Do You Know Your Mortgage Fraud Red Flags?

Please note this article is not a comprehensive primer on mortgage fraud – use the resources listed below for more red flags and tips. 

Anyone in the mortgage industry knows mortgage fraud happens, but all too often it’s a case of “that would never happen to me!” Are you sure?

Fraud 101

In 2013, 74% of reported cases involved loan application fraud and misrepresentation.* (Data from 2013 is the most recent available). Blatant discrepancies in a loan application are tip-offs that warrant further investigation. These might include:

• the same phone number for the borrower and employer
• different signatures for the same name
• inconsistent dates on the application and supporting documents
• income doesn’t jibe with the type of employment
• the employer address is a P.O. box
• borrowers buying down in value from their current home

These and others are the Fraud 101 items most of us know to look for.

Credit Documentation Fraud

But do you know where else to look for red flags? Credit documentation fraud is on the rise — to 17% of reported fraud cases in 2013 from 5% in 2012.* Discrepancies in employment, residence or personal data between the credit report and the loan application are good indicators that something isn’t on the up-and-up. Other items to check might include:

• verifying that the Social Security number used belongs to the applicant
• significant differences between original and new/supplemental credit reports
• the length of established credit is inconsistent with the borrower’s age
• Multiple recent inquiries on the credit report

Appraisal and Property Valuation Fraud

There is some good news.Appraisal and property valuation fraud is the lowest it’s been in years — 15% of reported cases in 2013 — primarily due to tighter regulations put into place since 2009, when appraisal and property valuation fraud accounted for 31% of reported cases of mortgage fraud.* The bad news is that appraisal fraud still happens. It’s prudent to look for warning signs like:

• inconsistencies in the type or location of comparables
• the house number in photos doesn’t match the appraisal
• the owner is someone other than the seller shown on the sales contract
• photos do not match the description in the appraisal
• use of more than one non- MLS sale for comparables
• occupancy on appraisal does not match the application

Loan Package Fraud

Fraud can be revealed in any part of a loan package. It’s worth verifying information and looking for inconsistencies in:

• the sales contract
• cancelled checks
• the title
• HUD-1 Settlement Statement
• income information
• tax returns
• assets

General Red Flags

Other general red flags can include:

• verifications that are completed on the same day as ordered or on a weekend/holiday
• homeowner’s insurance is a rental policy
• different mailing addresses on bank statements, pay stubs and W-2s
• assets are not consistent with the income
• child support noted on pay stubs, but not on loan application

I could go on and on about red flags that signal mortgage fraud, but the bottom line is: Trust your gut. If something doesn’t add up, investigate. Not every red flag you find means that a loan is fraudulent, but it may be an indicator that the application warrants a closer look.

Some resources worth checking out:

• Freddie Mac’s Mortgage Screening Checklist
• Fannie Mae’s Mortgage Fraud Prevention resources

*Data taken from LexisNexis® 16th Annual Mortgage Fraud Report, published in December 2014