The F Word........FRAUD

Fraud comes in all shapes and sizes, and fraud in the real estate world is no different. From inflating income to obtain loans, to falsifying documents to get rid of a house via short sale, fraud knows no boundaries. At national levels, mortgage fraud risk has declined 2.3 percent over the year.* Interthinx’s nongeographic fraud risk analysis found that investor loans are riskier than owner-occupant loans with three times the risk of employment/income fraud. The report also concluded that as the loan amount increased, so did the risk of occupancy or employment/income fraud. Oregon ranks at number 15 for mortgage fraud risk. Salem, Oregon received the highest fraud risk rating, "very high" as did Atlanta, Memphis, and pretty much all of southern California.

What does mortgage look like at the beginning of a loan? Buyers find themselves falsifying their financial information to obtain a loan when they would be otherwise ineligible. With stated incomes being a fossil of the housing boom, it isn't as easy to falsify income and it is a lot more bold these days. Income fraud is seen in traditional full documentation loans by forging or altering an employer issued W-2, tax returns, or bank statements. WOW! That is bold! There are the rare occurances of the loan broker falsifying the borrower's documents in order to facilitate the closing in order to "earn" their commission. Again, very bold and very stupid. According to CoreLogic, over $10,000,000,000 (yep...that is a ten billion) in loans were made with fraudulent application data in 2010 alone!

Occupancy fraud is another method which remains popular. This is when a buyer states they will be living in the property when in fact it is being purchase as an investment. You might wonder why anyone would do that? Well, interest rates for investment properties are significantly higher and require significantly larger down payments than owner occupied properties. That answer is pretty simple. And you might wonder why it matters? Lenders are well aware that a borrower will take all measures to protect the property he/she lives in. The owner's “attachment” to the property is just as emotional as it is financial. In the case of a non-owner occupied home, the emotional attachment does not exist, or at least is not as strong. Because of this lenders require a higher interest rate to offset the potential they have for loss.

Appraisal fraud is when the home's value is deliberately over or understated. When it is over stated, more money can be obtained by the borrower from the lender for a cash-out refinance, or more funds going to the seller in a purchase transaction, or in a fully blown fraud for profit scheme to the organizers. Inflating the value is easy to understand, but why would anyone deliberately understate the value of a home? On the purchase side again, in order to get a lower price for a foreclosed property. Some foreclosed properties have the appraisals completed prior to being put on the market. I dishonest appraiser may be involved in the preparation but there could also be somebody on the other end who is editing it with graphic editing tools. Devaluing property for the purpose of a loan modification or short sale is a whole second article, so come back in two weeks and we will find out all about it. Fraudsters can be very bold and with the prevalence of mortgage fraud and the limited capacity of the government to watch and detect, they are getting away with it. I always wonder, if these seemingly creative and clever people would use their powers for good instead of fraud, how much better would this country be?