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11049422.1015 MREV 090616 Genworth Mortgage Insurance Corporation ©2016 Genworth Financial, Inc. All rights reserved.
Shut the Door on Fraud
Participant Manual
Shut the Door on Fraud: Participant’s Guide
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Contents
Background Information ............................................................................................................................ 3
Fraud Motivators......................................................................................................................................... 4
Property Flipping, Churning and the One Close Flip ............................................................................ 5
Reverse Occupancy ................................................................................................................................... 9
Short Sale Fraud ...................................................................................................................................... 10
Loan Modification and Refinance Fraud ............................................................................................... 12
Double Selling ........................................................................................................................................... 13
Air Loans .................................................................................................................................................... 14
Elements of Fraud .................................................................................................................................... 16
Straw Buyer/Nominee .............................................................................................................................. 16
Identity Theft ............................................................................................................................................. 18
Fake Down Payment ............................................................................................................................... 20
Wire Transfer Fraud ................................................................................................................................. 22
Asset Rental .............................................................................................................................................. 22
Employment Misrepresentation.............................................................................................................. 24
Credit Enhancement ................................................................................................................................ 25
Fraudulent Appraisals .............................................................................................................................. 26
General Best Practices for Documentation Review and Underwriting ............................................. 30
Reference .................................................................................................................................................. 41
Equity Skimming – Purchase ................................................................................................................. 41
Flopping ..................................................................................................................................................... 43
Buy and Bail .............................................................................................................................................. 44
Phantom Sales (Property Stealing) ....................................................................................................... 45
Builder Bailout ........................................................................................................................................... 46
Chunking/Investment Club ...................................................................................................................... 47
Remember ................................................................................................................................................. 48
Legal Disclaimer ....................................................................................................................................... 49
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Background Information
Useful Websites
Federal Bureau of Investigation (FBI) Mortgage Fraud
o http://www.fbi.gov/about-us/investigate/white_collar/mortgage-fraud
United States Department of the Treasury Financial Enforcement Network (FinCen)
o http://www.fincen.gov/news_room/rp/mortgagefraud.html
Mortgage Asset Research Institute (MARI) a LexisNexis Company
o http://www.lexisnexis.com/risk/products/financial/mortgage-asset-research-institute.aspx
CoreLogic/Case-Shiller
o http://www.corelogic.com/products/case-shiller.aspx
Fannie Mae Mortgage Fraud Prevention Site
o https://www.fanniemae.com/singlefamily/mortgage-fraud-prevention
Freddie Mac Fraud Prevention Resources
o http://www.freddiemac.com/singlefamily/preventfraud/resources.html
Real Estate Websites
o http://realtor.com
o http://netronline.com
o http://listingbook.com
o http://zillow.com
Mortgage Fraud Blog (Rachel Dollar, Esq.)
o http://mortgagefraudblog.com
MortgageDaily.com
o http://mortgagedaily.com
Genworth provides links to various useful Websites in a Resources document,
which can be found here: http://genworthmi.articulate-online.com/5896945445
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Term Definition
Fraud A knowing misrepresentation of the truth or concealment of a material fact to induce others to act to their detriment.
Mortgage Fraud
A knowing misrepresentation of the truth or concealment of a material fact in a mortgage loan application, file or transaction which is meant to induce another to approve the granting of a mortgage loan.
Red Flag Information within the loan file or transaction that calls for additional scrutiny.
Best Practice
A suggested way of investigating issues found within a loan.
Fraud Motivators
Fraud for Profit:
Fraudsters use real estate and mortgage loans to steal the money involved in the transactions. Default is usually imminent after the loan closes.
Fraud for Property:
The fraudsters want the property, but are unable to obtain a mortgage loan.
Usually this is due to poor credit, lack of income or not having necessary down payment money. Although the borrowers intend to make the payment, the loan is likely to fall into serious delinquency or default.
Fraud for Commission:
Someone involved in the transaction only gets paid if the loan closes.
The fraudster convinces the borrower to go through with a loan so that the fraudster can get the commission.
Fraud can be committed for profit or property.
Some fraud schemes work for more than one motivator type.
For example, a property flipping can be for profit, for property or for commission.
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Property Flipping, Churning and the One Close Flip
Property flipping can be a legitimate activity and occurs when ownership of a property changes more than once in a brief period of time. Property flipping becomes improper when a home is purchased and resold at an artificially inflated value, often with a short timeframe. The flip typically involves an inflated appraisal, which may indicate that renovations were made to the property when, in fact, there were none, or the renovations consisted only of minor cosmetic improvements. Based on the inflated appraisal, the property sellers are able to re-sell the property for more than what might otherwise be possible. One way to help protect against improper property flipping is to include strong language in closing instructions that prohibits back-to-back transactions from occurring within a certain period of time.
Illegal property flipping occurs when property purchased and resold quickly at an artificially inflated price, utilizing a fraudulently inflated appraisal.
Flips typically involve straw buyers, so refer to straw buyers red flags
Flips sometimes involve naïve purchasers
Seller very recently acquired title, or is acquiring title concurrent with the subject transaction
No real estate agent is employed (non arms-length transaction)
Property was recently in foreclosure, or acquired at REO sale at a much lower sales price
The appraised value is fraudulently inflated
The appraiser frequently uses other property flips as comparables (examine comparable properties sales histories)
Owner listed on appraisal and/or title may not match the seller on the sales contract
Refinance transaction utilized to payoff private short-term financing
Fraudulent Flipping
o Many variations
Rising market values
Extended time on market
Desperate sellers
o Appraiser involvement
Churning
o Several properties repeatedly purchased/sold to related entities with slight value increases with each sale
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o Fake equity created
o Properties eventually sold to third parties
o Other properties within the scheme used as comps
Purchase Loans Disguised as Refinances
o Loans are disguised as refinances to circumvent down payment requirements
o Borrower is not in title on the title commitment
o Land contracts are executed shortly before or after application
o Land contract is dated a significant period of time back, but has only recently been recorded
o Borrowers are unfamiliar with terms/conditions of a land contract or unaware of the existence of a land contract
o There is no payment history on land contract or no payments applied to the balance
o There are recent transfers of the subject property – was the property recently flipped?
