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It’s Not Just Cybercrime, Mortgage Fraud Is Growing Too

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When it comes to threats facing the real estate industry, cybercrime has recently taken center stage. Rarely a week passes without a news story where purchase money was stolen through misdirection and wire fraud. Often perpetrated by criminal organization outside the United States, these attacks are an affront on our industry as a whole. Yet one threat that has plagued our industry for decades has started to once again gain in popularity, and that is mortgage fraud. For the past seven years mortgage fraud has increased year over year with accelerated growth seen in the past couple of years.

The FBI defines mortgage fraud as “a misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by the lender.” With such a broad definition, mortgage fraud comes in many different shapes and sizes. Coupled with the fact that it is a more local crime, perpetrated by a single borrower or a group of local real estate “professionals”, and mortgage fraud is often harder to detect than cybercrime.

As real estate professionals, it is vital that we remain as vigilant for mortgage fraud as we do for cybercrime. One way to maintain this vigilance to understand why mortgage fraud occurs and where it is most likely to happen, from both a geographically and by transaction type perspective.

Taking a page for the FBI, we can classify the reasons why fraud occurs into two broad categories. The first and by far the most prevalent is fraud motivated by the desire or need for housing. An individual borrower who needs a place to live may make misstatements on their loan application in a misguided effort to get the loan they need to purchase the home. Inflated income figures or classifying a family loan as a gift may seem innocuous, but it is fraud nevertheless. Granted most of these borrowers make their payments and the loans remain performing, it does not diminish our responsibility to confirm that the information collected from the borrower is accurate. The second category is the much more serious mortgage fraud for profit. This type of fraud often involves multiple “professionals” – Realtors, mortgage lenders, loan processors appraisers and settlement agents. The motivation is strictly financial and since it is an “inside job” large profits, or losses for the lenders, are often realized before the fraud is discovered.

As for where fraud is likely to occur, from a geographic perspective the top three states where the most mortgage fraud occurs are Florida, New York and New Jersey respectively. From a transaction perspective, some of the changes we are now seeing in the market are incubators for fraud including:

  • Purchase transactions have been on the rise and it is these transactions that are more likely to generate fraud than refinances. Involving multiple parties – sellers, builders, real estate agents, etc., funds for purchase transactions are widely distributed when compared to the lender-to-lender transfer during a refinance. This wide distribution opens the door for possible fraud.
  • The relaxing of credit standards by the GSEs has spurred the revitalization of higher LTV loan products. High LTV products have historically carried a higher risk of fraud, specifically in the areas of inflated appraisals or falsified down payments.
  • The return of the small, non-bank mortgage lender. These entities were prevalent prior to the real estate market crash, but most did not survive. For the past decade, much of the mortgage lending was done by larger, more heavily regulating banking institutions. As the number of less-regulated non-banking lenders grows, so does the potentials of criminal mortgage fraud.

As we all enjoy the growing real estate market, keep in mind that the amount of fraud is growing proportionally.

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