An experienced Loan Management Team Can Significantly Reduce Your Exposure
Mortgage fraud in Los Angeles, San Francisco, and Orange County has increased by over 9% between 2015 – 2016, according to analytics firm Core Logic, more than double the national average of 3.9%.
Fraud is clearly on the rise and there are two cost-free ways to protect yourself from losing money and to weed out the good deals from the bad ones. But first, it’s important to understand why loan fraud is very likely to keep rising for the foreseeable future.
You’ve probably heard the saying, ‘Everybody is eccentric in their own way’, and this is doubly true of lending in the real estate business. The mortgage industry is filled with unusual characters and properties – that’s just the nature of the business – and most of the time everything turns out alright.
But there are also times when crooks are involved, and it is getting worse. That’s because it’s getting harder to separate the wheat from the chaff.
Bridget Berg, the Senior Director of Fraud Solutions Strategy, says that as credit requirements loosen and LTVs on loans continue to rise, mortgage application fraud is going to continue to increase.
Loan funding is getting more and more competitive. Private lenders are sitting on unheard of amounts of cash, chasing deals they would have passed on before, and accepting lower interest rates and higher LTVs to get the business, even though it means more risk, less return.
Drew Louis, the owner of Del Toro Loan Servicing, recently spoke at a Note event a few weeks ago, and guesses that over 50% of the 450 in attendance were brand new to the industry. He believes that with so many inexperienced people entering the market, so much cash chasing too few deals, mixed in with the increase of sophisticated loan scammers, there is a disaster waiting to happen.
We can’t say exactly what areas of fraud will become the most prevalent but, according to Freddie Mac the three most common types of loan fraud to lookout for are:
- Multi-Lien Fraud, where the borrower uses the same property to secure and close multiple loans with numerous lenders at the same time. Even with title insurance lenders can lose a lot of money and legal cases can sometimes drag on for 6 or even 12 months with no resolution in sight.
- Identity Fraud, where a person’s identity is stolen and used to take loans out on vacant land or rental property.
Vacant land is targeted because it’s easy to inspect without alarming any neighbors, while rental property owners are victimized because some tenants will open the door for anyone claiming to represent the landlord.
Another variation of identity fraud is when one family member attempts to defraud another. Del Toro Loan Servicing saw a case like this a few years ago when a son who was 30 years old pretended to be his father who had bought a property almost 20 years before the son was born! The Broker Services Team at Del Toro red flagged the file and the loan fraud was avoided.
- Affinity Fraud, when family or friends of a vulnerable person talk them into taking out a loan. While common sense says that the broker or lender has no control over this, many attorneys will try to convince a jury otherwise – and name both the broker and lender as accomplices to the fraud.
It may sound ridiculous but plan on taking a big loss if you’re ever involved in a case like this. Even if you did everything right, you’ll pile up a lot of legal bills. If you do win or settle, you will likely end up reducing the interest rate and extending the term of the loan just to get the case against you dropped, costing you even more. Even worse, liens in cases like this, have been wiped out when the loan was not originated and closed meticulously.
Other common types of fraud on lenders are:
- Mortgage broker fraud – often intentional
- Seller carry fraud – tricks played here can wipe out the seller’s whole nest egg
- Borrower fraud post-closing –borrower’s actions during servicing can cause you significant loss
- Unethical litigation tactics – bad borrowers can wait you out and cause you to settle reducing your return or costing you money
At the beginning of this article we mentioned two steps you can take to reduce your risk of loan fraud, at absolutely no cost to you:
Option #1 – for the “do-it-your-selfer”, Click here to download a list of online resources and common red flags you can utilize to manage and mitigate your risk of loan fraud.
Option #2 – Have our experienced team oversee and assist with the underwriting and processing. This is a service we provide at no cost to lenders and brokers when we prepare your loan documents.
Del Toro Loan Servicing has processed and drawn docs for over 1,500 private money loans. Over the years, we’ve seen dozens upon dozens of loan fraud cases and have successfully blocked many.
Doesn’t having an extra set of experienced eyes looking out for your investment make a lot of sense – especially when there’s no cost to you? Review our website for a list of referrals or reach out to us here to learn more and see if we would be a good fit to help you sleep better at night.