o Multiple investment properties are purchased within a short time frame
o There are artificially appraised values
o Borrower is not listed as the owner of record on the appraisal
o Property is refinanced immediately after a purchase on the property
One close flip
o Typical flip – two closes
o One-close flip – fraudster never takes title
o Seller inflates price
o Contract padded
o Fraudster takes money as fees
Ownership changes two or more times in a brief period of time, with an unsupported increase in property value
Two or more closings occur almost simultaneously
The property has been owned for an unusually short time by the seller
The property seller is not on the title
There is a reference to a double escrow or secondary HUD-1
Parties to the transaction are affiliated
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There’s an up-and-down fluctuation of sales price over a short period of time
Multiple investment properties are obtained by same buyer within a short time frame
“Purchases” are disguised as “refinances” to circumvent a down payment
Property seller is an LLC/entity/corporation
There are unusual cash payouts at closing on the seller side of the HUD-1 to non-lien holders
Appraisal indicates recent sale/listing activity at a significantly lower price
Comparable sales on appraisal are previously flipped properties
Appraisal/Valuation Issues
o The property is selling for above asking price
o The appraisal shows recent prior sales at lower prices
Or indicates a prior offer that is below the appraisal’s indicated value
o The subject property has been on the market for a long time
o Unexplained or illogical resale of property purchased within past six months
o Unsubstantiated claims of improvements or over-improvements for the market
o The appraisal is not ordered in manner required by guidelines
o The appraiser is not on the lender’s list of approved appraisers
o The borrower listed on the appraisal is not your borrower
o The seller on the listing and/or sales agreement is not the owner of public record
o Comparable properties on the appraisal are unusual, distant or dated
o There are large or numerous adjustments in the Sales Comparison section
o The interior pictures do not show the recent improvements
Sales Contract Issues
o “For Sale by Owner” properties
o The property seller on the contract is not the owner of record
o Seller is a corporation, LLC, or other business entity
o Purchase is structured as a refinance to hide the fact there is no down payment
High Debt-to-Income Ratio
Power of Attorney (POA) is used
Notes in the file indicate the purchaser is pushing for a fast closing
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Ensure the subject property and transaction make sense within the subject’s market
o Values and renovations should be typical and marketable within the subject’s market
o All renovations and property improvements should be documented with pictures, receipts and/or paid invoices
o Websites such as http://www.homes.com, http://www.realtor.com, http://www.city-data.com, and http://realtytimes.com/rtmcrstate can provide market information
Review the three year history for the subject carefully
Compare the MLS listing price and description to the appraisal
o In most markets, listing information is available through http://www.realtor.com or through local real estate agents’ websites
Establish and utilize an approved appraiser list
Provide feedback to your Appraisal Management Company (AMC) concerning any issues that may arise
Independently verify and carefully review the borrower’s employment, income and asset information
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Reverse Occupancy
Borrower buys a home as an investment property and lists rent proceeds as
income in order to qualify for the mortgage, but instead of tenting the home the
borrower occupies the home as a primary residence.
The subject properties are sold as investment properties
Purchasers are first time home buyers with minimal or no established credit
Purchasers have low income but significant liquid assets that are authenticated by bank statements
Purchasers make large down payments
The appraisal has a comparable rent schedule (to show expected rental income from the subject property)
Purchasers present “rent free” letters stating they are not paying rent to live in their primary residence
Ethnic commonality among the purchasers and other parties to the transaction
Transactions occurring in a specific geographic location (a recent scheme was identified in New York state)
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Short Sale Fraud
The borrower does not qualify for a short sale but deceives the lender into allowing a short sale.
False poverty claims
Elective withholding of mortgage payment
Non-Arm’s length sales
Previous mortgage bailed
No change in financial circumstances but claims of economic distress
Present home owner has been in the same job since loan inception
The claimed hardship is vague, illogical, unsupported or not in the loan file
o Many borrowers copy hardship letters found on the Internet
o Conduct an Internet search for a sentence or two from your borrowers’ hardship letter to see if it was copied from something that a website provided
The present outstanding mortgage balance is higher than the home value
The seller and new owner are related
There is no indication the borrower tried to sell the property before requesting a short sale
Evidence there is a side agreement for:
o The present owner to stay in the property
o The present owner to regain title down the road
o Undisclosed fees or payments to the present owner, the buyer or any third party
Evidence the property was recently put into an LLC or partnership
The short sale request originated from a Short Sale Negotiator or other third party
o Some negotiators are legitimate, but others are not
o Be suspicious if the present owner requests all communications go through the Negotiator or third party
The purchaser’s down payment is questionable
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Perform a simple Internet search for the seller and new owner looking for evidence the parties are related or paid nominees
o Relatives
o Co-Workers
o Neighbors
o Paid Straw Buyers
Scrutinize the purchaser and the purchaser’s funds carefully
Contact the seller directly at least once during the transaction
Look for previous listings for the property on Realtor.com and/or a local MLS
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Loan Modification and Refinance Fraud
A borrower misrepresents his/her financial status to trick a lender into allowing a loan modification the borrower really does not qualify to receive.
Mortgage payments purposely not made
False claims of poverty
Occupancy misrepresented
The credit report, bank statements, pay stubs or other documents in the loan file indicate a different home address than what is listed on the application
The claimed hardship is vague, illogical, unsupported or not in the loan file
o Many borrowers copy hardship letters found on the Internet
o Conduct an Internet search for a sentence or two from your borrowers’ hardship letter to see if it was copied from something that a website provided
There is little or no financial information within the file
No employment verification has been completed
Bank statement and pay stubs show different direct deposit information
A pay stub indicates some of the borrower’s pay is being direct deposited into a savings account or 401k that has not been disclosed
Borrower claims an existing hardship, but the credit report does not show any late payments, other than the mortgage
Bank statement shows evidence of unreported income, such as social security, child support or rental income
The borrower is upside-down on the present mortgage
The borrower’s present adjustable rate mortgage is about to reset
Underwrite all modifications, obtaining the following documents:
o A written explanation of the hardship, with supporting documentation
o Evidence of the borrower’s willingness to repay the debt
o Verification of employment, income and occupancy
o An updated credit report
o All other documents required by all parties involved in the modification (servicer, investor, MI Company, etc.)
Ensure all modification agreements meet your organization’s legal requirements
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Double Selling
A double sale is the sale of one mortgage note to more than one investor.
Mortgage payments are made by an entity other than the borrower
Mailing address is not the borrower’s address
Two mortgages recorded on the same property
Mortgage is not recorded in the first lien position
The borrower is experiencing financial distress
Two notes may be identical except for signatures (or one may be a color copy)
Originator creates two loan packages
Two loans
Missing or illegible documents, wrong names appear on documents, numerous changes in documents
o Loan application
o Appraisal
o Closing instructions
o Missing commitment from lender
o Hazard insurance has the wrong mortgagee clause
o Missing mortgage insurance
The borrower’s signatures and/or initials differ between documents
A Power of Attorney (POA) instead of the borrower’s signature on the loan application documents
Closing instructions differ from underwriting conditions
Last minute changes in wiring instructions
Know with whom you do business
Do not fund loans until all conditions have been met and a complete closing package has been received
Verify previous lien pay-off from the original lender
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Air Loans
The term “air loan” refers to a loan with no underlying collateral to secure the loan. In essence, there is nothing but “air” securing the loan. Air loans involve material misrepresentations of some or all underwriting documentation, including a fictitious borrower, appraisal report, borrower equity contribution, and/or title work. The intent is to deceive the lender into funding a loan based on the material misrepresentations. This scheme typically involves numerous loans originated within a short period of time, with the perpetrator and/or fund disappearing before the loans go into default. As a result, air loans typically do not perform for very long. When the loan does go into default, the lender (or investor) suffers a 100% loss as there is no collateral to offset the loss.
