Income, employment misleading becoming harder for lenders to see
Prices are up, interest rates are rising, and it’s tough for a lot of people to qualify to buy a home. So what do some of them do? A growing number of them fake it.
According to mortgage-fraud researchers, income misrepresentations on home-loan applications were up 22.1 percent in the second quarter of this year compared with the same period in 2017. Ominously, most of it is not traceable to criminals trying to bilk lenders out of tens or hundreds of thousands of dollars through traditional loan swindles. Rather it’s increasingly what researchers call “bona fide” borrowers who don’t have the incomes to qualify but are determined to get a home mortgage, even if they have to mislead the lender.
How’s this happening? The Internet makes it easy. Researchers say many applicants can go online and find sites that will help them create customized pay and employment records, sometimes even confirmable by a phone call by the loan officer to an “employer” that doesn’t exist. Or they borrow thousands of dollars for their down payment but swear to the lender that it’s an interest-free present from a cousin or a brother, documented with a genuine-looking gift letter using a form obtainable online.
It’s all part of one of the least-reported issues in the real estate market of 2018: Home-purchase mortgage frauds are on the rise and are posing cat-and-mouse challenges to major players, including banks and big investors like Fannie Mae.
Here’s a quick overview:
Overall fraud in mortgage applications jumped by 12.4 percent from a year ago, according to realty analytics firm CoreLogic, which has access to a massive national database of loan applications and issues periodic reports on the subject. Falsifying income is the fastest-growing form of application fraud, but other types of misrepresentations also are on the rise, including occupancy fraud, where applicants tell lenders they plan to live in the house they are buying but instead they rent it out, sharply raising the risk of default and loss for the unsuspecting lender.
Fannie Mae recently warned lenders via several alerts about a loan-fraud technique in which applicants claim to work for specific companies and provide income and employment information that appears to be bulletproof but turns out to be totally bogus. Applicants frequently claim to have been students immediately prior to their current employment. This makes it difficult or impossible for lenders to pull tax transcripts from the IRS for the year spent as a “student.” Applicants also claim salaries that appear to be high for their age or experience. Fannie Mae has seen the scam mainly in California, but CoreLogic says it is spreading across the country.
“The typical scenario is a new job with a significant pay increase or a high-paying first job out of college,” said CoreLogic in its fraud report. “Some fake employer setups are well-organized and provide pay stubs, phone verifications” and even fake diplomas. “Some of these services are openly advertised on the Internet” and feature multiple levels of services and fees.
In an interview, Bridget Berg, CoreLogic’s senior director of fraud solutions, told me the increase in fraud by home-purchase applicants is partially a “function of what’s going on in the real-estate market” — large numbers of would-be buyers squeezed out by rising prices, frustrated by not being quite able to afford what they want, and motivated to “embellish” or simply make stuff up. Berg noted, however, that although “fraud risk” as measured by her company’s research is on the rise and troubling, it still represents a small fraction of total loans being originated — just under 1 percent.
George Souto, a loan officer with William Raveis Mortgage in Middletown, Conn., said that although he doesn’t see many applications containing outright fraud, he does encounter situations where applicants make overly generous estimates of their incomes. These applicants don’t do this with the purpose of defrauding the lender, but because the income they report to the IRS is lower than their actual earnings before tax deductions for expenses.
But other lenders say too many borrowers don’t see scrupulous truth on mortgage applications as all that important. Joseph Metzler of Mortgages Unlimited in St. Paul, Minn., said they “feel it’s OK to pad information or leave it out, to improve their chances of getting approved.”
But it’s not. It’s bank fraud and comes with serious potential penalties, including fines and imprisonment.