Mortgage Fraud Inflates Housing Bubbles
by Broderick Perkins - Published: February 16, 2005
St. Louis, MO - area brothers Patrick and Mario McGee and several associates were recently sentenced to a total of 18 months in prison and ordered to pay nearly a half-million dollars in restitution related to a "property flipping" scheme (buying homes and quickly reselling for inflated prices) that included mortgage fraud.
Secret Service investigations led a federal grand jury this month to indict Philadelphia, PA brothers Nathan and Danny Parker and four Atlanta, GA residents on charges of conspiracy, wire fraud, bank fraud, and the use of false Social Security numbers in a $4 million mortgage fraud racket.
A federal prosecutor said last week the U.S. government expects to charge more than 13 people in a mortgage fraud scheme allegedly orchestrated by Matthew Cox, a Tampa Heights businessman being sought for an alleged scheme to defraud mortgage lenders in Florida's Pinellas and Hillsborough counties.
Mortgage fraud is rampant in the United States and not only are the illegal activities an immediate threat to home owners and local communities, the scourge could ultimately cause the kind of economic conditions associated with so-called "housing bubbles."
Mortgage fraud complaints more than doubled in 2004. The Federal Bureau of Investigations received 17,127 reports of mortgage fraud in the fiscal year that ended Sept. 30, 2004, compared to only 6,936 reports in the previous fiscal year.
Nationwide, mortgage fraud is estimated to have cost businesses nearly $48 billion and consumers about $5 billion in the past five years, according to a recent study by the Federal Trade Commission.
Methods vary, but the run up in home prices is attracting an underworld that often uses inflated appraisals on properties distant lending companies never see. Often a conspiring group of insiders -- lawyers, appraisers, mortgage lenders, title and escrow workers, mortgage brokers, and real estate agents -- get a mortgage for more than the actual value of the property and then walk off with the difference.
The FBI says 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.
Companies that fall prey are often sub-prime lenders, which means consumers who most often become victims are those with risky or no credit -- typically lower income borrowers who can least afford the loss, say investigators.
"Each mortgage fraud scheme contains some type of 'material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan'," said FBI assistant director Chris Swecker, testifying before the U.S. House of Representative's Financial Services Subcommittee on Housing and Community Opportunity.
Late last year, the FBI's Operation Continued Action announced action against 205 individuals in 37 states in the agency's largest ever nationwide enforcement operation directed at financial institution fraud, which includes mortgage fraud, identity theft, and other crimes.
"The FBI continues to be the primary law enforcement agency in protecting our nation's financial institutions and the investigation of major fraud is a high priority...mortgage fraud in the secondary market is often under reported. Therefore, the true level of mortgage fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. The industry provides incomplete or inconsistent fraud data. Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing," Swecker testified.
The FBI's report says mortgage fraud can have a domino effect on the local housing market and the economy at large.
Lenders are the most obvious losers when they finance a home for more than it's worth. When the scam crumbles, the borrower defaults and the lender must foreclose on the home and resell it at true market value -- typically a much smaller amount than the original loan.
Ultimately, investors can lose faith in the industry if a growing number of lenders fail or if lenders seek to recoup their losses with higher rates and fees passed onto future borrowers.
"When loans sold in the secondary market default and have fraudulent or material misrepresentation, loans are repurchased by the lending financial institution based on a 'repurchase agreement.' As a result, these loans become a non-performing asset. In extreme fraud cases, the mortgage backed security is worthless. Mortgage fraud losses adversely affect loan loss reserves, profits, liquidity levels and capitalization ratios, ultimately affecting the soundness of the financial institution," Swecker testified.
Mortgage fraud also can spawn an insidious housing bubble-like effect that can ruin households and neighborhoods.
Overvalued property can falsely inflate nearby home values while also raising property taxes. When the scam is uncovered or homeowners default or both, values can just as quickly plummet leaving other owners with over-valued homes and upside down mortgages -- conditions that simulate or exacerbate a so-called housing bubble.
In January, a 31-month probe that included agents of the Internal Revenue Service, the FBI, the U.S. Postal Inspection Service, and the U.S. attorney's Mortgage Fraud Task Force culminated in the indictment of 40 alleged scammers -- including local police officers -- in an Indianapolis, IN flipping ruse likened to a bank robbery on paper.
Lenders lost millions reselling dozens of foreclosed homes that had been initially financed at over inflated values.
The scam left dozens of homes abandoned, inviting crime and promoting urban blight.
The Mortgage Bankers Association's StopMortgageFraud.com web site offers advice to help you avoid mortgage fraud.
Here are some additional tips.
*When shopping for a home or mortgage, get referrals to real estate and mortgage professionals with a proven track record from friends, family, co-workers and others you trust who have also recently completed a satisfactory transaction.
*Check their licenses with the state or other local regulatory agencies and ask their trade group for background information.
*Interview the professionals the same way you've been interviewed for a job. After all that's exactly what you are doing -- hiring a professional for a specific job. Be the boss.
*Question outrageously fantastic promises of extraordinary equity returns in short periods. When it comes to buying a home, if it appears too good to be true, it is.
*Be cautious of home buying deals offered by strangers making unsolicited contact by phone, email or in person.
*Shy away from high-pressure sales techniques.
*Ask for written information, including comparable sales and other documents, to verify the value of a the property. Don't buy a home with limited written information attesting to the value of the home or to the experience and solid background of the company offering the deal.
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CRC staff, 1.16.2007 |
