PHOENIX--For mortgage lenders and servicers, combating fraud might seem like playing “Whack-A-Mole.”
As an industry, we are doing a better job of detecting fraud,” said Jenny Brawley, associate director of mortgage fraud investigations with Freddie Mac, McLean, Va., here at the Mortgage Bankers Association’s National Fraud Issues Conference. “But as we also know, when we eliminate one type of fraud, another type crops up.”
“What we’re seeing these days, geographically, corresponds very closely with the number of distressed properties on the market,” said Ann Fulmer, vice president of business relations with Interthinx, Agoura Hills, Calif. “Fraudsters are opportunists, and they will go where the opportunity exists.”
In states such as Florida and Nevada, which have high rates of distressed housing, Fulmer said fraudsters have increasingly preyed on vulnerable borrowers. “Clearly the political and economic climate exists to get rid of these properties and the pressure is on the servicing side,” she said.
Fulmer noted that low origination volumes have reduced income for third-party professionals, such as real estate agents, appraisers and settlement agents, which in turn creates the atmosphere for fraud.
“A lot of people have washed out,” Fulmer said. “You see people who are desperate.”
Fulmer said risk scoring and management-level reporting summaries allow lenders and servicers to identify and concentrate on areas of significant risk. “A lot of times, we see an insider who is instigating fraud and profiting from it,” she said. She added that a relational database allows lenders and servicers to cross-check and identify patterns of fraud along a broad portfolio at the loan level or on the back end.
Kathy Coon, chief appraiser and director with FNC Inc., Pittsburgh, focuses on appraiser fraud. She said the easiest way to detect fraud in the appraisal is to look for inconsistencies.
“Property values and demand/supply cannot be independent of each other,” Coon said. “They are interdependent on one another, so if something in the comp doesn’t make sense, it’s a red flag. Contrary to popular belief, value is not an opinion. The appraisal report must be credible and it must include all relevant information.”
Rachel Dollar, CMB, partner with Smith Dollar PC, Santa Rosa, Calif., said bankruptcy fraud has become one of the prime tools in fraud arsenal, because when a homeowner files for bankruptcy, it puts an automatic stay on foreclosure proceedings. In some cases, she said, bankruptcies have been filed multiple times, which is most likely illegal but also delays the process.
“Oftentimes they file the bankruptcy the night before an eviction, so the lender rarely gets the opportunity to file for relief from a stay,” Dollar said.
Dollar has also noted a sharp rise in “mortgage elimination” schemes, in which fraudsters persuade homeowners that paying principal, interest or taxes is not required because asking such is “illegal.”
“Your staff should be trained to identify and elevate these issues, because otherwise they can create unnecessary legal complications,” Dollar said. “’Crazy’ packages should be reported immediately to your company’s legal counsel.”
Similarly, Dollar noted an increase in “squatting” and claiming they have the right to take possession of foreclosed properties.
“There is no such thing as ‘squatters rights,’” Dollar said. “It’s trespassing and is a civil or criminal wrong.”
In some cases, squatters will move into abandoned or foreclosed properties, filing lawsuits claiming possession of the property. “It’s really just leverage to get lenders or servicers to get rid of the property,” Dollar said.
To avoid squatting, lenders and servicers must keep watch on empty properties, document vacancy, track “cash for keys” payment recipients and contact authorities immediately. “If you do not do these things, you risk legal issues,” Dollar said.
“The best asset you have in combating fraud is your brain,” Fulmer said. “It’s important to be trained to detect fraud; but the most important measure is the ability to say, ‘does this make sense?’”