Rise in mortgage fraud hurts lenders, buyers

Nation's Housing

October 17, 2004|By KENNETH HARNEY

WHEN A homebuyer has a high FICO 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 considerably higher than 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 homebuyers 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 one of the hottest con games going.

An FBI assistant director testified that fraud is "pervasive" in the mortgage market and growing fast. Rep. Bob Ney, an Ohio Republican who is chairman of a House financial services subcommittee, noted industry studies suggesting that "between 10 and 15 percent of all home loan applications involve some fraud or misrepresentation."

The potential costs to buyers and mortgage lenders could be in the billions of dollars a year.

Some of the fraud might 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 came from.

But other fraud is far more organized. In Charlotte, N.C., last month, the FBI cracked a ring of 35 "mortgage industry insiders" who had combined to obtain 380 fraudulent home loans exceeding $70 million, said Chris Swecker, assistant FBI director for criminal investigations.

In Phoenix, 48 of 64 home loans originated by one loan officer involved "pervasive document fabrications," said Kenneth M. Donohue Sr., inspector general in the Department of Housing and Urban Development.

Frequently, mortgage fraud hurts not only lenders, but also innocent consumers, witnesses said at the hearing. Marta McCall, senior vice president of San Diego-based American Mortgage Network, noted 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, and 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, lenders nationwide are adopting defensive tactics.

In one approach described at the hearing, a large national lender has developed a risk alert system based on extensive statistical analysis of "red flags" associated with documented cases of fraud. HSBC Mortgage Services Inc, of Prospect Heights, Ill., 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 J. Morris, HSBC senior vice president, said in an interview that among the 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 might sound strange, because those characteristics would usually be associated with 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, Morris said. Also raising red flags are applicants who are self-employed and single purchasers who are buying a home and say they 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 exceeds a score of 30, an alarm goes off and the company's fraud-investigation procedures kick in.

Homebuyers and borrowers should be aware that mortgage cons are rapidly on the rise. Not all appraisers or loan officers you encounter are necessarily playing the game straight. They often target big lenders, but 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, 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's e-mail address is KenHarney@earthlink.net.

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