Something wasn’t adding up at Morgan Management. The New York-based real estate developer became the subject of an FBI probe this spring after signs of mortgage fraud began to turn up. The first red flags began to turn up in December 2014, when Deutsche Bank AG wouldn’t issue a loan to a Morgan apartment property in Pennsylvania because the company failed to provide certificates of occupation for the entire building. The company then turned to Berkadia Commercial Mortgage and was able to obtain a $45.79 million loan securitized by Freddie Mac. But it turned out that the loan had been obtained under false premises, when it was discovered the Morgan family had inflated the property’s value by making it look like empty apartments were occupied. The Morgans went so far as to fool inspectors by turning on radios in empty apartments, leaving shoes on mats and hiring a woman to pretend she lived in an apartment.
Investigation of the Morgans’ fraudulent practices has become part of a broader federal investigation into widespread mortgage fraud at an estimated $1.5 billion, a scale bigger than anything since the subprime mortgage crisis of 2007 to 2010. With mortgage fraud so rampant, it’s vital for both real estate and financial professionals to know how to spot warning signs. Here are some red flags to look for in order to protect yourself against the most common types of mortgage fraud.
Instant Red Flags for Phony Loan Applications
Some of the most common fraud tactics are relatively easy to spot if you know what to look for. Approximately three-quarters of mortgage loan frauds involve loan application fraud and misrepresentation, which is marked by some typical discrepancies. These include:
- The address of the applicant’s employer is listed as a P.O. Box
- Different mailing addresses listed on W-2s and bank statements
- The borrower and the employer have the same phone number
- The same name is signed with different signatures in different places
- The income given is unrealistically high for the type of employment
- Assets are too high for income level
- Child support is listed on pay stubs, but not on loan application
- Homeowner’s insurance policy is a rental policy
- Verifications are completed unreasonably fast, the same day or on a weekend
If you spot any of these tip-offs, flag the application for further investigation.
Credit Documentation Fraud Discrepancies
Another common set of fraud tactics is credit documentation fraud, which now accounts for approximately 2 in 10 mortgage fraud cases. Credit documentation fraud signs include:
- The borrower’s length of established credit isn't consistent with their age — for instance a youth in their 20s shouldn’t have a repayment on a 15-year mortgage loan on their credit history.
- The borrower’s paperwork includes significant differences between their original and new credit reports, such as different personal data, residence histories or employment histories
- Their Social Security Number isn't consistent throughout their application
Any of these indicators should tip you off that something may be amiss with the applicant’s credit documentation.
Appraisal and Property Fraud Scam Signals
The next most common type of fraud is appraisal and property fraud, which accounts for over one in ten mortgage fraud cases. Common signs of this type of fraud tactic include:
- The property owner listed differs from the seller shown on the sales contract
- The occupancy listed for the appraisal is inconsistent with that shown on the application
- Photos of the property or house numbers shown in photos don’t fit the description given in the appraisal
- Inconsistencies appear in the type or location of comparables
- Multiple non-MLS sales are listed for comparables
While you can spot many discrepancies like these manually, the most efficient and accurate way to smoke out appraisal and property fraud scams is to use automated tools and outsourced services. DataTree provides a home equity suite of services that includes field and desktop appraisal reviews. DataTree’s Watchlist Review service can also instantly alert you to suspicious persons and companies who have already been flagged by industry watchdogs.
Loan Package Fraud
Signs of fraud can show up anywhere in a loan package. To make sure you cover all your bases, look for inconsistencies in:
- Income information
- Cancelled checks
- HUD-1 settlement statements
- Asset listings
- Tax returns
- Sales contracts
Discrepancies in any of these areas can be a warning sign that something is wrong with the loan package as a whole.
Mortgage fraud is an epidemic, but you can protect yourself by building some preventive measures into your loan verification system. Looking for telltale signs of loan application fraud and misrepresentation, credit documentation fraud and appraisal and property fraud will help you flag the vast majority of fraudulent applications. Reviewing loan packages systematically for discrepancies will help you spot other warning signs. Signing up for automated and outsourced verification services will help you avoid manual errors and ensure accurate reviews. For a comprehensive suite of mortgage fraud protection services, get in touch with DataTree to see our complete list of fraud prevention tools and speak to a trained representative about which services are right for your needs.