Pre-Qualification and Pre-Approval

Happy Monday everyone! We hope you had a great weekend and had a chance to spoil your moms yesterday. Take a look at this important news article from the Los Angeles Times:

Don’t even think about fudging on your application for a mortgage by inflating your income a tad, checking the box to indicate you’re going to live there when you’re really not or exaggerating your job description.

Not long ago, people could get away with lies like these to obtain financing. But not anymore.

Nowadays, the tools are in place to nab fibbers who just want to buy a house, as well as out-and-out perjurers looking to bilk lenders out of hundreds of thousands of dollars.

There are “more fraud checks than ever, and it’s on every loan, not just a sample,” said David Kittle, a former lender from Kentucky who chaired the Mortgage Bankers Assn. in 2009.

More important, perhaps, the focus now is on preventing fraud rather than dealing with it after the fact.

“The responsibility for catching fraud is definitely moving up the loan production chain,” said Bruce Backer, president of LoanSifter, a pricing engine that lenders use to make sure they comply with federal regulations.

“If we let the money go out the door,” said David Montoya, inspector general at the U.S. Department of Housing and Urban Development, “we’re pretty much chasing the wind.”

Sometimes the fraud check is as simple as a quick call to the customer right before the loan is closed to verify information supplied on the loan application. Such a call to an otherwise unsuspecting borrower can sometimes uncover a lie perpetrated by a corrupt loan officer who’s in it for the commission — or more.

“Nobody wants anyone else to talk to their customers, but we do it in a conversational, nonconfrontational way,” said Kittle, who now works for IMARC, a Santa Ana firm that provides post-funding quality control audit services.

If the chat goes something like this — “Are you borrowing $500,000?” “No, I want to borrow only $300,000,” or “Do you earn $200,000?” “No, I make only $100,000″ — the auditor can stop the process in its tracks. You don’t get tagged as a con artist, the dishonest loan originator and his cohorts don’t fatten their wallets and the lender doesn’t lose any money.

In other cases, lenders are using sophisticated databanks to spot the crooks.

“There’s a tremendous wealth of data being deployed,” said Becky Walzak, a quality assurance consultant in Deerfield Beach, Fla. “There are tons of databases available to validate the information you give us.”

One website, for example, provides salary data on the type of work you do so the lender can determine if you are overstating your income. If you say you earn $250,000 a year but the site indicates the typical wage for your position in your town is just half that, it’s a red flag that something might be amiss.

Another site provides historical wage data, and yet another checks the information supplied by self-employed borrowers, including whether the borrower’s company exists, who the principals are, the number of employees and the annual revenue.

“You can’t lie about income anymore,” Walzak said. “There are too many ways we can find out whether or not you are telling the truth.”

There also are sites that will tell lenders whether there are judgments against you or liens against other properties you might own, while others reveal the number of properties you own, when you bought them and for how much. And there are systems available to review appraisals to spot inflated valuations.

Platinum Data Solutions in Aliso Viejo offers lenders a comprehensive review and valuation system that, among other things, looks for hidden relationships between the buyer and seller. Chief Executive Phil Huff says he’s working on a program that will search out collusion between real estate agents, loan officers, appraisers, title attorneys and others in the lending food chain.

In addition, Fred Melgaard, executive vice president of DRI Management Systems in Newport Beach, says his firm has plans to offer score cards on all vendors and service providers, including individual appraisers and real estate agents. And that’s on top of real-time — less than 60 seconds — credit reports, automated bankruptcy notices and up-to-the minute lien watch services that let lenders know what you may be doing with other lenders.

Even the Internal Revenue Service is getting into the act. The IRS already electronically delivers copies of would-be borrowers’ tax returns to lenders so they can verify incomes. Soon the agency will be speeding up the process — and making it more secure — by switching to e-signatures and eliminating the paper version of the form borrowers sign that allows lenders access to their records.

None of this is to say that mortgage fraud is being eradicated. Hardly. The FBI pegs the cost of mortgage fraud at roughly $3 billion a year. And that’s a “very conservative” figure of the losses to lenders and investors, concedes Christa Greco, a senior intelligence analyst at the agency.

At the same time, though, the most recent figures from the Financial Crimes Enforcement Network indicate that lenders are becoming more adept at uncovering fraudulent loans before putting them on their books. Indeed, in 40% of the suspicious activity reports submitted to the network in fiscal 2011, the lender turned down the applicant — whether it was for a new mortgage, a refinancing or a short sale — because it smelled fraud.