Insiders or third parties who have access to borrower information, forms and documents
First payment default
Borrower, property, employer, etc., are fake
Sometimes combined with stolen ID
A pattern of early payment default in loans with similar originators, origination dates, and location
Delayed note delivery to note custodian
Loan payments remitted by someone other than the borrower
Inability to contact borrower or returned mail shortly after origination
QC re-verifications indicate misrepresentations of income, employment and/or debts
Public record search shows no improvements o property
Mortgage and/or warranty deed never recorded
A sales transaction does not involve a real estate professional
From the credit report:
o The social security number was recently issued or belongs to a deceased person
o The credit report suggests the borrower does not live at the present address listed on the application
o There is little or no credit, or only new credit, or credit that does not make sense given the borrower’s age or employment
From the appraisal:
o The appraisal information does not match the subject’s pictures
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o The subject property pictures do not look similar to the comparable pictures (i.e. the subject may not actually be located in the same neighborhood as the comps)
From other documents in the loan file:
o Documentation is inconsistent within the file
o Signatures do not match from document to document
o A Power of Attorney (POA) is used
Require notarized documents and check notary signatures
Verify the identity of the borrower
Review and validate Social Security numbers
o Review Social Security number information on the credit report, as many credit bureaus do an information search for the Social Security number
o The year of issuance should make sense for the borrower
Obtain written verifications directly from the source of the information:
o VOD, VOE, VOM, VOR, etc.
Use outside resources to ensure the property exists
o Access the MLS system to see if the property has been listed for sale (In most areas, you can get this information through http://www.realtor.com)
o Check local tax records to ensure the property is real
o There are numerous websites that allow you to see an aerial view and/or moveable picture of the property, such as GoogleEarth® or Zillow ®
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Elements of Fraud
Straw Buyer/Nominee
An individual fronts as the purchaser/borrower in order to mask the true identity of the actual purchaser/borrower.
Typical straw buyer characteristics in a fraud for property scheme:
o The person who actually wants to purchase the property has damaged credit or is otherwise ineligible to purchase the property
o The person being identified as the borrower has no intent to live in the property
Common characteristics in a fraud for profit scheme:
o Sometimes the fraudster uses stolen identities
o A straw buyer or nominee may be recruited and/or paid
A first-time homebuyer with a substantial increase in housing expense
Indications the borrower does not intend to live in the property:
o Unrealistic commute
o Size or condition of the property, etc., does not make sense
No real estate agent in the transaction
Power of Attorney (POA) utilized
Names added to the purchase contract
Parties within the transaction are related (non-ARM’s length transaction)
Purchase contract addenda contains price adjustments that do not make sense
References to otherwise secret secondary financing on the purchase contract
“Boiler plate” contract with limited insertions, not reflective of true negotiations
Income, savings and/or credit patterns that is inconsistent with the applicant’s overall profile
Sources of funds are questionable
High LTV, limited reserves and/or seller paid concessions
Gift funds in the transaction when the borrower has significant assets
Inconsistent signatures throughout the file
Any indication an investment property is being represented as owner-occupied
Execution of a quit claim deed just before or soon after closing
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Transfers or large payments to brokers or third parties shown on the Closing Disclosure
Heed all credit report warnings:
o Credit freezes or fraud alerts policies must be followed
o The borrower must have a valid, unquestionably clear social security number
o A number of recently opened accounts may be a tip-off there is fraudulent activity
o Address and residency history should make sense in light of the application information
Check the driver’s license (or State ID) address and other information carefully
Source funds carefully
o Properly document/source funds needed for down payment, closing costs and reserves
Require borrowers to sign occupancy affidavits
o Let borrowers know that lenders are checking this information after the loan closes
o Inform borrowers prior to closing of QC policies for occupancy validation
Review the sales contract and appraisal carefully for evidence that another person has previously been denied a loan to purchase the subject property
Get detailed explanations for any recent quit claims or other transfer of property rights involving the subject property
Signatures should be consistent throughout the loan documents
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Identity Theft
Using someone else’s identifying information to obtain credit without the victim’s knowledge or consent.
There are several ways identifying information can be obtained:
o The fraudster may trick unsuspecting individuals into providing the information
o The information may be stolen via the Internet, discarded items, employment or credit applications or otherwise
Use of a family member’s identity without the victim’s knowledge
o The fraudster may either facilitate a loan in the victim’s name or impersonate the borrower
In fraud for property schemes, the borrower does not qualify for the loan, but intends to move into the property and make the payments
o Because the borrower is not credit worthy, these loans default at a high rate
According to The Federal Trade Commission – Identity Theft Survey Report, 9% of identity theft involves family members stealing a relative’s ID
In fraud for profit schemes, the fraudster is looking to facilitate a loan without the fraudster’s name being on any of the documents
Once the loan is closed, the fraudster walks off with the funds
Default is intended, so losses can be immediate and high dollar amounts
It is difficult to contact the borrower directly:
o All contact is through a middleman or gatekeeper
o The loan is being facilitated using a Power of Attorney (POA)
o The loan file does not contain usual contact information, such as phone number, email address or physical addresses (instead there are PO Boxes)
The employment information is suspect
o The pay stubs or other company information does not have a logo
o You cannot find the company listed with the State Secretary of State’s office, nor can you find information on the Internet
o The employer is a newly formed entity
o The employer’s contact information is a non-domestic (foreign) entity
o The employer’s address is a third-party mailbox store
A Google® or Yahoo! ® search can often reveal this
There are inconsistencies between the application information and the credit report
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Review the application, the credit report and all other information in the loan file for consistency and to be sure the narrative is logical
o If the credit report differs from the application, get a written explanation and, where necessary, outside confirmation that the application information is correct
o Use fraud detection software to assist in verifying identification
o Require valid government issued identification at the time of application
o Follow and investigate any fraud alert information found within the credit report
Contact the borrower directly, at least once at home and once at work, while processing the loan
Additional information about identity theft can be found at these websites:
o http://www.ftc.gov/bcp/edu/microsites/idtheft/
o http://www.justice.gov/criminal/fraud/websites/idtheft.html
o https://www.annualcreditreport.com/cra/index.jsp
o www.ftc.gov/os/2007/10/r611019redflagsfrn.pdf
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Fake Down Payment
There are several ways a lender can be duped into believing the borrower paid a down payment using fictitious, forged, falsified, fabricated, borrowed or rented funds.
