How Fraud is Affecting the Mortgage Process

$7.4 billion in loans were obtained using fraudulent activity in 2011, according to CoreLogic.

The distressed housing market breeds this kind of illegal activity. In fact, questionable short sales could be costing lenders as much as $375M per year.

Now, when borrowers look to gain mortgage approval, the documentation requirements have increased. The increase is a by-product of the financial crisis, driven in part by the losses lenders have incurred when loans have gone bad. Because of the additional measurements required to cross check for any discrepancies in documentation, producing a mortgage is more costly for lenders today. Some of these extra steps include additional employment verification, tax transcripts, and even a scan of the terrorist watch list!

There are four primary areas that can trigger extra underwriting concern and affect both you and your transferees.

· Address: The lender needs to be assured that the borrower will be the owner occupant and is not looking at the home as an investment or planning a flip. An explanation must be given to the lender if your employee is purchasing a home in Milwaukee yet their income is shown to be out of a Denver location. This is one reason relocation offer letters are required today on all relocations (not just new-hires).
Income: Altering W2’s and paystubs was becoming too commonplace; therefore, lenders now require a confirmation of income through IRS tax transcripts.
New Debts: Now, inquiries on credit reports must be explained to assure the mortgage lender that additional debt is not being added to the equation and altering the debt to income thresholds. Mortgage applicants are advised not to apply for other forms of credit during the application process as it might slow the process or add to documentation requirements.
· Large Deposits: Lenders will need to ensure down payment money is from legitimate sources. Gifts money from a relative is accepted but borrowing money is not. Larger deposits on a bank statement will be scrutinized. We are often asked to define a large deposit. It is a difficult question to answer as it is discretionary by the underwriter and is related to income levels.

With the combination of these additional steps and current fraud guard software, the good news is that identity/income fraud committed by borrowers on loan applications has decreased.

But, it’s not all positive.

Property fraud has increased by 25% since 2010. One Reason? Increased questionable short sales due to flipping or flopping a property. Flipping is a fairly well known term. But what is flopping? Some definitions to clarify:

· Flipping occurs when a home is quickly resold (sometimes even the same day) for a higher amount at a profit. This is sometimes done by investors and isn’t always against lending rules. In fact, in an effort to bolster the housing market, the FHA has extended a waiver of its anti-flipping regulations through 2012. This will allow the agency to continue insuring mortgages used to purchase homes that are bought and resold in less than 90 days.
· Flopping is a relatively new term. This typically occurs in short sale transactions where a more attractive offer with a higher price is withheld from the lender. A straw—or phony—buyer offer is presented to a lender and they buy the home at a lower price and then quickly turn around and sell it to an actual buyer for a profit.