Mainly two words intertwine when searching for answers about the financial collapse in the United States and its far-reaching impact. These words are: Fraud and Greed.
Fraud is a material misrepresentation with the intent to deceive. A better definition is provided in the Business Law and the Regulation of Business, which states that false pretenses is the crime of obtaining title to property of another by making materially false representations of an existing fact with knowledge of their falsity and with the intent to defraud.
Greed on the other hand is better defined by similar words: voracity, avarice, self-indulgence. The statistics released by governmental agencies such as the FinCEN reflect how mortgage-brokers driven by their greed compromised their ethics and places borrowers in situations of hardship and poverty. They enticed naïve citizens who wanted to live the American Dream of being homeowners. John Doe purchased a house worth $150,000 with a $32,500 yearly income. How did he do it? He simply followed a mortgage broker’s advice of stating that his earnings were $58,750 and not disclosing several liabilities. The outcomeof this? Joe could not afford the payments and his house went into foreclosure. Under the fraud for housing statistics, mortgage brokers account for 87.06% while borrowers account for $58.55%.
The 2007 Mortgage Fraud Report issued by the FBI , defines Mortgage Fraud as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.
According to the Financial Crimes Enforcement Network (FinCEN) report, finance-related occupations, including accountants, mortgage brokers, and lenders were the most common suspect occupations associated with reported mortgage fraud.1 Perpetrators in mortgage industry occupations are familiar with the mortgage loan process and therefore know how to exploit vulnerabilities in the system. Victims of mortgage fraud may include borrowers, mortgage industry entities, and those living in the neighborhoods affected by mortgage fraud. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When property values are inflated, property taxes increase as well. Legitimate homeowners also find it difficult to sell their homes as surrounding properties affected by fraud deteriorate. When properties foreclose as a result of mortgage fraud, neighborhoods deteriorate and surrounding properties depreciate.
The Mortgage Fraud Report identified two categories of mortgage loan fraud: fraud for property and fraud for profit.
Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan.
Many loan applicants lie when they state that the mortgage will be used for acquiring a property that will be their primary residence when in fact, they are acquiring an investment property.
Sometimes, the broker prepares this type of documents on behalf of his or her client, even when the client is not aware of the lies contained in such document. Here is where the cause of many defaults is. Borrowers who could not afford mortgages were enticed by greedy brokers and soon after the transaction went through, they found themselves unable to meet their mortgage payments in a timely manner and, as a result, these properties went into default and were foreclosured. Self-employed seeking for property also lie in their applications when the present themselves better off than they really are. This could be prevented by an extensive review of bank transactions that would reflect the trends of their income and expenses during a given period of time.
One way of accessing mortgages is by hiding liabilities which improves the debt-to-income ratio. Underreporting liabilities is a common practice that can be prevented by a careful review of the applicant’s credit report.
As a result of the events that have undermined the world economy, regulators are in the quest for strong oversight and other measures that involve high levels of accountability, however, the true impact of WallStreet’s meltdown is not yet known. Accountants and forensic accountants will play an important role in preventing , detecting, and investigation instances of fraud. Get ready for these challenges.