The seller and borrower agree to an inflated sales contract price
o Example: A seller’s asking price is $100,000
o If the borrower were to put $10,000 into the transaction and borrow $90,000, the seller would be paid $100,000
o If, instead, the contract is written for $110,000, the parties lie about the $10,000 down payment and the loan amount is $100,000, the seller gets the same amount of money, but the borrower doesn’t have any funds in the transaction
The seller agrees to a “silent second” mortgage, which will not be mentioned in the sales contract or filed for a lien until several months after the loan closes
A third party lends the borrower the funds
o Sometimes this is disguised as a gift
o Assets may be rented or borrowed
o Someone getting paid commission when the transaction is completed may put in the funds (Fraud for Commission)
A down payment assistance scheme is utilized
The source of the down payment is not clear or does not make sense
The down payment is acquired suddenly, without explanation, as opposed to being saved over time
The down payment is not being held in a financial or depository institution
The property value appears to be inflated
The contract price exceeds the asking price
Property Valuation:
o Review the appraisal carefully, looking for any indication the value has been padded or inappropriate comparable properties were chosen
o Utilize outside resources, such as http://www.realtor.com, http://www.homes.com and local records of recently closed sales to ensure the property value makes sense for the subject’s market
Deposits:
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o Source any large deposits
o If the bank statements appear suspicious, obtain a VOD
Ask, on the VOD request, both when the account was opened and when the borrower’s name was added to the account
o Obtain the bank statement for the month before the months you already have reviewed
o Be wary of borrowers showing both large savings accounts and large credit card balances
Would you pay 29% interest on a credit card balance if you had savings earning 3% interest?
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Wire Transfer Fraud
Wire transfer fraud occurs when transfer instructions are altered, causing funds to be diverted from the intended recipient and delivered to another account.
No two attacks are alike
Fraudsters use a variety of tactics using malware, social engineering, phishing and email compromise
Example
o The perpetrator sent an email to the buyer (using an email address that was similar to the settlement agent’s email address) indicating a “wiring change” has taken place and provides changed wire transfer instructions
o Buyer complied with the instructions in the email and wired the proceeds as directed
o When funds were not received in the timeframe anticipated, the buyer was contacted
o Upon investigation, the actual settlement agent had not changed the wire instructions
o The money went to a staged bank account and the perpetrator absconded with the funds
Asset Rental
The borrower pays a fee to use someone else’s assets.
Depository Accounts:
o In one version, the funds are deposited into the borrower’s account for a set period of time
o In another version, the borrower’s name is added to an account that belongs to someone else
o In a third version, a fabricated "bank or financial institution" is created or used to house assets
o In each version, the borrower, by paying a fee, appears to have more reserves, funds to close and presents a lower risk to the financial institution
Verifications of employment and income:
o A borrower pays a company to verify false employment or income info
Verification of Deposit, Employment, Income, Mortgage or Rent that did not come directly from the source of the information
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Credit report information is inconsistent with the verification
Even dollar figures appear on the verification
o Verification of Rent will often have even numbers, but not the others
Information on the bank statement does not match the verification
The statements or verifications come from an institution that is unfamiliar or distant from the borrower’s location
o If a web search for the depository institution comes back with hits that state, “We Verify Any Assets” or other reference to mortgage fraud, then there is an issue
Independently research where to send verifications
o Do not blindly use the employer or depository institution information from the application
o Use online directories or “411” to obtain the contact information for the verification source
o Call the verification source directly and ask where to send the verification request
o Never put “To the Attention of” on the verification request unless told to do so by the verification source
o After receiving the verification, call or email the verification source to ensure the verification was sent by the source
Require the person providing the verification to sign a statement that the documents submitted are true and accurate, under penalty of perjury
Ensure the bank statements match the VOE and vice versa
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Employment Misrepresentation
The borrower provides fake employment information.
The Credit Report indicates a different employer
o This is common, but still requires investigation and explanation
The employer’s phone number area code does not match the address location
Borrower's name is part of the employer name
Address of the employer is a PO Box
Borrower has signed their own VOE as "President" or "owner"
The pay stubs, W-2s or other documentation from the employer is questionable
Look for telephone listings and Websites to verify the employer’s existence
Always independently verify addresses and telephone numbers used for employment verification
Perform a reverse search for the employer’s telephone number and/or find aerial photographs of the employer’s location (http://www.zillow.com for aerial pictures)
Never send a VOE “to the attention of” unless specifically told to do so by the employer
When the pay stubs or W-2s are questionable, send a VOE and vice versa
Conduct a web search for “The Borrower” and “The Employer” to see if you can find any hits
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Credit Enhancement
In a credit enhancement scheme, a mortgage fraud perpetrator artificially boosts a borrower’s credit to qualify him for a loan.
Adding seasoned lines of credit to credit histories
Family members paying down debt to help the borrower qualify
o For example, parents move a credit card balance to their card to lower an adult child’s debt load
o After the loan closes, the child puts the balance back on his/her own card
o This alters both the borrower’s credit and monthly debt obligation
Additional characteristics may include:
o The borrower pays a fee to get his/her name added to someone else’s credit card
o The additional credit available may help raise the borrower’s credit score
Although the credit repositories and mortgage lending organizations have tightened rules on counting tradelines where the borrower is an authorized user, new versions of this scheme allow the borrower to become financially obligated on the card
The borrower is listed as “authorized user” on more than one credit account
The borrower is an authorized user on an account belonging to a non-family member or non-employer, such as the Realtor
Large recent deposits into the borrower’s bank account
Credit card balances have recently been brought down to zero, without evidence that the borrower paid these down from his own funds or another allowable source
Source funds that are used in the transaction, including those that are used to pay off other credit obligations in an attempt to raise the borrower’s credit score
Source all large deposits
Be sure to follow all applicable guidelines for “authorized user” accounts
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Fraudulent Appraisals
Misrepresenting property value is an element of many fraud schemes.
Over-inflating the value, also known as artificial inflation, is used to create fake equity which can be skimmed by the borrower
o Loans based on over-inflated appraisals default at a high rate
Undervaluing, also known as deflation, is used at the start of schemes that involve reselling the property to pocket artificial or hidden equity
o This is a common short-sale fraud characteristic
Appraisal misrepresentation can take many forms, including:
o Padding the appraisal to increase the value
o Omitting information to keep the value down
o Choosing comparable properties that not the best representatives of the subject’s value
o Inaccurately reporting square footage, condition or property features
o An individual falsely represents he/she is a licensed appraiser
The appraisal was obtained in a questionable manner:
o Someone other than the lender, or someone acting on the lender’s behalf, ordered the appraisal (Examples: buyer, seller, loan broker)
o The person who ordered the appraisal on behalf of the lender will only be paid if the loan closes, or has a job in loan production
o There is no evidence within the loan file showing who ordered the appraisal
The appraiser selection or compensation is questionable:
o The appraiser not from the subject’s market area
o The appraiser’s licensing information is missing, cannot be verified, or is clouded
http://www.asc.com is a useful Website for this
The appraiser is paid based on what is found within the appraisal, rather than being paid a flat fee for services performed
Example: The Appraiser receives a $150 bonus if the value is at least $250,000
Information found indicates there have been enforcement actions taken against the appraiser
The appraiser does not meet lender qualifications or is not on the lender’s approved list
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The applicable guidelines for choosing an appraiser were not followed
Questionable comparable properties were used:
o The properties chosen as comparables are materially different from the subject
o The comparables should be the best available indicators of value for the subject
o The comparables chosen are an unacceptable distance away from the subject
o Listing and/or pending sales comparables are used instead of actual, closed sales, without adequate explanation
Too much time has passed between the date the comparables sold and the date of the subject’s appraisal (The comparables are stale)
o The specific amount of time will differ from appraisal to appraisal, based on the subject’s market
A comparable has been involved in multiple sales or a quit claim transaction within the past year, without adequate explanation
Large adjustments, a large number of adjustments and/or excessive net or gross adjustments were made to a single comparable property or throughout the appraisal
Appraisal Photographs:
o The pictures are missing, blurry or appear to obscure part of the house from view
o Odd angles often mask unfavorable conditions
o Main room pictures are missing
o A “For Rent” or “For Sale” sign appears in the photos where none should
o The photos are inconsistent with the appraisal information or narrative
o The background of the photos is inconsistent with the season or each other
Appraisal Map
o Subject and comparable properties do not appear to come from the same neighborhood, without adequate explanation
o Rural property market area sometimes exceeds traditional neighborhood lines
o Neighborhoods ordinarily honor natural boundaries: highways, railroad tracks, school district lines, municipality lines, waterways, large parks and the like
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o Map reveals issues that may impact the home’s value, such as the subject being on a busy street or adjacent to what appears to be a commercial area
o The comparable properties do not share the same issue, such as backing up to railroad tracks or near high power lines
o When looking at the map, the subject’s area appears rural, but has not been identified as rural
Other Appraisal Red Flags
o The address on the appraisal does not match the loan file and/or application address
o The address number in the pictures does not match the appraisal.
