Mortgage lenders are pretty much on their own when it comes to fraud — i.e., identifying perpetrators, preventing exposure and chasing culprits into jail.
“The burden is on the lenders to police the industry,” says Angie Gardiner, senior vice president, NovaStar Mortgage, Kansas City, Mo., speaking at the Royal Media Subprime Summit in La Jolla, Calif. earlier this week.
Lenders also must take the lead in cleaning up predatory lending, says Gardiner, singling out one practice to make her point. “Regulators don’t understand ‘flipping’,” she says, referencing a practice that began drawing wide attention several years ago, in part from a HUD-related scandal in Baltimore.
More recently, says Gardiner, document fraud has become prevalent and troublesome. “There are a lot of scanners out there. Anyone can take a pay stub and say whatever they want.”
And, don’t look to brokers for help in avoiding nefarious ploys, adds Gardiner. “Even though they may have given blank verification forms to the consumer, their attitude is they didn’t do anything (wrong). It’s a case of ignorance, says Gardiner, but not an acceptable defense. “I tell them (brokers): ‘If it came out of your office, you’re responsible’.”
Lenders are well advised, she says, to heed the axiom: “Once burned, twice shy.” NovaStar has drawn up a list of suspicious players in the mortgage process, carrying some 8,000 names divided into separate categories — “watch” and “do not take” (an application). Almost two-thirds of the names on the list are appraisers, according to Gardiner. (That correlates with a new October Research survey, which found that 99% of real estate appraisers say their peers go along with pressure to inflate property values.)
Fellow Summit speaker, James Pechiney, director, fraud management, PCFS Mortgage Resources, Cincinnati, Ohio, says his company puts bad actors on an “ineligible list.” The roster is accessible only to company employees at the present time, although Pechiney says consideration is being given to “sharing the list with outsiders via our website.” By giving employees access to the list, says Pechiney, “the company makes (fraud fighting) part of our culture — our subconscious.”
Gardiner’s approach is less delicate. When her staff meets with new brokers and addresses the fraud issue, she says, “We try to scare the crap out of them.” Each broker is told to expect one of their branches to be shut down because of fraudulent activities.
According to Gardiner, NovaStar suspends 10 to 20 brokers each month. They can reapply for active status, but Gardiner cautions: “time and time again, we find that if they’ve done it once, it will happen again.” NovaStar is a nationwide originator of primarily nonconforming mortgage loans through a network of more than 10,000 brokers and 400 sales people.
In an environment of falling production, Gardiner worries about lapses and indiscretions producing fraudulent results. “When rates climb, fraud increases.” In the past few years, she notes, “loan officers have been getting used to ‘big bucks’,” a payday the originators may try to extend with sloppiness or overt malfeasance.
At the end of the day, Pechiney says finding and punishing “fraudsters” will always be a “high-touch” venture. “No machine can see altered numbers or forged signatures,” he maintains. Human involvement is the prevailing method to battle fraud. “We can’t take our eyeballs off of it,” says Pechiney.
To some extent, he concludes, the industry has created its own problems with fraud. “We’ve created a mentality that there’s a loan for everyone out there — and we should realize that may not be true.”
