Fraud at Core of Repurchases
MBA secondary conference panel session
May 23, 2007
By MICHAEL KLING
NEW YORK -- Mortgage fraud, which cost lenders more than $4 billion last year, could be at
the heart of the recent wave of repurchases, according to panelists at a mortgage banking
conference.
Fraud's contribution to repurchases is not fully documented, but it is significant, said Ann
Fulmer, vice president, industry relations, for Interthinx. Sometimes fraud is so entrenched at
some lenders' shops -- it's not recognized as fraud.
And often its impact is not felt for years.
Loans with fraud are eight times more likely to default in the first year and 20 times more
likely to enter foreclosure, according to Fulmer, who was speaking at the Mortgage Bankers
Association's Secondary Marketing Conference. Lenders typically lose 40 to 60 percent of
the loan amount. "There is an unlimited supply of schemers and schemes."
Fraud is seldom the stated reason for repurchases, said Rachel Dollar, a partner at the law
firm of Lanahan & Reilley LLP. Early payment defaults are the main stated reason.
Yet 45 percent of EPDs historically involve fraud, Dollar said. Recent estimates place that
figure closer to 75 percent. EDPs are traditionally due to unemployment, job loss or divorce.
But she noted unemployment is low, death has not skyrocketed, and divorce rates are
actually down.
Fraud for profit is not behind the problem, Dollar added. Knowing that EPDs will be audited,
criminals perpetrating fraud-for-profit pay the mortgage for the first year. Also, appraisal
fraud, more often associated with fraud for profit, is down.
Instead, Dollar blamed the increase on soft fraud, or fraud for housing, which was in turn
promoted by a real estate bubble, for causing the increase in EPDs and repurchases.
In addition, investors became more aggressive in seeking repurchases, she explained.
Although definitions of EPDs vary depending on contracts between investors and lenders,
some investors can demand a repurchase if a loan has a 30-day late payment in the first
year, Dollar said after the session.
Lenders are increasingly fighting fraud with front-end tools, automated fraud detection tools,
and automated valuation models, she said. They're also increasing recovery efforts by
seeking criminal litigation and going to authorities. Straw buyers, blaming lenders for their
ruined credit, are also filing more lawsuits.
MBA is following the example of videos from the motion picture industry. The group has
created a notice that warns in large letters: "Mortgage Fraud Is Investigated By The FBI" and
includes an FBI emblem, much like videos and DVDs begin with an FBI warning. "We've had
a tremendous response to this notice," said Corey Carlisle, senior director, government
affairs, for the MBA. In fact, some lenders are adding it to appraisal and title forms.
"We continue to hear that mortgage fraud is growing," he said. Lenders lost $4.2 billion from
fraud on 60,000 loans last year -- but that's just reported loses. Although fraud is pervasive
and growing, there is little agreement among policy makers on what to do.
Legislators, both state and federal, frequently mistakenly mix mortgage fraud with predatory
lending. For instance, Senator Barack Obama (D-Ill.) has reintroduced the "Stop Mortgage
Fraud Act." Although it has some good points, Carlisle said, it "inappropriately conflates
mortgage fraud with predatory lending. It is narrowly defined to go after you, the mortgage
lender."
Fortunately, the MBA doesn't expect the bill to go anywhere.
With mortgage fraud in the headlines, states feel compelled to act. Three have enacted
mortgage fraud bills and over 10 are considering the issue, with many confusing the problem
with predatory lending. Strong laws already exist; the problem is enforcement, Carlisle said,
noting that the MBA is advocating funding for 30 new FBI agents and two Department of
Justice attorneys.