 attacks, the FBIs top priority was combating white collar crimes, Casebeer explained. But after the attacks, the biggest priority became protecting the nation from terrorism acts — pushing down white collar crime down to priority No. 7 and reducing the resources and people assigned to combating this crime.
Moreover, within white collar crime, the No. 4 priority is financial institution fraud — the category mortgage fraud falls under. In the Dallas division alone, which covers the largest physical area of the four FBI divisions in Texas, only 5 agents cover financial institution fraud.
She emphasized that thorough Suspicious Activity Reports with names and addresses of all the parties involved in transactions play an important role in combating mortgage fraud. Repeated referrals on SARs of a particular broker, for example, widen the chance for review and a case to be opened.
Because of limited resources, “I have to make sure that when I’m prosecuting, investigating and taking people out in the industry, these are some of the big heavy offenders,” she said.
Even then, the process to prosecute an offender is a lengthy. After months of gathering records and investigations of involved parties to formulate an indictment, the case is again prioritized for prosecution. White collar crime cases are generally prioritized by dollar losses, number of victims and age of victims, according to Casebeer.
“The burden is really back to you guys to try to police your own industry and try to understand what our resources are and what we can do,” she said.
Casebeer added that a lot of the time lenders could have avoided fraud by simply checking out the collateral before approving the loan.
Noting that reported mortgage-fraud losses total $1.0 billion so far this year, panelist Fran Eberts, vice president of mortgage fraud management at Guaranty Bank, indicated that the industry’s participation in fraud as well as its lack of investment in fraud prevention and management have lead to the “epidemic” proportions of fraud.
What most “indictments have in common are investors, Realtors, appraisers, settlement agents and attorneys, and loan officers or mortgage brokers,” she said. “They can’t do it without our help.
“We are all paying the price for years and years of the industry turning its head to the problem on mortgage fraud. Years when each shop was only concerned with loss mitigation, not with fraud prevention or fraud management programs.”
In a document outlining what an ideal fraud management program would consist of, Eberts said companies should provide internal and external notice of a zero-tolerance policy, have broker approval and customer identification procedures in place, educate and train employees, and have lender representation and warranty insurance.
Lender’s programs should additionally require investment in software fraud detection tools, confirming the property and its value in high-risk areas, closing agent verifications, stringent closing instructions in order to be successful if litigation arises, pre-funding and post-closing audits and expanded quality control audits, and a fraud unit. The outline also advises lenders to share fraud information both internally and externally to parties such as regulators, fraud database services, and other lenders. It also warns about early payment defaults, as these are red flags for money laundering.
“Each shop needs a comprehensive mortgage fraud management program and an integrated approach to mortgage fraud to stop all mortgage fraud from entering their pipeline,” Eberts added.
