Industry Focus: Mortgage Fraud Prosecution and Prevention

Mortgage fraud is a dangerous business and an integral part of what has put the mortgage industry into such turmoil this year. One might ask how it could happen in an industry that has so many different "checks and balances." To explain how this is possible, we must first look at the process of your paperwork in buying a home. In order to buy a home, you must go through several different steps and they are all reviewed by different people and/or even companies. There is: 1.) the appraisal that must be done by a state licensed appraiser, 2.) the survey, (which is basically a blue line drawing of your property but still must match up to previous records and the appraisal), 3.) title companies who pull and verify tax roll records and title searches on your property, 4.) insurance agencies to insure your property (you must have insurance before closing and now it is customary for an insurance agent to view the property), and 5.) the mortgage company. Throughout the process of your file being at the mortgage company, it more than likely goes through at least three departments and is viewed by three or more persons. It begins in the processing department that verifies everything you have put on your loan application, and then it moves to the underwriting department to be reviewed by a licensed underwriter. Once approved, then it moves to the closing department where it is also looked at by the quality assurance group. Then your paperwork travels to the title company for you to close on your property. A person may try to lie on their application, but by the time it goes through all these processes, it is usually discovered and the loan turned down. However, there are people that have been able to find a way to work the system for their own benefit. In order for someone to commit loan fraud on a larger scale such as this, all the aforementioned players must be in collaboration with each other. A person buys a property for $100,000, and then they have their appraiser come back out and re-appraise the property for $300,000. An unsuspecting buyer can come in and be duped by these people and then end up having a $300,000 mortgage on a property that is only worth $100,000. This is what happened in a scandal a little over a year ago. If it was just one particular house, then it wouldn?t affect the market. But when a number of people are doing this and they do it many, many times before getting caught or getting out of the business, it can be detrimental to the housing industry. Property values cannot go up to match the sale of the home in their area, so the mortgage company and the person with the new mortgage are both taking a huge loss. The neighborhood prices, although not to this extent, still rise and there begins the property value inflation that we have seen in the market today.