Fannie Mae is warning lenders about service industry borrowers who misrepresent their incomes.

Is mortgage origination fraud rearing its ugly and damaging head again?

Fannie Mae issued a fraud alert to lenders on Tuesday, Oct. 6, warning about income misrepresentation involving Southern California mortgage brokers and service industry applicants.

“We have observed misrepresented incomes in a compilation of loans that were originated by (mortgage brokers) based in Southern California over the past several months,” the fraud alert said.

Indicators that a loan application may be phony include:

• Borrowers are employed in service industries such as nail salons, small retail businesses, transportation/delivery businesses and repair services.
• Borrowers have generic titles such as “manager.”
• Letters documenting fund gifts are noticeably altered, with gift amounts changed using correction fluid.
• The borrower’s income does not appear reasonable for his or her job or amount of experience.

Fannie Mae doesn’t give any more details about what led to the alert or where in Southern California the suspected fraud is occurring.

It does offer some fraud-prevention tips and links, urges lenders to report suspected fraud and suggests they become “fraud smart” by getting educated on the issue.

A check with law enforcement failed to turn up more details about the suspected fraud. The Los Angeles FBI office and district attorneys in Los Angeles and Orange counties were unaware of Fannie Mae’s allegations. A spokeswoman for the California Department of Real Estate said the agency hasn’t had any complaints from Fannie Mae in three years.

To be sure, mortgage fraud is a serious problem costing millions of dollars. But as a mortgage broker, I get a little sensitive to generic warnings that my industry should be treated with suspicion.

Mortgage brokers handle nearly 15% of the nation’s $3.12 trillion loan volume, according to “Inside Mortgage Finance.” California’s share of that volume amounts to about $624 billion, and the state has 26,840 mortgage brokers.

Perhaps Fannie should consider tightening up on loan requirements. For example, it could mandate every loan have an IRS authenticated income verification transcript, known in the industry as a 4506-T. Currently, it requires borrowers to merely sign a consent form.

Fannie Mae also views multiple letters documenting down payment gifts as suspicious.

But plenty of cultures provide financial support to extended family members, with down payment support coming from parents, siblings, aunts and uncles or cousins.

Buyers intent on fraud can add large deposits to their accounts more than two months ahead of time and never have to worry about sourcing the gift funds.

Fannie Mae could come out and say no gifts allowed.

Reputable mortgage brokers have good relationships with their lenders. Smart mortgage brokers can cut to the chase with a lenders’ underwriting manager when questions come up.

As long as you can back up your mortgage credit application with facts, you’ll get your mortgage funded.