When a home buyer has a high credit score in the upper 700s, is self-employed with an annual income of more than $100,000, owns a few rental properties, is purchasing a house priced well above the area average and is buying it alone, what comes to mind?
Solid citizen? A good addition to the neighborhood? An excellent bet to get a big mortgage with a great rate? Sure. But would you believe fraud? Would you believe that statistically the buyer with that profile is more likely than other loan applicants to be involved in some form of mortgage rip-off skullduggery when the lender he is applying to specializes in loans for home buyers with imperfect credit?
Welcome to the booming and sometimes bizarre world of mortgage fraud. With larceny in their hearts and sophisticated electronic document-preparation programs in their laptops, unethical mortgage loan officers, brokers, real estate agents and lawyers can create fake FICO scores, fake tax returns, fake identities and order up inflated appraisals.
And, according to witnesses at an Oct. 7 congressional hearing, mortgage fraud is now one of the hottest con games going.
An FBI assistant director testified that fraud is “pervasive” in the mortgage market and is growing fast. Rep. Bob Ney, R-Ohio, the chairman of a House financial services subcommittee, cited industry studies suggesting that “between 10 and 15 percent of all home loan applications involve some fraud or misrepresentation.” The potential costs to home buyers and mortgage lenders could be in the billions of dollars a year.
Some of the fraud may seem minor a little fibbing on the application about a borrower’s income, or a lack of candor about where the buyer’s down payment cash really came from.
But other fraud is far more organized. In Charlotte, N.C., the FBI last month cracked a ring of 35 “mortgage industry insiders” who had combined to obtain 380 fraudulent home loans exceeding $70 million, according to Chris Swecker, assistant FBI director for criminal investigations. In Phoenix, 48 out of 64 home loans originated by one loan officer involved “pervasive document fabrications,” according to HUD’s Inspector General Kenneth Donohue Sr.
Frequently, mortgage fraud ends up hurting not only lenders but innocent consumers too, witnesses told the committee. Marta McCall, senior vice president of San Diego-based American Mortgage Network, cited the example of a first-time buyer who was persuaded to purchase a property that was significantly overvalued because of a fraudulent appraisal. The seller pocketed big profits, but now the buyer finds herself unable to refinance and unable to pay off her loan by selling the house because the property is worth less than the mortgage amount.
Faced with more fraud than ever before, lenders nationwide are adopting defensive tactics to sniff out con jobs before they succeed. In one instance described at the hearing, a large national lender has developed its own risk alert system based on extensive statistical analysis of “red flags” associated with documented cases of fraud. HSBC Mortgage Services Inc, which specializes in loans to borrowers with credit problems, uses its proprietary “FraudScore” on all of its new mortgages. Some of the red flags are counterintuitive.
For example, Loren Morris, HSBC senior vice president, said in an interview that among the key telltale signs of fraud in applications are unusually high FICO scores combined with high incomes, higher-than-average mortgage amounts and home values for the neighborhood. That may sound strange since all these characteristics would normally be associated with cream-puff, problem-free applicants.
But in the murky world of mortgage fraud, the bad guys know this too, and they often try to make a loan application “look as good as possible, so it will sail though” automated underwriting systems without a hitch, said Morris. Other red flags: self-employed, single purchasers who are buying a home but say they already own one or more rental houses.
HSBC’s FraudScore system weights these and other factors – including city and state on a scale of zero to 52. When an applicant presents combined factor weights exceeding a score of 30, an alarm goes off and the company’s fraud investigation procedures kick in.
What’s the takeaway here for home buyers and borrowers who harbor no fraud in their hearts? First, be aware that mortgage cons are rapidly on the rise. Not all appraisers or loan officers you encounter are necessarily playing the game straight. Though they often target big lenders, con artists frequently harm innocent purchasers who end up with loans they don’t want, can’t afford and can’t get rid of. Worse yet, if lenders keep losing millions of dollars to fraud, they’re going to pass along those costs to all borrowers in the form of higher fees and interest rates.
Ken Harney is a real estate columnist for The Washington Post