o The loan file references a different appraisal
o If a second appraisal has been ordered, the loan file should have an explanation of the first appraisal’s deficiency
o There appears to have been another appraisal with a different value
o Rent indicated for an investment property is above or below market rent
o Information can be found at http://www.finestexpert.com or http://www.Zilpy.com
Appraisals should be thoroughly reviewed
o Be sure the appraisal was completed on the correct form
o Check that all lender, investor, GSE, USPAP and MI company guidelines have been met
o Use common sense in evaluating the appraiser’s conclusions
The facts on the appraisal should make sense and agree with other information found within the loan file and publicly available information
The narrative should fully explain how the appraiser used the facts to arrive at conclusions
o Know the markets in which you do business
If the appraiser indicates there is a shortage of comparable properties, the appraisal should contain explanations for:
o The efforts the appraiser made to find better comparable properties
o Why better comparable properties were not available
o What that says about the subject’s market
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If there have not been many houses on the market, and those that have been on the market have sold, that can indicate a stable market
If many houses have languished on the market, it may indicate an issue
Appraiser Selection
Lenders should have appraiser independence requirements rules and guidelines in place
Lenders should maintain a list of unacceptable appraisers and check to be sure no appraisals have been submitted by anyone on the list
Outside resources should be monitored for information about appraisers
http:///www.asc.gov provides licensure information
Contact the appraiser after receiving an appraisal to check that the appraiser actually completed the appraisal
Many recent fraud schemes involved someone using an appraiser’s name and license number to create a fake appraisal
There have been cases of appraisers who have lost their licenses doing this
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General Best Practices for Documentation Review and Underwriting
Analyze every loan
o This requires more than just validating the information entered into the AUS system
o The AUS report and loan program guidelines provide minimum documentation requirements
o Additional information may be required to address red flags or provide more solid support
All red flags must be addressed before closing a loan
o Have the borrower provide additional documentation and/or written explanations
o Conduct additional research via the Internet and document market conditions
o Use the LOS “Notepad” feature to explain situations to others who may look at the file later
Be sure all conditions have been cleared prior to a loan closing
Document
Sales Contract • The borrower is not listed as the purchaser on the contract
• The seller is not the owner of public record • The earnest money deposit information on the
contract is inconsistent with the assets section of the application
• The sales contract or other documentation indicates an addendum that is missing
• The contract is “boiler-plate” language only • This indicates there was no bargaining back
and forth, which often means a non-arm’s-length transaction
• The contract contains unusual inducements or features, such as private property, sales concessions not typical for the market, high rent escrows or real estate commissions, above-market or listing purchase price or money being paid out to the purchaser
• One or more of the parties has not signed the contract
• The signature on the contract differs from the signature on the loan application
• Thoroughly review the sales contract
• Check that dollar amounts, seller concessions and parties involved are consistent with the information contained within the loan file
• If the contract shows any of the following, be sure it is within acceptable guidelines: • Money being paid
to the buyer or any third party
• Sales concessions or interested party contributions
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Document
• The contract was signed after the loan application
Loan Application
• Significant changes between the original application and updated applications
• Any indication the borrower does not own the property on a refinance transaction
• Purchase price differs from contract price or offering price
• Borrower’s indication that the property will be owner occupied does not make sense
• The borrower does not appear to be moving to the home
• The borrower’s employment is beyond a reasonable commute from the subject property
• The subject property is located in an area where rental or vacation properties are common
• The borrower is “moving down” without explanation
• There is “payment shock” or “reverse shock” between the borrower’s present and proposed monthly housing payment
• Assets information is questionable • The assets are inconsistent with the income or
job title • The account upon which the earnest money
check is drawn is not listed with the assets • Income or employment information is
inconsistent with the credit report or is otherwise not solidly supported by documentation within the loan file
• Debt/Income ratio is just at the maximum approvable
• The application does not show at least a two-year history of employment
• The borrower’s last name is the same as the employer’s name, the employer’s address is the same as the borrower’s address or the borrower has a job title that may indicate the borrower owns the company, but the self-employment box is not checked
• Any information is missing or any section is incomplete
• Compare the original application to the final application in the loan file
• Information that significantly changed should be explained and, if necessary, supported
• Independently verify employment
• Research the employer telephone number and address, rather than relying on what is on the application
• Do a Google or Yahoo! search for your borrower and the employer or job title
• If your borrower is in a job that requires licensure, check with the appropriate authority to be sure your borrower can even be in the line of work
• If your borrower is self-employed, check your Secretary of State’s business registry
• Be aware of the types of fraud being perpetrated so you can recognize the schemes when you see them
• A good Website for staying abreast of fraud is http://www.mortgagefraudblog.com
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Document
Credit Report • No or little credit • Evidence of a possible alias or multiple social
security numbers • Any indication many accounts have recently
been paid in full, which may indicate an unreported loan
• The length of time reported does not make
sense, given other information in the file • Recent inquiries from other mortgage providers
which have not been explained or documented as not resulting in new credit
• Any “DBA” listings • Tradelines showing payday or car title loans
• Carefully review the credit report
• Any unusual or inconsistent information should be brought to the borrower’s attention
• The borrower should provide written explanation and documentation to support the explanation, where applicable
• Obtain an updated credit report if there is reason to believe the borrower’s credit situation may have changed since application
• Compare employment and residency information on the credit report to the application
• Pull a new credit report the day of closing
• Not a day or two prior to closing
• This is a best practice suggestion, not a GSE requirement
Driver’s License/State ID Card
• No hologram • No photograph • Name, address, physical characteristics or
picture to not match • The license is expired • There appears to be tampering • The document does not match the standard
format for the issuing state • Best Practices
• Compare the driver’s license with a second form of ID
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Document
Social Security Numbers
• Credit report alert indicates a problem, including: • The SSN# has never been issued • The SSN# belongs to a deceased individual • The SSN# is not in the usual format • The borrower provides a Social Security
card that does not look or feel authentic • The series of digits seems unlikely
(example: 234-56-7890)
• Best Practices: • Review the Social
Security Number and, if possible, card
• Verify the SSN# as part of the credit report process
• SSN# can be validated directly through Social Security or through a third party vendor
• If verification is done with the credit report, be sure to review that part of the report carefully
• If using Desktop Underwriter®, be sure to address all “Verification Messages” issues
