Final answer:
Requiring private mortgage insurance (PMI) is not considered a red flag for mortgage fraud; it is a standard practice to protect lenders from loan default. Actions that are red flags include requesting an improper transfer of property, inflating values and requesting signatures on incomplete documents.
Step-by-step explanation:
All of the following activities are considered "red flags" as possible signs of mortgage fraud, EXCEPT requiring private mortgage insurance. Mortgage fraud typically involves actions such as requesting a quitclaim deed to transfer the interest in the property without a proper sale, inflating contract prices or appraisals to misrepresent the value of the property, and requesting signatures on incomplete loan documents to commit fraud.
However, requiring private mortgage insurance (PMI) is a legitimate practice used by financial institutions to protect themselves from default on loans, especially when the borrower makes a down payment of less than 20% of the home's value. In the context of securitization, a bank that plans to hold a mortgage loan as an asset has an incentive to scrutinize the borrower carefully to ensure repayment.
In contrast, a bank intending to sell the loan may be less careful, leading to the origination of what are known as subprime loans. These loans, sometimes called NINJA loans, may have low or zero down payments; there might be little scrutiny of whether the borrower has a reliable income and payments may start low, only to increase significantly after the first year or two.