GSEs: Fewer Cases of Mortgage Fraud–with a Catch


LOS ANGELES–Fannie Mae, Freddie Mac and Ginnie Mae reported fewer cases of mortgage fraud amid tighter underwriting requirements and greater regulatory scrutiny. But analysts from the three companies warned that as lenders relax lending requirements, the industry could see a return to a riskier mortgage environment.

Jennifer Horne, vice president of anti-fraud and anti-money laundering with Fannie Mae, Washington, D.C., said one measure of fraud–tip volume to the company’s fraud division–has fallen substantially from 2010 through 2015, falling to just under 4,000 tips in 2015.

“The good news is, we’re in a declining fraud risk environment,” Horne said here at the Mortgage Bankers Association’s Risk Management, Quality Assurance and Fraud Prevention Forum. “The bad news, our most reliable indicators suggest that we are returning to a more risky fraud environment.”

Horne said consumers continue to be the single largest source for fraud tips, but they also represent the largest number of “false positives.”

“Many borrowers perceive that they have been victims of fraud by a lender, but in many cases that does not pan out,” Horne said. “Fraud tips from lenders and servicers tend to show actual fraud at play.”

Horne added that origination fraud schemes continue to represent the most common reported scheme over the past nine years, but in recent years, that number has dropped dramatically and are now on a par with servicing fraud and REO fraud. However, when “false positives” are taken out of the mix, origination fraud makes up nearly half of actual fraud schemes.

Robert Hagberg, director of enterprise fraud risk with Freddie Mac, McLean, Va., also presented a “good news/bad news” scenario. “We’re not talking about 2006-levels of fraud, but we’re starting to see some case-level fraud–a collection of schemes that beg further scrutiny,” he said.

Hagberg said the current credit policy environment, in which lenders seek to expand credit, also invites fraud schemes. “Schemers look for loopholes, for ways of getting around guidance,” he said. “As we go about our business of writing and enforcing credit policy, we have to examine how it’s being used.”

Hagberg also noted that first-time homebuyers have the least amount of experience and are most vulnerable to being misled by fraudsters. “The Millennial generation is the most educated but the least experienced in the mortgage process,” he said. “And you add to the mix a huge immigrant population that is vulnerable to those who would take advantage of them.”

Throw in the number of recovering housing markets in the country, Hagberg said, “and you have an environment that is ripe for an increase in mortgage fraud.”

Freddie Mac has seen increases in investment income representation cases. “It’s become the new ‘stated income’ fraud of the 2000s,” Hagberg said. “It just doesn’t make sense that a borrower who makes $30,000 a year is qualified for a $700,000 mortgage. Documentation is simply not enough–when you put the puzzle pieces together, it simply doesn’t make sense.”

Hagberg said Freddie Mac has also seen an uptick in investment property schemes, the main purpose of which is a purchase transaction masquerading as a refinance. “It’s simply a way to avoid putting down a down payment,” he said.

Thomas Neighbors, assistant special agent in charge with the HUD OIG Joint Civil Fraud Division, noted that Ginnie Mae doesn’t buy loans, just guarantees them (to the tune of $432 billion in fiscal 2015). But he noted that it doesn’t make Ginnie Mae impervious to mortgage fraud.

“Because everything in a Ginnie Mae pool is insured, if a loan goes bad, the insurance covers that loss,” Neighbors said. “When we attack fraud, we’re looking at any number of factors, such as FHA origination fraud and Home Equity Conversion Mortgage fraud.”

Neighbors said Ginnie Mae has noted a strong increase in multifamily property mortgage fraud investigations, totaling 28 percent of all FHA mortgage fraud investigations initiated in fiscal 2015, up from 23 percent in fiscal 2014. Nearly half of those involved embezzlement or equity skimming by property managers.

Neighbors added that “old tricks” are back in style: false employment and earning documents and reports of identity theft. But he also noted some new twists, such as misuse of appraiser credentials and HECMs used in builder bailout schemes, as well as reverse mortgage originations being “churned” as refinancings.

“We are seeing a lot of reverse mortgage refinancings that simply have no tangible benefit to the borrower,” Neighbors said. “A lot of the underwriting we see come from out of state, so they’re unfamiliar with the area in which they are writing. This is going to end up with a lot of civil liability for lenders, because their underwriters have an obligation to know the area in which they do business.”