Warning signs that can help avoid originating bad loans
Mortgage fraud has been a major topic across the industry over the last couple of years. Whether it is conventional loans, non-QM loans, or private money loans, the industry continues to work to get fraudsters identified and out of the market.
The National Private Lenders Association (NPLA) started a watchlist last year to try to identify individuals and companies suspected of fraudulent activity. Many lenders have their own lists as well.
While a lot of the detection is taking place at the lender level, brokers play an important role in the identification of both fraud and potentially bad loans. One executive shares his thoughts on how brokers can help reduce both fraudulent and bad loans.
Alan Tiongson (pictured top), VP of secondary markets and asset management at Constructive Capital, said there are a few early signs a broker can see that should raise some red flags.
“You’ve got to look at the structure of the loan, and how borrowers come to own the property,” Tiongson told Mortgage Professional America. “If it's transferred hands multiple times throughout the year, or how did the guy get the property? Was it a quitclaim to them from another individual? That's kind of a first indication.”
Other red flags to consider
One of the hardest parts for brokers in the process is the ability to pick up on these red flags right away, which often comes after looking at hundreds, if not thousands, of loan files.
“I feel like, unfortunately, that comes with experience,” Tiongson said. “It’s not something somebody fresh out of school or new to the industry is going to be able to pick up on. I think you just see enough of it where, especially when it comes down to underwriting, you can start to detect those things to watch.”
Tiongson also noted fraud issues that have been detected in certain cities, like Baltimore, Philadelphia, and Detroit, in relation to questions about inflated property valuations.
In addition to geographic tendencies, Tiongson said if loan files or certain properties are being shopped around to multiple lenders, that might give a broker a reason to give a file extra scrutiny.
“If you see the same loan or same property being shopped around to multiple lenders, that's just another cause for concern,” he said. “You're trying to see, ‘Okay, why is this getting shopped around? Am I the last person to receive this, and I'm just the idiot that's left?’ It's just playing detective, asking the right questions, but it comes down to gut feeling, and I think that comes with experience.”
Part of playing detective can be doing extensive research on a property’s history and seeing if the improvements made justify a large increase in value.
“If you dig into the property history and the chain of title, you'll find out a lot about how they came to really own this property,” Tiongson said. “If a property was just purchased five months ago, and then they're coming to us for a refinance, and the property value has gone up by $60,000, I'm looking for photos of that property when you first acquired it. Did you make improvements on this property that warrant this? Who was the appraisal done by?”
Building a close relationship
Of course, one of the best ways to avoid fraudulent transactions is to build a strong relationship with your customers. Not only will you be able to vouch for them with lenders to help them get deals done more quickly, but you will be setting yourself up for repeat business.
“Every client that comes to them, it's already hard enough to get a client through the door at your shop,” Tiongson said. “I’ve always looked at a borrower, and there are multiple ways of making income, like having a repeat borrower come back. I'd rather have one borrower come back to me multiple times. I know this person with whom I can actually build a rapport and relationship.”
By building that rapport, a broker might be able to get multiple loans on the same project.
“One borrower could be multiple loans for you,” Tiongson said. “We originated a short-term bridge loan on a fix-and-flip. And then, if there's a close relationship, you'll know when that project is nearing completion, because that borrower is going to come back for the long-term refinance. If rates drop, they're coming back to you for the refinance again.
“I think it's important to maintain that relationship. That’s why I think constant contact is critical, and I feel like that will help businesses and brokers. Their business would explode if they just touched every client that way and treated every client that way. They need to maintain that same relationship and just not see it as a one-off.”
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