Seven out of every 10 mortgage applications that turn out to be deceitful are submitted by mortgage brokers rather than borrowers, according to a new data base.
The data base is part of a system that is allowing lenders, for the first time, to pool together and then cross-reference loan applications as a way of pinpointing fraud and other shady practices.
What is the nationwide system turning up? Fraudulent brokers appear to follow lenders, setting up shop where borrowing is picking up. For instance the Midwest, a hot market in recent years, has the highest incidence of shady sales practices by brokers.
The data base was compiled over the last six months by Mortgage Asset Research Institute, a fraud consulting firm in Reston, Va. Its system incorporates information from more than 600,000 loans. Chase Manhattan Mortgage, Countrywide Credit Industries, Norwest Mortgage, and other major mortgage lenders have contributed to the base.
The initial findings give credence to warnings by the Mortgage Bankers Association and others about the potential for abuse by brokers, who may be tempted to stretch the truth to receive finders fees for loans.
"The ability to register and cross-reference loans would be a huge benefit" to cut down on fraud, said Ronald J. McCord, president of the MBA.
The system is being hailed by the National Association of Mortgage Brokers, which said it is developing a task force and programs to look at combating the very same abuses that the data base is identifying.
"This is about 12 months ahead of where we'd like to be," said Brian Kinsella, executive vice president of the Mclean, Va., organization.
The data system is intended to help identify brokers who seek first and second mortgages from different borrowers or participate in programs to inflate a property's value by arranging for it to be bought and sold many times in a year.
Lenders are also using the data base to police practices that, though not illegal, create unnecessary processing costs. Among the practices: locking in, or committing, to more than one loan, and submitting applications to more than one lender.
The industry, buffeted by several years of ever-narrowing margins, is recognizing the need to set aside rivalries and work together-through technology-to combat fraud, observers said.
"It's better to do this in a collaborative, not competitive, manner," said Mark Smith, president of Crestar Mortgage Corp., Richmond, Va.
"We'll get the bigger bang by working together to cut costs," said Mr. Smith, who is also president-elect of the MBA.
Indeed, the mortgage industry is said to lose billions of dollars each year to fraud and duplicative processing expenses. Lenders typically commit as much as a thousand dollars to prepare and lock in a mortgage, especially when hedging expenses are factored in.
Still, as good as the system may be, lenders say they must still act with caution.
"We have to be careful," said Mr. McCord, the MBA president, who is also president of American Mortgage and Investment Co., Oklahoma City. "We don't want it to become restrictive for consumers to shop for mortgages."
Indeed, lenders are inconvenienced by borrowers' frequent practice of applying to more than one, but that's not illegal.
The system offers lenders, on a national basis, the ability to ferret out problematic brokers and correspondents, said D. James Croft, executive director at Mortgage Asset Research.
"This gives lenders, for the first time, comparative hard data they can go to brokers with," Mr. Croft said.
Indeed, some mortgage companies say the system has turned up the names of longtime brokers whose practices were never before questioned.
Also, some lenders have uncovered-and been able to fix-in-house problems. "Internally, we've had cases of two people registering the same loans," said David Koenig, director of hedging at Principal Residential Mortgage, Des Moines. "That's something we move to correct very quickly."