Bank Statements
• Altered copies • Missing pages • Unsubstantiated statement copies or screen
capture printouts instead of statements • Application information does not match the
bank statements • The statement address should be your
borrower’s address • Direct deposits should match the income
information • Large deposit or withdrawals, or regular
payments from the account that do not match known debts
• Direct deposits that do not match the borrower’s pay stub information
• Automatic and/or recurring payments, which may indicate undisclosed debts, such as child support, alimony or a delinquent tax payment plan
• Send a Verification of Deposit (VOD) to the depository institution
• Ask both when the account was opened and how long your borrower has been on the account
• Ask for an additional month’s bank statement
• The month prior to what the borrower provided can be informative
• Source any large and/or questionable deposits back at least ninety days
• Obtain information about any regular, recurring or payments
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Document
or questionable deposits
Verification of Deposit (VOD)
• The VOD is completed on the same date it is mailed
• Questionable handwriting: • The top section is completed by the party
asking for the information, the bottom by the depository institution, so there should be different handwriting in the two sections
• The section completed by the depository institution should have a single handwriting
• Should this be handwritten at all? • Any deletions or cross-outs • No depository accounts are listed on the
application, but there is a VOD in the file • Escrow or closing checks are written on an
account not mentioned on the VOD • There are other account owners listed on the
VOD • Round dollar figures are listed on the VOD • The ending balance on the VOD is significantly
different than the beginning balance or the average monthly balance
• Large changes in balances should be explained and/or sourced
• Account owners are not borrowers on the loan • There is no average monthly balance shown • Loans are listed on the VOD that do not
appear on the credit report • The document appears to have been hand
carried • A lack of creases on the document if it was
mailed • The bank or financial institution name is
unfamiliar • The document was faxed and it shows a
sender’s fax number on the top of the page that does not belong to the depository institution
• Independently verify the address to which the VOD is being sent
• Ask the depository institution to provide specific information regarding:
• The names on the account
• The date the account was opened
• The average monthly balance
• The number of monthly transactions
• Any unsourced or questionable large deposits
• Verify the name and title of the bank employee who signed the VOD after it is received
• Ask for additional bank statements to support what is on the VOD
Verification of Employment (VOE)
• The employer and the borrower have similar last names
• The VOE is not on original letterhead or a standard mortgage industry form
• The date the VOE was completed is the same as the date the VOE was mailed
• Independently research and verify the contact information for the employer
• Do not send the VOE to the attention of any
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Document
• The employer uses a mail box drop address • The business entity is not registered or in good
standing with the specific State • The job title on the VOE differs from the
application • The amount or type of income shown on the
VOE differs from the application • An discrepancy exists between the end of the
previous employment and the start of the present employment
• The comments section contains excessive praise
• Round dollar amounts appear on the form • The borrower has a large recent increase in
income • The income does not make sense for the job
and location • The borrower signed his/her own verification • The form is returned from a large company
handwritten • http://www.salary.com is a good source for
wage and salary information
particular individual, unless the employer specifically requested this after the contact made through the independent contact
• After the VOE is returned, confirm the name and job title of the person who completed the form
• Check that the borrower’s place of employment is a reasonable distance from the subject property, if the subject is a primary residence
• Use industry standard forms to conduct a Verbal Verification of Employment before the loan closes
W2 and Pay Stubs
• The income seems unlikely, given the borrower’s job title or type of employment
• http://www.salary.com is a free resource that can help evaluate salaries
• The social security number, address or other identifying information differs from the application
• Spelling errors or incorrect addresses on either document
• Different fonts or type sizes on a single document
• Numbers appear to be squeezed in • Information does not line up with the document
(Cut and paste giveaway) • W-2s or pay stubs are handwritten, or one is
typed and the other is handwritten • Check numbers are not in increasing
sequential order, or appear too close in number
• Withholding for Social Security or Medicare is inconsistent with the levels required
• http://www.irs.gov/publications/p15t/ar02.html#en_US_publink1000142998
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Document
• Round dollar amounts • The year to date totals on the pay stubs do not
make sense when compared to the W-2s • The reported income on the application differs
from what is shown on either document • Debts shown on the pay stub have not been
reported on the application • The W-2 copy submitted is the “Employer
Copy” or another copy that should have never been in the borrower’s hands
Tax Returns • Address, profession, social security number or other documentation does not agree with the other information in the loan file
• Handwriting or font changes within the forms • Alimony is being paid but is not disclosed on
the application • There is a Schedule F, Farm Income/Loss • There are missing pages or schedules • The signature on the application differs from
the signature on the tax return • There is high income or a complex tax
situation, but no accountant was used • An amended return has been filed and a large
unpaid tax obligation remains unpaid • Unemployment is reported on the return with
no gap in employment on the application • There is a Schedule SE or Schedule C
included, but the borrower does not claim self-employment on the application
• The borrower claims to have filed an extension but cannot provide preliminary or filed estimated returns
• The tax returns are not signed and dated by the borrower • Although the borrower may print an
electronic copy of what a tax preparer sent to be signed and filed, the borrower should sign and date the tax returns prior to handing them over to the lender
• This certifies that the information is valid as of the date the returns are supplied to the lender
• IRS Form 1040, Schedule A Red Flags: • Real estate and/or mortgage interest is
deducted but, according to the loan file, no property is owned, or the other way around
• In addition to calculating income from tax returns, spend time reviewing the tax returns for any Red Flags
• Ask the borrower for additional information for any questions that arise from the review
• Have borrowers sign and 4506-T, Request for Transcript of Tax Return
• Execute the document • Review the transcript
to make sure the information is consistent with the tax returns
• Ask for year-to-date information from self-employed borrowers
• Bank statements should show deposits consistent with the previous year’s gross income
• YTD gross and net income should be consistent with the previous year’s figures
• Ask for a third year’s tax returns to establish the income is steady
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Document
• Tax preparation fees are deducted, but the prior year’s return indicates no tax preparer was used (IRS Form 1040, 2nd page, bottom)
• Minimal or no deductions for a high income borrower
• There are unreimbursed employee expenses (Line 21)
• IRS Form 1040, Schedule B Red Flags: • There is no interest claimed, but the
borrower claims, on the application, to have substantial cash in the bank
• No dividends are earned on stock the borrower claims to own • Information about dividends paid by
publicly traded companies can be found at http://www.finance.yahoo.com
• IRS Form 1040, Schedule C Red Flags: • The business codes can be found in the
Schedule C Instructions, on the IRS Website
• Inconsistencies between the type of business and the deductions
• Example: The business is retail or sales, but there is no “cost of goods” listed
