As the Mortgage Bankers Association (MBA) works to educate lawmakers about the damage caused by mortgage fraud against lenders, we face somewhat of an uphill battle. To some, this type of white-collar crime appears to hurt (in their wallets) only those people who can take it. And while no one condones fraud, the issue loses some urgency when viewed in this light.
But as the fraudsters have become more savvy and their schemes more profitable, these crimes have begun to threaten community health and security, and even international security. It is through these issues that we are finding some traction on the Hill.
In Buffalo, New York, a 30-year-old man and his wife bought 40 cheap homes and obtained second mortgages on each for as much as $100,000 above each property's assessed value. When the nearly $2 million in mortgage checks came through and the couple skipped town, the abandoned properties they left behind became prime contributors to neighborhood blight.
In Chicago, a savvy drug-dealing gang has shifted its focus to this budding financial crime. The money and homes gained through mortgage fraud have helped the gang support its other criminal activities, such as drug-dealing, smuggling and prostitution.
Mortgage fraud has even begun to finance international terrorist activities. The Federal Bureau of Investigation (FBI), for example, indicted two men in Detroit in 2004 who used mortgage fraud, along with a variety of schemes, to secure more than $200,000 to buy military equipment for Hezbollah, a Lebanese terrorist organization.
The truth is that a lot of neighborhoods are part of the collateral damage done by these mortgage-fraud schemes. The abandoned homes left behind have been likened to "a communicable disease." Once a few buildings are boarded up, it is all too easy for the entire street to spiral downward. Other streets soon follow, and, ultimately, entire communities pay the price.
Mortgage lenders do, of course, usually take the full brunt of the direct economic hit from mortgage fraud. Even if a lender sells the mortgage, investors that discover they have purchased a fraudulent loan through the secondary market generally require the lender to repurchase the loan. Lenders, in turn, often have no practical recourse--even if someone can be tracked down, fraud perpetrators usually have few assets to tap into for compensation.
While there are no definitive statistics available, the FBI recorded $1.01 billion in reported mortgage-fraud losses in FY2005. The FBI believes this number underestimates the impact of fraud, because the data are based on only a portion of the industry.
The FBI recently reported that accounts of mortgage fraud have increased sevenfold in the past five years, and the FBI caseload has increased more than 160 percent since 2003. Whatever the actual number, law enforcement and the mortgage lending industry agree that mortgage fraud against lenders has exploded in the past several years, with severe consequences for individual consumers, entire communities and lenders.
As this problem has escalated, so too has the Mortgage Bankers Association's dedication of time and resources to battling it. This year combating mortgage fraud against lenders is one of our top advocacy priorities. But we've been working on the issue for several years.
In October 2004, MBA testified about three critical needs before the House Financial Services Committee's Subcommittee on Housing and Community Opportunity's hearing on mortgage fraud:
* Increased investigation and prosecution of mortgage fraud by law-enforcement agencies;
* Improved communication between mortgage lenders and the state and federal agencies that investigate and prosecute mortgage fraud; and
* Better industry tools and intra-industry communication to combat fraud. …