Mortgage Fraud Regulation Change with Teeth
By Charlie Elliott Jr., MAI, SRA

One must have been out of touch, not to hear about mortgage fraud in recent weeks and months. There seems to be much more talk about it than action taken to do anything about it. It is reminiscent of the old adage, “Everybody talks about the weather but nobody does anything about it.” There is one big difference here in that there is precious little that we can do about the weather, however, there is much that can be done about loan fraud, given the will of the powers that be, to seriously address the problem. This is not to say that nothing is being done to prevent fraud, but suffice it to say that too little is being done.

Exactly what is fraud? While taking a college business law course too many years ago to count, I seem to recall the definition of fraud as being “the misrepresentation of a material fact for personal gain.”

The FBI has reportedly broken down mortgage fraud into two segments, fraud for profit and fraud for property. Fraud for profit is estimated to account for 80 percent of mortgage fraud and consists usually of insiders, such as lenders, lawyers, real estate agents and appraisers committing fraudulent acts to make a profit. Fraud for property is estimated to account for 20 percent of mortgage fraud. It occurs when buyers of property misrepresent facts, such as income or assets, in an attempt to qualify for a purchase loan, which they intend to repay.

As an industry professional, I would choose to break down mortgage fraud in a different way. I would classify it in two ways, also. The first would be “blatant mortgage fraud” and the second would be “subtle mortgage fraud.” Blatant fraud is the type exhibited when moneys are stolen outright, as in the case of a closing where participants abscond with the proceeds designated to pay off an existing loan. The subtle forms of fraud would fall into the category of such practices as overstating borrower income, ignoring a negative credit rating or pressuring appraisers for a higher appraised value on a property. I suggest to you that the latter is the most prevalent form and, perhaps, on balance, the most monetarily damaging. Furthermore, subtle fraud is more difficult to detect and less likely to cause a major concern when uncovered.

Listed below are a number of news reports and professional opinions, which offer some idea as to the magnitude of the problem.

• The FBI reported that mortgage fraud quadrupled from 4,225 reported cases in 2001 to over 17,000 in 2005.

• Georgia Attorney General Thurbert Baker reports that dealers are leaving the drug trade to enter the loan fraud arena as a safer alternative.

• The FBI also reported that mortgage fraud has the potential to be an epidemic that could have as much impact as the Savings and Loan crisis.

• Rebecca Hauck pleaded guilty on May 15, 2006, in a federal district court to a mortgage fraud scheme involving victims in Georgia, Florida, Alabama, South Carolina and North Carolina, where she stole their identity and placed mortgages on their properties. She was charged on 42 counts of various forms of fraud.

• In April 2006, New York Attorney General Elliott Spitzer indicted eight individuals who allegedly participated in a scheme that defrauded residential mortgage lenders of tens of millions of dollars over the past five years. The 83-count indictment involved hundreds of falsified mortgage applications, the purchases and financing of properties through straw buyers. It was accomplished with the assistance of attorneys and appraisers.

• Lenders lost more than $1 billion in 2005, up from $429 million in 2004, according to the FBI.

• A number of cases involving Al-Qaeda allegedly funding Middle East operations through mortgage fraud are in the news. My search in Google News with search words “Al-Qaeda mortgage fraud” generated 160,000 hits.

• As a recent participant in an industry loan fraud discussion panel, made up of a number of industry professionals, it was the consensus of many of the participants that as much as 25 to 30 percent of all loan transactions are affected by some form or fashion of fraud.

While there is no ethical or moral justification for such behavior, we find a wide array of barriers to eliminating the environment, which tolerates and promotes fraud. These barriers, in many cases, are established and supported by those very people responsible for monitoring and regulating the financial health of our system. It appears, from my vantage point, not to be much different from that of our immigration problem. It stems from a very multifaceted and complex system, involving government, politics, money, lobbyists and power. We see many responsible for monitoring the system looking the other way, in many cases to protect their jobs and the positions of those who protect them, a kind of “I scratch your back and you scratch mine.” There is one primary difference in that merely scratching someone’s back is still legal, however, fraud is not.

Who are the victims? We all are victims in one way or another, but there will be individual cases where some of us lose more than others. Much is lost by a few when a small bank loses a million dollars to fraud, due to a dishonest closing agent. Individual borrowers lose in a big way when they suddenly find that money, which they paid to cancel a mortgage, was stolen and that the mortgage still exists. Furthermore, society loses when the incidence of fraud is so prevalent that banks charge higher interest to everyone to cover fraud losses. This is no different from the retail store charging everyone more to cover shoplifting.

In conclusion, mortgage fraud is out of control and must be dealt with more seriously. Change must begin at the top in Congress with a no-nonsense attitude toward directing regulatory agencies in eliminating gaps in the system where fraud occurs. Loan closings must be monitored more closely, borrower documentation must be verified more carefully and appraisers must be selected by risk-management professionals disassociated with loan originators. The use of more independent closing vendors must be subscribed to for loan settlement services, reducing the potential for influence from any and all individuals with a financial interest in a transaction.