HOWARD PITKIN – ‘Limited resources’
A growing count of mortgage fraud cases is adding to the woes of a lending industry already mired in subprime problems and increasing foreclosures.
A recent report by Reston, Va.-based Mortgage Asset Research Institute found the number of reported mortgage fraud cases in 2006 climbed 30 percent from 2005. MARI, a subsidiary of information services firm ChoicePoint, tracks incidents of fraud in its Mortgage Data Industry Exchange (MIDEX). The exchange keeps a count of “material misrepresentations” found in mortgages, and lenders submit reports to MIDEX in cases where – knowing what they know after their investigations – they would not have originated or bought the loans.
“We’re seeing more submissions than we’ve ever seen,” said Merle Sharick, vice president and national manager of business development for MARI.
Florida and California ranked as the top two states with the highest rate of mortgage fraud occurrence on the MIDEX. Connecticut ranked No. 24 in 2006, down from 19 in 2005. The state has placed at or near the middle of the 50 states for the past several years, with rankings of 25, 32 and 30 in 2002, 2003 and 2004, respectively.
Connecticut Department of Banking Commissioner Howard Pitkin, however, does not find much comfort in the middle-of-the-pack status.
“Mortgage fraud – and mortgage problems in general – is probably the biggest issue facing the American markets and state authorities,” he said.
An extra challenge for state authorities such as Pitkin is the battle against a growing caseload with a limited number of personnel. His department currently has nine examiners.
“We have limited resources, so we have to prioritize,” Pitkin said. “If I can find a way, I will add some more [examiners].”
Like the MIDEX, data from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN – which collects reports from federally insured financial institutions – show the number of mortgage fraud incidents in Connecticut is on the rise.
Since 2000, the annual number of mortgage fraud reports in Connecticut documented by FinCEN has nearly tripled, growing from 20 in 2000 to 56 in 2005. The data for 2006 go through June, with 19 reports filed. Nationwide, the number has grown from 3,515 in 2000 to 25,931 in 2005. Through June 2006, the national number was 17,368.
In response to the increase in fraud, the Washington, D.C.-based Mortgage Bankers Association is lobbying for an extra $6.25 million annually for the FBI to hire more investigators and prosecutors dedicated to cases of fraud against lenders.
“Certainly, if they had more funding, that would be a good thing,” said Pitkin, whose department works cases with the FBI.
One of the most common forms of fraud detected by MARI is application fraud – particularly stated income – meaning borrowers overstated their personal income in order to secure a loan. The study found that 55 percent of overall fraud incidents reported to the database for mortgages originated in 2006 contained application fraud, and the subprime equivalent was even higher at 65 percent.
One lender in particular, trying to discover the scope of the problem, went back and reviewed 100 stated-income loans, Sharick said. Out of those, he noted, the lender found that in 60 percent of those loans, the borrower had substantially overstated his income.
“You really need to know your customer,” Sharick said. “More lenders are recognizing that they need to be doing a diligent job. Verify and re-verify your documents.”
In addition, lenders should verify the availability of the borrower’s funds, and call the borrower’s employer to confirm employment, he said.
Pitkin agreed.
“There’s nothing to say the originator shouldn’t get to know the borrower better,” he said.
Not being thorough can prove costly.
“It’s a situation where the onus is on the lender,” Sharick said. Problem loans tagged as fraudulent can be forced back onto the lender from the secondary market, and the lender will have to buy them back, he added.
“It’s important that [lenders] do as much as they can up front to catch it,” Sharick said. “After that loan enters the pipeline of the process, then it’s too late.”
The full effect of mortgage fraud in 2006 may not be known for a few years.
“It will likely take three to five years to uncover most of the fraud and misrepresentation in the 2006 book of business, and MARI will continue to receive MIDEX reports on 2006 loans,” states the MARI report. “During this period of time, many [adjustable-rate mortgage] loans will be refinanced, potentially preventing discovery of some of these issues.”