• There is a deduction for real estate depreciation, but the property is not disclosed on the application, or the other way around
• There is a deduction for interest paid, but no corresponding loan or obligation is listed on the application
• No taxes or licensing deduction • Wages are paid, but: • No tax expense deduction is made • There is no employer ID number • The salaries paid do not make sense for the
claimed industry • Income is significantly higher in the most
recent year • IRS Form 1040, Schedule E Red Flags:
• The Schedule E is missing, despite a profit/loss amount on the Form 1040, Line 17
• The bottom line on the Schedule E does not match Form 1040, Line 17
and stable in on-the-fence situations
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Document
• Properties are listed on the Schedule E, but not disclosed on the application, or the other way around
• Mortgage loan interest is deducted, but there is no mention of the mortgage on the application
• The borrower shows Partnership or S-Corp income or loss, but the business is not disclosed on the application, or the other way around
Tax Transcripts
• The social security number, address, or other identifying information does not match the information in the loan file
• The date the tax returns were received differs significantly from the date the forms were signed
• This may evidence amended returns were filed, but the borrower has submitted the originals
• The gross income, net income, deductions or any other reported dollar amounts to not match the tax returns in the file
• Best Practices: • Ask for and obtain
clarification and/or supporting documentation addressing any and all inconsistencies
• Get tax transcripts for all borrowers
• Carefully check the information on the transcripts against the documentation in the loan file
Deeds • Recent or multiple quit claims or changes in property ownership
• A Power of Attorney has been used in the transaction
• Any spelling errors or other informational errors on the deeds
• A refinance transaction where it appears there is presently no mortgage on the property
• Scrutinize loans carefully when there are quit claims in the title chain
• Check the subject’s county tax records website
• Find the specific Website by doing a simple Web search for “(The Subject’s County) property tax records”
• The county records usually show the chain of title
• Get explanations and supporting documentation for any inconsistencies
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Document
Business Licenses
• The business phone number and/or address are the same as the borrower’s phone number and/or address
• A PO Box is used as the business address • No Website or other information about the
business can be found in the Internet
• Best Practices: • Contact the
applicable State regulating authority to confirm the business license
• Some businesses require local licenses to operate
• Some professions require State licensure
• Compare information on the tax returns with the business license information
• Search the Internet for information about the business
Notary Stamps • The notary seal is not embossed • The date notarized is prior to the date of
application or the date the document shows to have been signed
• Documents that would not ordinarily be notarized together, or by the same notary, appear to have been notarized at once, or the other way around
• The notary appears to be related to or employed by a party to the transaction
• The notary commission had expired when the documents were notarized
• The notary seal appears to be a novelty notary seal ordered over the Internet
• Best Practices: • Confirm the
notary’s good standing with the state or county
• Compare the dates notarized to the dates signed
• Compare notarization of documents within the mortgage file
• Ask the borrower when and where the documents were notarized
• Contact the notary directly
• The state or county will have the contact information for the notary
• Notaries are required to keep detailed records of
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Document
when and for whom they verified identity
Power of Attorney
• The POA grantor and/or grantee is not from the local area
• Spelling or other information errors within the document
• The POA was not prepared by an attorney, or notarized
• You are unable to get in contact with the POA grantor
• The fact there is a POA is, by itself, a Red Flag
• Confirm with the grantor that the POA is legitimate
• Verify the identification of the grantee and the grantee’s relationship to the grantor
• Ensure the POA makes sense based on the POA type and the grantor’s situation
Closing Disclosure
• The borrower is getting cash back at closing on a purchase transaction
• A third party, other than one that would be ordinary and acceptable, is being paid money from the closing
• Multiple Closing Disclosures for the same transaction, other than a buyer copy and a seller copy
• The Closing Disclosure is not available for review three days prior to closing
• Overpayment of fees, commissions or other charges
• Excessive rent-escrows for an owner occupied purchase transaction
• Total funds required for closing exceed those verified
• Best Practices: • Carefully review the
Closing Disclosure • If there are
separate buyer and seller Closing Disclosures, be sure each contains similar information
• Ensure all dollar figures on the contract match the Closing Disclosure
• Compare payouts listed on the Closing Disclosure to lien holders
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Reference
Equity Skimming – Purchase
Both Purchase Money and Refinance Schemes: Creating fake equity in a property and using a mortgage to convert that equity into cash in pocket or to cover down payment or closing costs.
Purchase examples
o A potential buyer lacks down payment funds, so the seller is talked into raising the asking price and acting as though a down payment was made
o A fraudster creates fake equity to cover closing costs or to funnel cash back to a purchaser after the loan closes
Refinance examples
o Someone purchases an inexpensive property, purports to have done renovation work and obtains a cash-out refinance mortgage based on the increased value, even though no renovation work was actually done
Common characteristics of this fraud include:
o Many parties involved
o Fake or fraudulent appraisal
Padded appraisal
Claimed renovations not completed
o Contract price inflated
o Source of funds for down payment or earnest money questionable or not properly documented
Consequences of this fraud:
o Lender has underwater mortgage
o Foreclosure likely
Recent title transfers, especially quitclaims
Cash going back to the borrower at the closing table, especially in a purchase transaction
A cash-out refinance is obtained shortly after the property was acquired
Many lenders/investors require a cooling off period (i.e. six months) between acquisition and any refinance
The reason the borrower is pulling cash out is not documented, or does not make sense
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Review appraisals carefully and thoroughly
Use outside resources, like http://www.listingbook.com, to make sure the value makes sense for the subject’s market
Review the appraisal contract section for the subject property’s listing history
Require the appraiser provide complete explanations for all appraisal conclusions
For purchase transactions, compare the appraisal to the real estate listing
o In many areas, listings can be accessed through http://www.realtor.com
o The MLS system can often be accessed through local real estate agents’ Websites
Ensure all down payment and closing costs are properly documented/sourced
For refinance transactions, compare the appraisal property description to tax record information
Determine how long the borrower has owned a property in cash-out transactions
Be sure closing conditions specifically identify what debts should be paid off and to whom, and where other dispersed funds should go
Review the borrower’s credit report carefully for any sign of financial distress
Review the Closing Disclosure prior to funding the loan
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Flopping
A type of property flipping: The fraudster uses inside information for profit.
Flopping examples:
o A real estate professional has a short sale listing and knows the servicer will accept no less than $200,000. A potential buyer offers $250,000, so the real estate professional, based on this inside information, purchases the home for $200,000 and sells it to the buyer for $250,000.
o A fraudster convinces an elderly couple their house is worth $100,000, when it is actually worth $250,000. The fraudster purchases the home in an all cash transaction (quitclaims are popular for this) and sells the property for the actual value.
