The national housing boom is producing a companion
boom -- one that you don't read about as much:
Dishonesty and outright fraud by home buyers and
mortgage and realty industry professionals on loan
applications has exploded in the past two yeas.
A newly-released national study by a research group
says fraud-related cases on mortgage applications
reported to the FBI more than doubled between 2003 and
The Mortgage Asset Research Institute (MARI), which
pools fraud information supplied by hundreds of
mortgage lenders, says loan fraud is worst in Georgia,
South Carolina, Florida, Utah and North Carolina.
Individual cities with high fraud rates -- based on
"serious early delinquencies" on home loans closed
during 2004 -- include Atlanta, Dallas, Denver,
Orlando, Charlotte, Memphis and Scranton.
What sort of games are people playing with mortgage
applications? You name it -- everything from little
white lies about income or assets all the way up to
what the FBI calls "air loans" that are based on
completely fabricated information.
The rising popularity of low- and no-documentation
("stated income") mortgages is also a key component of
rising fraud levels, according to MARI. Sometimes
referred to as "liar loans" or "NINAs" (no asset, no
income verification), low-doc mortgages originally
were designed for professionals and business owners
with high credit scores who preferred not to lay out
their confidential tax, income and investment
information every time they applied for a mortgage.
Typically those loans required FICO scores above 700,
relatively low loan-to-value (LTV) ratios, and came
with slightly higher fees or rates.
But recently, even consumers with subprime credit
scores, low down payments and questionable incomes are
opting for reduced documentation. Too many of these,
however, turn out to be liar loans indeed, says MARI,
where applicants falsify their incomes and asset
information -- frequently with the help or a
cooperative mortgage broker.
The MARI report cites this real-life example to
illustrate the problem: "An officer at a Florida
mortgage company applied to a second lender for two
stated income loans. The applications were submitted
90 days apart. In the first application, the borrower
stated his monthly income as $24,000, and in the
second he said it was $30,000." When the mortgage
officer was challenged about the discrepancy, he
replied, "I thought that on stated income loans you
could claim an income as high as necessary" to qualify
for the loan amount the applicant needed.
The most common misrepresentation and frauds in
2003-2004 related to falsehoods on applications (56
percent of all reported frauds), followed by
fabricated tax returns and bank documents (33 percent
-- up sharply from 23 percent three years earlier),
false employment verifications (12 percent), and
hoked-up appraisals (10 percent).
Other key findings in the new MARI report:
California, which led the nation in fraud throughout
the 1990s, no longer is even ranked among the top hot
spots. On the other hand, the Midwest -- which rarely
had notable fraud problems in the 1990s -- now is
experiencing a rapid surge. Detroit and Chicago
continue to have excessive early default rates, and
Michigan, Missouri and Illinois all have risen sharply
on MARI's annual list of problem areas. Columbus,
Ohio, is ranked seventh overall in the country, based
on its early default rate for loans closed in 2004.
Property flips continue to be a significant source of
fraud and financial loss for lenders. Typically more
than one scamster is involved. MARI cited as an
example a case from Ohio: The FBI broke up a property
flip ring that involved nine real estate "investors"
and title agents. The investors bought properties,
then fabricated bogus appraisals to flip them to
unsuspecting buyers barely weeks later, for sales
price up to twice the investors' purchase price.