Think Twice Before Telling a Little Lie to your Lender


Sunday July 31, 2005


By: Ken Harney-The Providence Journal


If you needed to stretch your actual income to qualify for a mortgage to buy the house you love, would you consider telling a little white lie, fibbing to your lender?


What if your loan officer thought up some creative ways for you to get into a house you couldn’t otherwise qualify  to buy., such as cooking up some faked W-2’s, credit scores or submitting false banking and tax documents?


Would you? Whatever your answer, the sobering fact is thousands of people across the country---ordinary house buyers and loan industry personnel---no longer are playing the mortgage game straight.


Think of it as the little-publicized, seamy underside of the billowing national housing boom: Widespread and growing fraud in home loan applications, where sticker-shocked buyers lie about their incomes and assets, and where mortgage brokers create what the FBI calls “air loans” --- Fictitious borrowers, houses, addresses, credit reports, bank statements and income verifications.


It is a multibillion-dollar problem, largely unseen by the vast majority of consumers and loan officers who wouldn’t think of taking part.


But a new national report confirms the mortgage industries fears: Fraud appears to be growing faster now than ever. The FBI received more than double the number of mortgage-related “suspicious activity reports” from 2003 to 2004, and the problem is spreading from the biggest cities out into the smaller metropolitan areas such as Scranton , PA and Tulsa OK. The top cities for mortgage fraud last year according to a new report by the Restin Virginia based Mortgage Asset Research Institute (MARI) were Atlanta, Dallas, Denver Orlando, Charlotte, Memphis, Scranton, Columbus, Houston, Salt Lake City and Louisville. Those cities all have excessively high rates of early defaults on home mortgages closed during 2004--- a key indicator of fraud. Though most cases of fraud involve multiple misrepresentations, the institutes study found that fibs and falsehoods on applications by individual borrowers constitute the most common problems (56 percent of all cases) followed by bogus or incorrect tax and financial documents (33 percent, fake employment verifications (12 percent) and fabricated or intentionally inflated appraisals (10 percent).


The MARI report, based on pooled industry fraud data as well as FBI statistics, did not attempt to propose ways to cut down on fraud, but instead focused on the types of fraud being perpetuated around the country.


Here are some of the patterns found most commonplace.


Problems with “stated income” transactions. Known in the industry as “liar loans” or NINA’s (no income, no asset verification), these programs were originally designed for highly credit worthy professionals and owners of small businesses who prefer not to show all their documentation on income, investments and other financial assets.


Stated income means you simply state your income, estimate your assets---not prove them with documentation—and that’s what’s accepted by the lender for underwriting purposes. Typically stated income loans also carry a slightly higher interest rate or fees to compensate for the perceived higher risk.


But during the housing boom, stated income and NINA mortgages routinely have been extended to applicants with shaky credit profiles and insufficient incomes to qualify for their home purchases. In one case highlighted in the report, a Florida mortgage broker worked hand in hand with the NINA borrower, changing the applicant’s alleged income as he shopped for loans from different lenders. When challenged the broker said: “I thought that with stated income you could claim an income as high as necessary” to obtain the size loan needed.


Property flipping fraud networks.  If you can assemble a team of dishonest appraisers, title agents, realty agents and investors you can fool lenders by flipping properties at hoked-up prices and loan amounts. Federal investigators in Ohio recently broke up a ring of realty and title industry scamsters. They would buy houses, and then fabricate new appraisals to flip them to new buyers using appraisals that effectively doubled the properties values within a few weeks. Lenders who extended mortgages based on the excessive valuations were defrauded.


Employment or income disinformation. If a buyer’s income doesn’t make the grade, sometimes unscrupulous loan officers will help them fake it. In a small Michigan town fraud investigators traced seven mortgages to a single office where the broker showed the borrowers employed at a company owned by the broker. Five of the loans contained CPA verification forms that were forged. The CPA’s listed address was the same as that of the broker-owned employer.


Working with MARI and the FBI’s crimes investigation teams, the home loan industry is mounting a major effort to spot the telltale hints of fraud before mortgages are closed or go into default.


For it’s part, the FBI is putting out the word: If you attempt to defraud or lie to your lender and you get caught, you are likely not only to pay back any money you received illegally, but spend time in the slammer to think about it.


By: Ken Harney-The Providence Journal

Ken Haney’s email address is Ken


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