Fraud by Mortgage Brokers Is Said to Be on the Upswing

Fraud committed by mortgage brokers has been on the upswing for the last few years, according to industry sources.

While industry insiders are quick to say that most mortgage brokers are honest, they add that there is an opportunity for brokers to forge papers and misrepresent borrowers to lenders and to mortgage insurers that provide coverage to help marginal borrowers qualify.

Some sources said misrepresentation by brokers in some markets has been prevalent since the end of the refinance boom as the brokers try to keep up the high volume of applications they enjoyed when rates were at the lowest level since the 1970s.

"There appears to be a number of folks who didn't want to see the slowdown" in volume when rates rose at the beginning of 1994, said James Croft, executive director of the Mortgage Asset Research Institute, Reston, Va. "They are trying to make the loans fit into programs where they didn't really fit."

Mr. Croft provides public information about fraud for a fee. He also has a large data base of firsthand information from member-lenders. That data base is available only to participants.

Mr. Croft said that while broker fraud exists in every state, it has been most prevalent in California and southern Florida.

Some wholesale lenders take measures to head off fraud by using screening procedures on brokers with which they do business.

"Before a broker is approved to sell us loans, we require our marketing director to do an on-site review and do a fraud check on him through data bases to determine whether there are incidents of fraud with that broker," said Ron Gaither, senior vice president of production risk management at Prudential Home Mortgage. He said that method has been successful in weeding out potentially fraudulent brokers.

Mr. Gaither said that four to five years ago, fraud involving mortgage brokers was becoming a problem at Prudential, the lender has since taken steps to be more aware of methods used by dishonest brokers.

Mortgage insurers are often the ones who lose when a fraudulent loan is approved and slips through the cracks.

The manager of MGIC's investigation unit, Dennis Omick, has been on the lookout for fraud for the last 12 years, and said he has seen an increase in fraud in the last five or six.

Because of the rapid increase in mortgage brokers, there are more incidents of deception, he said. But, he added, it is difficult to track because shady brokers open and close shop before anyone catches up with them.

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