Fraud-And the Victim Is You

By Kempner, Jonathan L. | Mortgage Banking, November 2004 | Go to article overview

Fraud-And the Victim Is You


Kempner, Jonathan L., Mortgage Banking


MORTGAGE FRAUD HAS MOVED INTO the headlines, with a recent article in USA Today stating in bold type that the FBI considers the problem an "epidemic." An Associated Press headline also recently announced: "Mortgage Fraud is Rampant in U.S." Just through September, the FBI had opened 533 mortgage fraud investigations this year--more than three times the number started in 2002.

"You can find [mortgage fraud] anywhere in the country," says Chris Swecker, FBI assistant director for criminal investigations. The Mortgage Bankers Association (MBA) and our members have been working closely with the FBI, since we share its concern about this growing problem. Mortgage lenders have lost billions of dollars due to fraud in recent years.

Syndicated real estate columnist Kenneth Harney reports, "Mortgage fraud is now one of the hottest con games going." He notes that industry studies claim "between 10 and 15 percent of all homeloan applications involve some fraud or misrepresentation."

MBA recently had a chance to testify before the House Subcommittee on Housing and Community Opportunity at a hearing examining the growing problem of mortgage fraud. Marta McCall, senior vice president for risk management at American Mortgage Network Inc., San Diego, spoke for all lenders when she testified that "Mortgage fraud is a growing part of our residential mortgage system that costs the industry and consumers millions of dollars each year."

To illustrate the toll fraud can take on innocent lenders, McCall shared the story of one small mortgage company in the Southwest. This small lender with a solid reputation was defrauded by a single crooked loan officer The loan officer was debarred from Federal Housing Administration (FHA) programs for one year, but is still working in the industry. But the company was debarred from the FHA program four years after the fraud was committed, and forced to close. As McCall said, "Owners who had built up the company lost their investment, and over 30 employees lost their jobs because of the crimes of a single person."

Lenders have experienced increases in both the number and variety of fraud schemes used against them. One common tactic, known as "flipping," involves obtaining an inflated appraisal and then selling the property for a large profit. Fraud perpetrators often hide behind "straw borrowers," who unwittingly may be given falsified financial and credit histories in order to qualify for a mortgage on the property being flipped. Stolen identities also are used to help fraudsters obtain loans.

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Such criminal acts often result in foreclosures on overvalued properties. Subsequent losses can result in serious financial damage for lenders at a time when margins are already being squeezed.

Fighting fraud requires a multi-pronged approach. Lenders should work with law-enforcement officials to root out the problem, because fraud often is conducted by a criminal ring that includes originators, real estate agents, appraisers and closing attorneys. Mortgage industry participants also need to share information, to make it harder for fraud perpetrators to find new companies to victimize. Lenders should keep developing new ways to uncover fraud within their firms. …

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