Crackdown on Mortgage Fraud
Written by: Laura DiBiase
Kurtzman Carson Consultants LLC; El Segundo, Calif.
The housing market news has been grim. New home sales have dropped to a 13-year low, home prices have plunged, and the number of foreclosures has skyrocketed. Recent interest rate cuts haven’t done anything to help. While much of the blame can be attributed to the weakening economy, mortgage fraud has greatly contributed to decline.
Mortgage fraud is one of the fastest-growing financial crimes in the country. There are two distinct types of mortgage fraud identified by the FBI. The first is called fraud for property or housing. This generally involves one piece of property where a borrower makes mis-representations regarding income or employment history in order to qualify for a loan. The borrower generally intends to repay the mortgage, they are just attempting to move into a home they most likely cannot afford. This type of fraud generally impacts the economy when the borrower defaults on the loan.
The second type—and most damaging to the entire mortgage industry—is fraud-for-profit, and is often referred to as “industry insider fraud.” It involves schemes where individuals within the industry attempt to inflate the values of the properties, issue loans based on fake properties and/or revolve equity. Numerous properties and multiple loans are generally involved and the intent is financial gain through fake sales and higher commissions.
The FBI and state law enforcement agencies have begun a national crackdown on mortgage fraud. The FBI recently indicated that they have approximately 1,200 open cases that have already grown by 40 percent from 2007. In 2003, the FBI received about 3,000 suspicious activity reports related to mortgage fraud, and they are expecting that number to be closer to 60,000 in 2008. The Mortgage Fraud Blog, www.mortgagefraudblog.com, is a Web site which identifies itself as the “central clearinghouse for information on recent mortgage fraud schemes, indictments and prevention.” The site has been adding two or three news stories per day of new indictments and arrests for mortgage fraud activity.
Recent guilty pleas in a San Diego case illustrate the inner-workings of most of these fraud schemes. Two owners of a Century 21 Real Estate office coordinated loan officers, loan processors and real estate agents to orchestrate more than 200 fraudulent real estate transactions. In some deals, they used straw buyers (with higher credit scores and savings) to obtain financing for other customers who would not have qualified for the loan. In other transactions, they altered financial, rental, and/or employment information on the loan documents. They also misrepresented that the applicants were U.S. citizens and even posed as the employer or landlord when lenders called to verify the information. The defendants have admitted that they received over one million dollars in commissions alone. So far, only one of the defendants who headed up the scheme has been sentenced. Amazingly, the sentence includes only five months in prison, five months in a half-way house and a $400,000 fine.
In January, the FBI announced that it had begun an investigation of 14 companies for accounting fraud related to subprime mortgage loans. They have not disclosed the names of those companies but with as quickly as indictments are coming lately, those names will hit the news soon enough.
As the number of applicants for new home loans, refinances and home-equity loans plummets, one fear is that the fraudulent industry insiders will begin to get desperate for the amounts of money they were making a few years ago. New schemes will be orchestrated and carried out even as the FBI and state law enforcement are investigating the older schemes. The best advice for consumers is to be wary—if it sounds too good to be true, it most likely is a scam!