MortgageOrb chats with Andy Hall, CEO of Hall Underwriting and Consulting LLC, this week to get his thoughts on how to catch fraud earlier in the lending process.
Q: A recent Mortgage Asset Research Institute (MARI) report indicates that, despite fewer mortgage applications, instances of fraud jumped 45% in the second quarter of this year. Given the heightened lending standards and general push for greater due diligence, does it surprise you that fraud increased during the second quarter?
Andy Hall: Not at all. First, the majority of the new fraud findings occurred in somewhat seasoned loans. I do believe the originators and lenders have tighter controls in place now that should impact the amount of fraud perpetrated going forward, but there are still many loans out there where misrepresentations were made that are still now just being recognized.
Q: Also, as part of its report, MARI says combating fraud requires the following from mortgagees: a) better technology, b) earlier response and c) more collaboration with other mortgagees. What steps are you seeing institutions taking to stem fraud? Do you agree with MARI's assessment?
Hall: First, I absolutely agree with MARI's assessment. Fraud reviews must be an integral part of the loan origination process. We are seeing more and more fraud investigation being required in the due diligence process. At HUC, we have policies and procedures in place that will ensure that any misrepresentation is determined early on in the process and can be addressed up front and dealt with appropriately.
Q: Do you worry that with so much attention and energy going toward solving the problem of rising foreclosures, some considerations, such as monitoring fraud, are being pushed aside?
Hall: I think that originators, lenders and servicers have so many issues confronting them today that their focus may change from day to day. However, due diligence firms should, at the very least, be able to remove the concern about fraud. Again, with the proper experienced staff, and with all of the technology resources available, no due diligence firm should allow a fraudulent loan to slip through any review.
Lenders must have the confidence in their due diligence vendor that all fraud is being captured. One additional step that lenders and investors can take to minimize the purchasing of fraudulent loans is to significantly increase the size of the samples being reviewed in any given loan sale.
Q: What are some of the larger compliance risks that leave lenders and investors in a particularly vulnerable position?
Hall: This goes back to my last comment. Sample sizes for loan reviews must be larger than in the past. In most instances, all due diligence firms have compliance engines that should detect any compliance violation. However, the smaller the sample of loans being reviewed, the easier it is for compliance violations to slip through because the loans were not tested.
I think that regardless of whether investors re-underwrite every loan that they are considering for purchase, at the very least, a compliance test should be completed on all loans within the pool. As for specific compliance risks that can pose certain risks to lenders, there are many simply due to the fact that many state laws are ambiguous and leave a great deal to individual interpretation. The Massachusetts law is one of those that is very vague. Due diligence firms must take an ultra-conservative approach to any compliance issue that is not black and white.
Detailed discussions of these findings must be held with the purchasers of loans so that they are always fully aware of the risks being taken in purchasing these types of loans.