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Special Reports
Mortgage Fraud
Economist: 'Builder Bailout' Fraud on the Rise
By Brad Finkelstein
NEW YORK--With the decline in the housing market, "builder bailout"
fraud schemes are on the rise, according to the chief economist of mortgage risk management company First American
CoreLogic, Sacramento, Calif.
A builder bailout occurs, explained Mark Fleming, when a builder has a lot of
inventory and has ended up in a situation where it needs cash for some pressing purpose, such as to repay its construction
lines of credit.
In these schemes, in which Mr. Fleming said there are confirmed multiple loan
plots involving multiple lenders, the builder works with a mortgage broker. Straw buyers are used to act as "out-of-state"
property investors. The loans are usually stated income mortgages.
Affinity fraud is related to the builder bailout scheme. This is a "community
of people" known to the perpetrator of the scheme who are willing to help pull it off, he said.
Sometimes a straw buyer is a dupe and doesn't realize he or she is being used
by the perpetrator, who is leveraging a relationship with the person to take advantage of him or her.
An issue that is becoming more prevalent is piggybacking credit. This is where
someone gets placed on another party's credit card in order to boost the perpetrator's own credit score.
Mr. Fleming noted that this artificially inflated score increases the risk for
the lender.
Fair Isaac, which is one of the creators of credit scoring models, will fix its
model later this year, he said.
Cary Burch, president and chief executive of Poway, Calif.-based Lender Support
Systems Inc., uses his company's position as a provider of compliance and loan accounting software as a gauge of
the impact that fraud has on its customers. He said the firm gets a good understanding of the marketplace and the
various points that fraud can enter the market.
And it is not just in one place. Fraud cuts across the entire spectrum from the
consumer to the loan officer/mortgage broker to the lender. The impact goes all the way up to the secondary market
investors, who are getting burned.
It is very important, Mr. Burch said, for the industry to educate and to provide
accurate information, not to withhold or overstate anything.
For example, in a stated income loan, the question is will the borrowers state
the "accurate income" or will they tell the originator an amount which is enough income to qualify?
Law enforcement entities have become more involved in mortgage fraud issues, but
he said these entities do not have enough staff to combat all the fraud out there.
There is a desire to eliminate all mortgage fraud, Mr. Burch said. But all fraud
cannot be eliminated so originators need to concentrate on reducing the risk of fraud.
This effort needs to start at the consumer level. In many cases the consumer knows
there is a misrepresentation being made.
Incentives need to be made, not for closing loans, but for quality loans, he said,
adding that if the loan goes bad, no one goes back to the mortgage broker.
But lenders are not innocent in this process either. "Give someone an opportunity
to fail you and they will," said Mr. Burch.
A lot of the predatory lending occurring has an element of fraud. This is because
the originator is dealing with a borrower unable to understand the disclosures, how the loan adjusts and more.
The current tightening of mortgage underwriting has had an impact. There needs
to be a healthy balance to create the right programs. The tightening has led to a loss of creditworthy borrowers,
Mr. Burch said.
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