As soon as Paul Manafort, former campaign chairman for President Trump, was sentenced to 43 months in prison during the conclusion of his second federal trial, New York prosecutors jumped on the bandwagon and charged him with 16 counts of fraud, including residential mortgage fraud. While this was a great opportunity for Manhattan district attorney Cyrus Vance Jr. to happily observe “No one is beyond the law in New York” while threatening Manafort with an additional 25 years in jail time, the truth is that residential mortgage fraud is “fairly run-of-the-mill” as far as crimes go according to criminologists.
“I would classify it as a very plain, vanilla fraud scheme,” explained Paladin Advisory Services principal Ann Fulmer. Paladin specializes in investigating loan-quality issues for lenders. She went on, “Fraud happens a lot of times because somebody is desperate. Whether it’s a loan officer who wants to close loans on the table, an appraiser who wants to get business, or a homeowner who is stuck in a loan they can’t pay and short sales.”
In Manafort’s case, it appears the charge stems from a mortgage application on which Manafort claimed his daughter would be living in a property he was actually renting out on Airbnb. A previous federal indictment also claimed that he had first attempted to purchase the condo using a shell company in order to launder money in 2012.
The Link to Foreclosure
In Manafort’s case, the New York district attorney would likely be happy to charge him with something less innocuous but, because Manafort has already been charged and convicted of tax and bank fraud, double jeopardy laws in New York prevent this.
“That is likely one reason the case against Mr. Manafort is for mortgage fraud rather than bank fraud, even though it involves the same conduct that was at issue in the bank fraud case,” observed Wall Street Journal reporter Aruna Viswanatha. The New York state attorney general’s office has already sued Manafort's family foundation over misuse of funds, and the foundation has agreed to dissolve itself.
While the charge of mortgage fraud is logical in this case, since there are few remaining options that would enable New York to get in on the actions against Manafort on a state level now that the federal courts are done with him, in most cases, mortgage fraud only comes to light in the event of foreclosure. In fact, CoreLogic estimates that in 2018, about 1 in every 109 mortgage applications contained “indications of fraud.” That word, “indications,” is important, because most mortgages, fraudulent or otherwise, are not ever subject to investigation because the mortgaged property never goes into foreclosure.
“There’s no damage until there’s foreclosure,” explained Miami-based lawyer Josh Migdal, adding that many times lawsuits concerning mortgage fraud end up being filed against attorneys and other involved parties as well as the borrower because usually borrowers do not accomplish the fraud on their own and the evidence that the borrower was unable to pay or otherwise compromised in their ability to uphold their payment commitment does not come to light until the property is lost. “[Foreclosure] is when everything bubbles to the surface,” Migdal added.
Fraud Incidences are on the Rise
Disturbingly, fraud risk is on the rise, in large part because there are many would-be buyers competing for a limited number of increasingly valuable homes. According to CoreLogic, mortgage fraud risk rose 12 percent year-over-year at the end of Q2 2018. Bridget Berg, principal of fraud solutions strategy at the company, explained, “Because home prices are rising and demand is strong, most mortgage fraud in this type of market is motivated by bona fide borrowers trying to qualify for a mortgage.” She added, “Undisclosed real estate liabilities, credit repair, questionable down payment sources, and income falsification are the most likely misrepresentations.”
While most borrowers realize it is fraudulent to blatantly falsify income or create false tax documents, many do not realize that some forms of credit repair, which mask past debts rather than restore credit permanently, or omitting other financial obligations from a mortgage application are fraudulent actions. However, with the internet offering a vast array of services that will help borrowers generate fake pay stubs and even answer phone calls as the borrower’s “employer” for verbal confirmation, more borrowers are finding it tempting to fudge their pay a little to get a loan they believe they can pay. This type of fraud rose about 22 percent last year.
Occupancy fraud is also on the rise, thanks in large part to the strong rental market in both short- and long-term rental properties. “Most people want to say they’ll live in the property because their terms will be better than if they are renting out the property,” explained Maryland senior mortgage banker Matt Lieberman. He added he finds many investors will do the same in order to get better terms on a house they plan to flip rather than live in for an extended period of time. This creates a problem for banks and lenders, Lieberman said, because investors who purchase the loan can demand a buy-back if the original lender missed an indication that the borrower lied about occupancy.
CoreLogic also found higher risk for fraud in loans originated with wholesale lenders and brokers, who do not fund loans but, instead, gather information and shop it to lenders. This could mean brokers are also committing fraud, which would be a troubling reflection of behavior during the last housing boom. In CoreLogic’s report, analysts cited an instance in which Fannie Mae released a fraud alert last May on a three-year trend of fake employers validating income in which brokers were involved. “Similar activities are taking place across the country in all channels, according to report from lenders in our consortium,” CoreLogic reported. Some borrowers even used fake diplomas to validate jobs above their actual level of formal education. CoreLogic noted this trend is growing, “especially for purchase transactions.”
Tell us what you think:
- Are we heading for another housing meltdown?
- Should Paul Manafort be charged with mortgage fraud as a “stand-in” for bank fraud?
- Do you think relaxing lending standards would help prevent fraud?
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