How to Spot Mortgage Fraud
It seems like Florida is always nabbing one of the top spots on somebody’s “best of” list. Now, thanks to a booming housing market and the popularity of nontraditional home loans, suspected mortgage fraud is up 35 percent nationwide—and Florida ranks in the top 5 places in which that type of fraud can occur.
“When you look at the sheer volume of real estate transactions here in Florida, it’s inevitable that the state will have a higher delinquency, fraud and foreclosure rate,” says Edward M. Wentzel, senior vice president of SunTrust Mortgage in Orlando. Here are some recent scams and tips on what to look for in your real estate transactions.
1. Hyped Appraisals
One red flag, Wentzel says, is when a buyer is willing to pay more than the seller’s asking price. “I heard of one case where the sellers sold the house and the buyers actually went and got a mortgage that was substantially higher than the sales amount,” he says. “Then, the bank was left with a mortgage that was substantially higher than the amount [the house] was worth. They must’ve had an appraiser working with them because it takes a couple of people to pull it off.”
In November, worldwide financial services corporation Lehman Bros. Holdings filed suit against a group of investors, title companies, a mortgage company and an appraisal company involved in possible mortgage fraud at a New Port Richey condominium complex. According to the lawsuit (filed in Tampa), the defendants used inflated appraisals in a scheme to potentially defraud Lehman Bros. out of millions of dollars. Each of the properties (13 in all) were appraised at $733,000 when, in actuality, they were worth barely one-third that amount.
During the real estate boom of the past five years, it was easier for lenders to fail to spot loans that were worth more than the actual properties’ values. Now, as the market is cooling down, mortgage experts say lenders are expecting to uncover more cases of mortgage fraud.
In many cases, lenders don’t find out until buyers start missing their payments. As the lender prepares to foreclose, the inflated appraisal is discovered and the lender is out thousands of dollars or more when the home is sold. “In most cases, it’s down the road six months [or more] before people realize they had a faulty appraisal,” says Wentzel. “And [these criminals] usually need more than one person to carry it out. Somebody was in on the scheme.”
2. Phony Fees
Mortgage fraud needn’t involve big bucks to constitute a crime. Wentzel explains that, in many cases, mortgage fraud goes unnoticed because it consists of simply padding the paperwork with phony fees. “Someone can put a bogus fee on the closing statement and you might not find it until later when you’ve started auditing and you see that [someone is] getting $50 here or there from the closing agent,” he says.
It might be a good idea for sales associates to have the seller/buyer review the paperwork with an attorney prior to closing.
3. Altered Paperwork
Wentzel recommends comparing all of the documents prepared in advance with the final versions that will be signed at the closing to make sure everything is above-board. “Keep an eye out and [scrutinize] the HUD statement that’s prepared before closing, for example, and compare it to the HUD at closing to make sure there aren’t any strange third-party fees that popped up at the last minute,” he says.
4. Know Your Vendors
Wentzel advises sales associates to work with mortgage professionals, appraisers and title companies that they know and trust—or get referrals from reputable people in the community. Checking out professionals’ licenses with the state, county or city regulatory agencies is a must, he says, because their license could’ve been suspended for fraudulent activity in another area. Also, if an individual’s name is listed (instead of a company) as someone who gets paid for services rendered that could possibly indicate a scam, he says. “I’ve heard of that happening,” he says, adding that corporations—not individuals—should be paid for the appraisal, title work and so forth.
Where to Report Suspicious Lending
Visit the Mortgage Bankers Association’s (MBA) Web site dedicated to stopping and reporting mortgage fraud: www.stopmortgagefraud.com.
INFO THAT HITS US WHERE WE LIVE... Well, we can all finally enjoy some solid signs of recovery in the housing market. Tuesday we got the news Existing Home Sales were UP 3.4% in April to a 4.62 million unit annual rate. Sales are now UP 10.0% over a year ago. The median price is UP 10.1% from a year ago and the average price is UP 7.4% for the year.
This great news was followed on Wednesday with new single-family homes sales UP 3.3% in April to a 343,000 unit annual rate and UP 9.9% over a year ago. The months' supply of new homes dropped to 5.1, although inventories rose a bit. The median price is now UP 4.9% versus a year ago and the average price is UP 5.1% for the year. No one expects a huge increase in sales right away, but as one economist put it, "The housing recovery is definitely underway."
BUSINESS TIP OF THE WEEK... When someone asks what you do, be ready with an exact 15-second reply. This "elevator pitch" should state the pain you solve and whom you solve it for.
>> Review of Last WeekWORRIED BUT WINNING... Worries about Europe obsessed Wall Street investors, yet there was enough positive sentiment to give stocks their first winning week in a month by the time everyone left for the long weekend. Fears that Greece would abandon the Euro were joined by news that the U.K. slipped back into recession where Germany may soon find itself after logging one quarter of negative growth. The week concluded with Spain about to do its biggest bank rescue in history. Phew!
The good vibes pivoted around the unexpectedly upbeat home sales for April and the revised University of Michigan Consumer Sentiment Survey. This surprised to the upside, hitting its highest reading in four years. Still, all was not rosy, as April Durable Goods Orders were up less than expected and when volatile transportation items are taken out, Durable Goods were down for the second month in a row.
For the week, the Dow ended UP 0.7%, at 12455; the S&P 500 closed UP 1.7%, to 1318; and the Nasdaq ended UP 2.1%, to 2838.
In spite of investors' eurozone worries, there was enough optimism about stocks to keep bond prices pretty much flat for the week. The FNMA 3.5% bond we watch finished the week down just .05, at $104.11. National average mortgage rates were little changed in Freddie Mac's weekly survey, holding near record low levels. Their chief economist noted this was "helping to drive home buyer affordability."
DID YOU KNOW?... GDP (Gross Domestic Product) is the total market value of all goods and services produced, equal to all consumer, investment and government spending, plus exports, minus the value of imports.
>> This Week’s ForecastAPRIL PENDING HOME SALES AND JOBS TO SUPPORT THEM... Wednesday we'll see if the good news in housing will continue. Pending Home Sales for April will give us an idea of Existing Home Sales in the June time frame and they're forecast up a bit, though not quite as much as in March.
We'll then see if this beginning of a housing comeback gets help from the May Employment Report. With Q2 GDP expected to show economic growth slipping under 2%, only 155,000 new payrolls are forecast for the month. Core PCE Prices, the Fed's key inflation reading, should stay within the central bank's guidelines.
Monday, in observance of Memorial Day, all U.S. financial markets are closed.
>> The Week’s Economic Indicator CalendarWeaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.
Economic Calendar for the Week of May 28 – Jun 1
>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months... The Fed is committed to keeping rates super low well into next year and economists believe they'll succeed.Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.
Current Fed Funds Rate: 0%–0.25%
Probability of change from current policy: