Fraud Schemes Adapt to Evolving Market Environment

While the government has recently ""enhanced"":http://dsnews.comarticles/federal-agencies-fight-modification-scams-2011-12-02 its efforts to fight mortgage modification scams, mortgage fraud remains a prevalent issue throughout the industry.

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According to Jenny Brawley, associate director of mortgage fraud investigations for Freddie Mac, three elements drive mortgage fraud schemes: pressure, opportunity, and rationalization.

The recent lending environment, which includes enhanced regulation, tighter underwriting standards, and full-documentation loan requirements, will not necessarily decrease mortgage fraud, Brawley said at a panel on mortgage fraud at the Five Star MPact Mortgage Conference and Expo.

In fact, the FBI characterizes mortgage fraud schemes as ""particularly resilient"" and credits them with being able to ""readily adapt to economic changes and modifications in lending practices.""

[COLUMN_BREAK] According to Brawley, one common fraud scheme in the current environment of high lending standards involves recruiting a straw buyer with a high credit score to apply for mortgage loans, often in return for $10,000 to $20,000.

The scam artist enters a separate agreement with the straw borrower agreeing to pay the mortgage and pay him or her a specified amount. The scheme amounts to ""buying"" good credit. However, the fraudster then defaults on the mortgage, damaging the straw borrower's credit and leaving him or her with the liability.

Stephen M. Hladik, partner in Pearlstine, Onorato & Hladik, LLP, based in Pennsylvania, has seen instances in which a straw borrower later attempted to sue the lender under the Truth in Lending Act. However, having signed the promissory note, the straw borrower is not offered sympathy from the law but rather treated as a fraudster as well.

Brawley points out that they key to preventing this type of fraud is for the lender to get to know the borrower. She believes the lender can often detect a borrower's intent with straw borrowing schemes.

In addition to straw buying schemes, Brawley points out that steep qualifications such as the proposed qualified residential mortgage under Dodd-Frank, which would require a minimum down payment of 20 percent, will put pressure on the industry that will likely lead to misrepresentations of loans through inflated sales prices.