Mortgage Fraud: An Ever-Present Danger

Diane Banks, Principal Consultant, Capco Academy

October 5, 2023 

Mortgage fraud is the deliberate act of lying or omitting information pertaining to a new or refinanced mortgage application. According to the Federal Bureau of Investigation (FBI), it is any sort of “material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan”. Though mortgage fraud is more commonly initiated by external parties rather than insiders, you can never completely rule out the risk of collusion between an external party and those involved in the various stages of the loan process.  The loan officer, the underwriter, the appraiser…these roles and others are all areas of opportunity for mortgage fraud.

The Financial Crimes Enforcement Network  (FINCEN) conducted a financial trend analysis of business email compromise in the real estate sector (RE-BEC), from January 2020 through December 2021. The analysis was based on bank secrecy data that was filed with FINCEN and the analysis showed that title and closing entities were the most frequently impersonated institutions. While there is a plethora of mortgage fraud schemes, three distinct categories were identified by the Federal Housing Finance Agency and Fannie Mae.   The categories are fraud for profit, fraud for housing and investor fraud.

Differentiating Between Types of Fraud

• Fraud for Profit
• Fraud for Housing
• Investor Fraud

Fraud for Profit exists where industry insiders use their knowledge to facilitate fraud by misusing the mortgage lending process to steal cash and equity from lenders or homeowners.  These industry insiders include personnel familiar with the loan process such as appraisers, brokers, and loan originators.  Frequently, those that are aware of the concepts, factors and loopholes in mortgage lending are the culprits.  The insider who assists in creating the fraudulent documents, or who works with the appraiser with the flipping scheme, is an ever-present reality for the mortgage industry.  Though commonly conducted by insiders, Fraud for profit may also include outsiders, like a borrower completing an application with false information or stolen personal data. 

Fraud for Housing is typically initiated through illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.  Fraud for housing, while committed by borrowers, is often conducted with the assistance of loan originators or other personnel.  They often work in conjunction to mispresent or omit relevant details regarding employment, income, debt and credit information.  They may misrepresent property value or the condition of the property.

Investor Fraud may be conducted by parties such as contractors, realtors, and flippers.   There are various forms of investor fraud.  The scammer may purchase a property with the intent to re-sell it at an artificially inflated price for a considerable profit, and they only make minor improvements.  They could use a straw buyer, who is probably using false personal data to purchase the property. The appraiser is then paid a fee to submit a false and artificially inflated appraisal report to the bank. The bank then makes the loan to the straw buyer. The straw buyer and the appraiser are paid off and the bad actor keeps the rest of the money for himself. 

Steps to Prevent Mortgage Fraud

We know that mortgage fraud is an ever-present danger, and it is important that financial institutions and mortgage lenders catch it early within the loan process. You must not only have a fraud prevention program, but a culture that supports your program…to include open communication, training, tools, and vendor due diligence. 

• Establish a Fraud Risk Assessment
• Ensuring your Mortgage Fraud Program is Flexible  

The first step to mitigating your organization’s mortgage fraud risk begins with a fraud risk assessment.  Knowing what, who, and how of your mortgage process is critical in mitigating the risk of fraud.  What mortgage products does your institution offer? Who supports these products, both internal and external personnel and/or entities?  How can applicants access your mortgage fraud application?   The sooner you can identify and understand your mortgage fraud risks, the better you will be prepared to take the steps necessary to minimize loss that will occur with mortgage fraud. 

Just like your compliance program, your mortgage fraud program should be a living program, that adjusts to: (1) the latest threats, both internal and external; (2) changes in products and services; (3) changes in vendors, etc.  It is a good idea to create a separate mortgage fraud program or include one within your BSA or lending program…either way, routinely review your existing program to be better prepared to address mortgage fraud.

How Capco Can Help

Capco’s Mortgage Quality Control reviews can help lenders capture defects, identify trends, source root cause and take steps to correct actions.  We have a team of experienced underwriters that will ensure compliance with investor and agency requirements and guidelines. Capco’s Mortgage QC team can perform pre-fund and/or post close reviews, servicing reviews, EPD reviews and adverse loan reviews as required by regulatory agencies such as FNMA, FHLMC, FHA, VA, and USDA.