LENDERS DON'T USUALLY WINCE IN PAIN OVER visions of liquidity woes. But a quick glance at 2004's headlines left them troubled as they read about federal investigators busting a Charlotte, North Carolina, fraud ring swindling lenders out of up to $50 million. Another headline talked about a bust of five people in a Cincinnati real estate flipping scheme that bled investors for millions.
Other scams feeding lenders' nightmares are: balloon-flipping scams targeting emerging markets; falsified Social Security numbers cloaking criminal histories to secure mortgage licenses; and an FBI probe of well-organized fraud rings comprised of brokers, lawyers and myriad loan stakeholders. All these misdeeds had lenders flinching to uncover what the FBI thinks will be billions in cost.
With parasitic fraud schemes flaring up and mutating cleverly ahead of authorities into burgeoning markets nationwide, mortgage fraud begs a wait-a-minute, Will Rogers philosophy of horse sense: When it comes to loan quality, would you rather perform preventative medicine--or an autopsy?
Now visualize a volume wholesale lender originating thousands of loans nationwide each month through a large broker network. This lender audits loans randomly for quality control (QC), mostly post-closing, to ensure adequate due diligence. So where is the disconnect between news headlines and the routine QC grind?
Most troublesome about the practice of conducting blind, random audits after origination is that they typify the industry's current tactics against fraud: steering while looking through the rearview mirror. This is still common practice, even though these tactics can take lenders two years or more to discover that loans closed today won't be attractive or convertible to cash on the secondary market later.
Whether borrowers inadvertently misstated income, or outright fraud for profit has unraveled investor confidence on a percentage of the lender's loan volume, when loans trickle into defaults well after closing, it's much too late for lenders to contemplate fraud prevention.
In a post-boom environment where increasingly sophisticated and virulent fraud is a rising tide that will affect everything in the water, only lenders that maintain a reputation for loan quality in the secondary market will survive. "Will it sell?" is no longer just a chief concern of secondary marketing officers and other executives. Portfolio marketability has become a lender mantra for 2005.
Welcome to the new dilemma facing lenders--how to accurately quantify, define and screen fraud within existing workflows. How does a lender implement compatible fraud-filter technology while incurring minimal costs yet producing maximum loan quality? Increasingly problematic is the need to decipher which indexes and tools are most effective at intercepting fraud.
A competitive mortgage market prompts lenders to innovate new tactics to increase loan volume and balance loan quality. But grappling with loan quality means not only uncovering the causes of fraud, but also identifying the market's barriers to loan quality, and then crafting solutions that effectively integrate into legacy lending practices and nomenclature.
Lenders have only to canvass their increasingly vital broker networks--a primary source of sustaining volume, including alternative-A and nonprime products--to glean threats of fraud. Twenty years ago, most people secured home loans face-to-face through their local banker, someone who usually knew the borrower and the borrower's circumstances. Thanks to the onset of cheaper browser-based...