A High-Tech Battle with Fraud

Article excerpt

Michael Stuckey is a walking, talking commercial for the mortgage fraud-detection business. * No, he doesn't work for any of the numerous fraud-detection software companies. Stuckey holds the title of director of real estate underwriting at American General Financial Services Inc., the Evansville, Indiana-based consumer finance subsidiary of insurance giant American International Group, New York. As such, he is a customer of fraud-detection companies and, about four years ago, American General Finance began using for the first time automated fraud-detection software. Since then, the incidence of mortgage fraud in his company's portfolio "has been so small it's negligible," he says. * Stuckey adds, with emphasis, "We've had no fraud loss since. None." * The statement is even more extraordinary, considering the trend line of mortgage fraud. Ponder these headline-breaking stories:

* In 2005, a white paper issued by the Federal Financial Institutions Examination Council (FFIEC), Washington, D.C., reported that as many as 10 percent of all mortgage loan applications annually in the U.S. residential real estate market involved "material misrepresentation.

* In October 2005, USA Today reported, "As the U.S. housing market hits record highs, mortgage fraud appears to be rising from California to Florida." The story quotes the author of a report on mortgage fraud, who noted that "fraud is costing the industry tens of millions of dollars."

* Mortgage Fraud Blog (www.mortgagefraudblog.com) quotes the Federal Bureau of Investigation (FBI) as saying, "Pending mortgage fraud cases increased 91.5 percent between 2003 and March 31, 2006."

People in the mortgage business break down fraud into two overall categories: fraud for property and fraud for profit.

Fraud for property generally involves that slight exaggeration when a person might enhance, for example, his or her annual income to win loan approval. "You have a person, or a couple, that is trying desperately to get into a home, and they might not tell the whole truth as to how long they have worked at present jobs, how much they make, etc.," says Jay Meadows, president and chief executive officer of Rapid Reporting Verification Co., Fort Worth, Texas.

"At least 30 percent of the Form 10035 [Uniform Residential Loan Applications] that are filled out today involve some type of misrepresentation, and typically they are income-based fibs," he says.

This type of application generally results in a loan that remains in good standing and causes no servicing problems for the lender, Meadows adds.

Then there is the other kind of fraud-fraud for profit.

Think of fraud for profit as a well-organized scheme in which an illegal financial transaction is created to swindle cash out of a mortgage company.

Fraud for profit is overtaking fraud for property, especially in regard to the losses produced, notes Lisa Binkley, who in May joined Rapid Reporting as its executive vice president of risk strategy and policy development.

"The losses on a fraud-for-profit situation [are] significantly higher because the primary motive is financial gain either through the use of created identities or created properties," she says. "Mortgage lenders typically deal with losses up to the 70 percent range when there is a fraudulent transaction in a fraud for-profit misrepresentation."

Some recent headlines from the Mortgage Fraud Blog include a story about a Chicago mortgage broker who admitted his role in a scheme to defraud lenders of more than $900,000 through more than a dozen mortgage transactions in Illinois from 1998 through 2002; a Morrisville, Pennsylvania, woman sentenced to two years in jail and to paying restitution of $63,000 for providing false checks and bank documents at a loan closing; and two closing agents indicted in the Southern District of Ohio in connection with a mortgage fraud scheme.

Binkley, who came to Rapid Reporting from Homecomings Financial, a GMAC company hased in Minneapolis, where she managed pre-funding and post-closing quality control, says she worked on a $23 million mortgage fraud case in Houston and she recalls multimillion-dollar fraud cases in Indianapolis and Brooklyn, New York. …