fraud: noun.
Deceit, trickery; specifically: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right.
Webster’s offers several definitions of fraud, but they all add up to the same thing: deception. Mortgage fraud, therefore, may be defined as a deceptive transaction involving a mortgage or collateral. Mortgage fraud is a crime of local opportunity that can trigger national lending losses in the billions of dollars and has a stubborn, weed-like way of thriving in almost any economy or market condition.
One reason for mortgage fraud’s tenacity is that it isn’t terribly high-tech. It can be perpetrated by ordinary individuals with a minimal supply of cunning. Mortgage fraud is a quiet crime that rarely attracts police tape or flashing lights and, in our experience, is more likely to look like a simple clerical error on a settlement statement, bank statement or pay stub. Yet, collectively, these “errors” can cost homebuyers, communities, lenders, investors and taxpayers billions of dollars a year.
To help minimize our exposure to mortgage fraud risk, in 1989, Freddie Mac created the secondary market’s first fraud investigations unit to identify the latest scams and work with federal, state and local law enforcement to investigate and pursue mortgage fraudsters. Our fraud unit’s work has led to hundreds of indictments and convictions, tens of millions of dollars in civil judgments and restitution orders, and the recovery of a significant percentage of our fraud losses.
Today, in the wake of the housing crisis, we are seeing new fraud schemes emerge and old ones repackaged for the modern market. We are aggressively tracking and investigating both.
On the loan origination front, fraudsters are working to evade the stringent controls and underwriting guidelines adopted since 2009. We continue to see mortgage applications with inflated incomes, undisclosed debts, and false statements of employment, asset and property. On the other hand we’re seeing a dip in the number of cases involving well organized schemes, such as builder/condominium bailouts and investment property clubs.
In today’s marketplace, the most active types of mortgage fraud seem to occur in the servicing of a mortgage. Loan modification, short sale and real-estate owned (REO) schemes have fully emerged and comprise the majority of the investigations Freddie Mac performs. Our challenge is to stay one step ahead of the fraudsters.
Fraudsters prey on desperate, financially stressed borrowers unable to make their mortgage by setting up phony foreclosure rescue companies that charge big fees for little if any real help. Whatever the specifics, foreclosure rescue frauds invariably leave the borrower in worse shape.
‘Do The Right Thing’
Fortunately, we have allies in this fight. There are many conscientious real estate and mortgage professionals who want to do the right thing. We often receive calls from industry professionals who know they’ve seen something inappropriate and won’t look the other way. They understand that fraud turns a shortsighted profit at the cost of the public’s long-term confidence in homeownership and the housing industry.
What can the mortgage and real estate industries do to fight mortgage fraud and protect their bottom line? In essence, fraud prevention is all about getting back to basics:
Know with whom you are doing business. Check out your counterparties to determine if they have the appropriate licenses and impeccable references needed to earn your business.
Channel your inner sixth sense. If a detail in a transaction doesn’t seem right,act on it and investigate it further.
Get educated. Raise your awareness of the types of fraud and their red flags in your industry so that you can easily spot them.
Report it. Once you may have identified a potential red flag, find out how and to whom to report it.
Freddie Mac is committed to fighting fraud by training real estate professionals through special seminars and Freddie Mac’s website (www.freddiemac.com/singlefamily/preventfraud), where we post the latest fraud prevention information and best practices.
If you see fraud being committed – or aren’t sure but want to report a suspicious real estate or mortgage transaction – call the Freddie Mac Fraud Hotline at 1-800-4FRAUD-8 (1-800-437-2838) and contact your local FBI office, attorney general and real estate board.
Kathleen Cooke is a fraud investigation manager for Freddie Mac.