Characteristics of this type of fraud include:
o The house was on the market as a short sale for what would be considered a long time for the given market
o A relationship between a professional working in the transaction and a party to the transaction has not been disclosed
o Fiduciary duty violated
o No “Fingerprints” on the Transaction
o Documentation not registered
A professional involved in the transaction is related to the buyer or seller without this being disclosed
Quitclaims
The property is being purchased after recently being sold in a short sale or foreclosure
The seller appears to never have lived in the home
Use Automated Valuation Models (AVM) or conduct field reviews to double check the appraisal
o Fannie Mae’s Collateral Underwriter®
o Freddie Mac® offers its Home Value Calibrator ® which measures the risk that an appraisal exceeds the actual market value, and its Home Value Explorer ® (HVE ®) AVM
Research short sale activity and sales prices in the market area
o Both transactions need to make sense in light of the subject’s market
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o Websites, such as http://www.realtor.com, can provide information about short sales in the market area
Take steps to ensure there is an arm’s length transaction:
o Do a simple Google® search for the seller and purchaser to see if the names pop up somewhere together
Require all parties in the transaction to sign affidavits indicating:
o The transaction is a true sale
o The parties are unrelated
Buy and Bail
The borrower purchases a new home, and walks away from a previous home and its existing mortgage.
Borrower current
Home value plunged
New home purchased
Previous mortgage bailed
The new home is less expensive than the mortgage on the existing loan
The borrower has negative equity in the present home
The present home is being converted into a rental property
Information about the present home’s tenant is limited or missing
The purported tenant appears to have a pre-existing business or personal relationship with the borrower
The rental amount, per the rental contract, is unreasonable for the home’s market
Tenant signature on lease matches borrower’s signature
Review the borrower’s credit report looking for anything that may indicate financial distress
Ensure occupancy makes sense, getting borrower explanation where warranted
o Example: If a borrower is purchasing a second home, or converting a present home into a rental property, be sure the narrative of the surrounding circumstances is included in the file, and that the narrative makes sense.
Obtain all rental agreements and ensure the information is accurate and believable
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o Contact the prospective tenant
o Verify the tenant’s security deposit
o Use outside resources to confirm market rent for the area
o Local newspapers often have rental classified advertisements
o Cash flows (rent minus expenses) should make sense
Look for and follow applicable guidelines when borrowers are converting a present primary residence into a rental property
Many investors, including the GSEs, have minimum reserve and/or equity requirements when there is a rental conversion
Phantom Sales (Property Stealing)
Fraudsters transfer property title into their own names illegally and either refinance, sell the property to an unsuspecting buyer, move in or collect rent for a short period of time.
False quit claim deed filed
Refinance, sale or rental
Vacant homes, second homes and homes owned free and clear most susceptible
Any recent quit claim in the chain of title, especially when:
o Quit claims are not common in the subject property’s area
o The quit claim deed owner is not from the subject area
o The quit claim deed owner is not related to the previous owner
o The quit claim deed owner is selling the property to a third party shortly after acquiring ownership interest
Closely scrutinize all transactions where there is a recent quit claim in the title
Most lenders have guidelines requiring at least six months pass after acquisition before a cash-out refinance
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Builder Bailout
A Builder Bailout scheme involves a builder using fraudulent methods to help sell inventory.
Hidden down payment assistance
Excessive concessions
Rental management agency
Guaranteed rental income
Builder sub-companies
Straw buyers, including paid nominees, friends and family members
Asset Irregularities:
o Suspicious down payment
o Unexplained large deposits on the bank statements
o Gift funds, grant funds or down payment assistance from questionable sources
o Money disbursed to lien-holders and/or vendors not found on the title commitment
o References to secondary financing on the purchase contract, but not on the loan application
o Paid concessions or inducements, like prepaid condo fees, free furniture, etc.
Other Irregularities:
o The borrower is purchasing down and planning to keep the present primary home, converting it to rental usage
o The subject property is located in an area/development that primarily has investment properties
o Robust sales in a development despite an otherwise slow market
o Parties on the contract have multiple roles within the transaction
Review the sales contract carefully
o Ensure the information on the contract matches information on the application and elsewhere in the mortgage file
Use outside resources to learn about sales concessions that are being offered to potential buyers
o Review the MLS listing for the subject property
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o Check the website for the subject’s development
o Conduct Internet searches for subject’s development and builder, looking for any special sales offers or other inducements
Properly source the funds used for earnest money and to close the loan
Review the Closing Disclosure, paying close attention to parties receiving funds
o Look for concealed incentives
Research market conditions in the subject’s area
The transaction needs to make sense for the specific market
Chunking/Investment Club
After obtaining the borrower’s information, a loan originator submits multiple loan applications, unbeknownst to the borrower.
Investment groups
o Scammer manages
o Victims provide financial information
o Scammer facilitates secret sales, using the same information over and over again
o Additional “investors” brought in to keep the scam going
Real estate seminars
Paid straw buyers
Multiple credit inquiries within a short period from various mortgage providers
Buyers:
o Out of state or distant buyers
o Buyers with whom you have no direct contact; rather, you work through intermediaries
Sellers:
o The seller is a corporation or LLC
o The property has been recently purchased and is now being sold at a higher price
Incomplete or questionable lease agreements
Payoffs, per the Closing Disclosure or Sales Contract, to non-lien holders or unknown vendors
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Search for undisclosed properties owned by the applicant
Examine income and liabilities to see if the borrower can afford to maintain the property without a tenant
Verify lease documents
o Contact the tenant
o Ensure the rent indicated on the rental contract makes sense for the market
o Use satellite maps to view the actual property and its condition
o Do an internet search to see if there is a phone at the rental property, and then search to see in whose name the phone is registered
o http://www.anywho.com, http://www.switchboard.com, or http://www.411.com
If the credit report reflects numerous recent mortgage lender inquiries, document the circumstances surrounding and disposition of those inquiries
Remember As you use the tools we have covered today, keep in mind, common sense should be your overriding factor in evaluating loans.
– Does this loan file make sense?
– Is the information consistent throughout the loan file?
– Do the documents support the data and the loan transaction?
– Have all loan inconsistencies been adequately addressed?
Remember, just because there is a Red Flag does not mean there is fraud, but multiple Red Flags that cannot be adequately addressed increase the probability of misrepresentation and fraud.
– If you feel there might be something wrong with the loan, dig deeper
– Common sense — the strongest weapon in the fight against fraud
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Legal Disclaimer
Genworth Mortgage Insurance is happy to provide you with these training materials. While we strive for accuracy, we also know that any discussion of laws and their application to particular facts is subject to individual interpretation, change, and other uncertainties. Our training is not intended as legal advice, and is not a substitute for advice of counsel. You should always check with your own legal advisors for interpretations of legal and compliance principles applicable to your business.
GENWORTH EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THESE MATERIALS AND THE RELATED TRAINING. IN NO EVENT SHALL GENWORTH BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER WITH RESPECT TO THE TRAINING AND THE MATERIALS.
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