Meeting Highlights: Short-Sale and FHA Fraud Are Top Focuses

In order to prevent fraudsters from flipping properties quickly at high appreciation, lenders will be focused in the coming months and year on putting a stop to "flipping" by putting processes in place to eliminate short-sale fraud.

Going forward, there may be some sort of "seasoning requirement" implemented, such as a policy where the property can't be flipped within 90 days, according to Frank McKenna, vice president of fraud strategy for analytics provider CoreLogic.

"Lenders will be focused on trying to get the FHA to increase their seasoning to 90 days as well, because the FHA lifted the 90-day retail requirement of the property where you couldn't resell a property within 90 days," McKenna said in a phone interview following the CoreLogic Mortgage Fraud Consortium Members' Meeting in Chicago.

"They will be focused on closing fraud—fraud that occurs after the transaction funds by closing agents. They've done a lot of good work on the origination side, but they don't have any visibility into what happens after the loan closes. There's a lot of embezzlement by closing agent fraud."

While fraud risk had trended down dramatically through 2008 and even into early 2009, in mid-2009 and 2010 it started to creep back up again, McKenna told National Mortgage News.

The increase is a result of high-risk government lending programs like FHA and the Home Affordable Refinance Program.

"A lot of those programs are bringing risk back into the market," he said.

"Lenders said their biggest concern this year is 'flipping' again. They are concerned with all of the distressed properties out there like short sales and foreclosed properties. There are a lot of investors that are taking advantage and flipping the properties the same day for sometimes 50% to 100% more than the property sold for. They are seeing that as a very big problem right now."

Government experts from the Federal Bureau of Investigation, Financial Crimes Enforcement Network, Internal Revenue Service and Financial Fraud Enforcement Task Force were on hand to discuss policies and trends.

Lenders indicated that in 2010 FHA fraud is "the area that they are focusing in on," McKenna said.

While there is strong underwriting, it doesn't stop the fraud from happening. FHA is "still very attractive" to the fraudsters and fraud rings because they like to recruit straw borrowers.

"FHA guidelines, in terms of who qualifies and how much they have to put down, are a lot more lenient than the typical type of conforming programs. They can recruit young college graduates who don't have a lot of credit history or people who don't have great credit history and they only have to put 3% down."

In order to help lenders prevent fraud, CoreLogic has launched a short sale monitoring solution, which it will most likely extend to foreclosure monitoring in the future. Through the technology platform, lenders can share their information on what properties they are short-selling.

"If there are any subsequent loans that are made on those properties, we will notify the lender so they can stop them," McKenna said.

"It's less about the technology and more about the sharing of data. The big piece of it is that lenders agree to share their information with each other to stop fraud. Most of the big lenders are involved. Just last week, five of them sent in their data to pilot the solution. We are getting a lot of traction in the sharing concept."

The rate of fraud or suspicious sales is about five to 10 times higher on REO properties than for short sales.

Foreclosure moratoriums could impact fraud by "not putting these types of properties on the market" for a period of time, McKenna told NMN.

"Everything gets backlogged. There may be more of a flood of foreclosures in a flip. This might create more opportunity for fraudsters. Fraud rings love to operate in an environment of a lot of volume because there's more of an opportunity to flip things very quickly."

CoreLogic started data sharing a couple of years ago for shot-gunning fraud through a multiclosing alert program. Lenders shared their data to be notified in home equity lines of credit when there were other loans being made on the same property concurrently with their own.

"To date, known dollars saved is something over $300 million in loans that were stopped because of the fraud ring activity. It basically eliminated the problem."

Among other highlights from the meeting, HVCC requirements are something lenders want to know if the fraud rate is lower when the appraiser is independent from the broker. There are certain loan programs that are not requiring that independence, McKenna said, and brokers are allowed to pick appraisers.

"They want to know the difference in the fraud rate. They believe that independence creates a much lower rate of fraud. They want us to investigate that for them," McKenna added.

"They are noticing a lot more appraisal fraud in today's market because of the distressed real estate market"

By Jennifer Harmon