Mortgage Fraud Responsible for many Foreclosures – Lenders were not the Only Predators

Opportunity didn’t have to knock. The door was wide open. Loose controls and fractured oversight too hard for opportunists to ignore.

December 21, 2007 – Palm Coast, FL – When lenders started securitizing mortgage loans and reselling them to investors, the mortgage industry quickly outgrew its ability to watch what was going on. With trillions of dollars changing hands and lots of people looking the other way, a perfect storm was born, of which the final toll may surpass that of Katrina. The media and politicians eagerly point the finger at greedy lenders for causing the glut of foreclosures. But they share the blame with greedy opportunists throughout the transaction process.

Many banks no longer hold the loans that they originated. They often sold them to Wall Street firms who, in turn, packaged them with hundreds of other loans and resold them to investors. Everybody along the “food chain” got a cut of the action. The more loans, the more cuts. A highly competitive industry arose, creating a need for processing speed and volume. Lenders reduced the barriers to credit by creating exotic “stated-income loans” for which no proof of income was required or by enticing marginal income buyers with “teaser loans” with low initial interest rates that reset later to much higher rates. Transaction volumes soared in the frenzy that followed. Controls were loosened or overlooked entirely.

But wasn’t the government watching out for us? In their attempt to protect the borrower, the government has created so many regulations that a typical closing package is well over one inch thick. Nobody reads everything they sign and initial at a closing. Further up the line, important items can get buried among the myriad of disclosures and notices.

The regulation of the parties involved in a typical real estate transaction is not centralized. No single agency has the responsibility to oversee real estate agents, real estate brokers, loan originators, appraisers, title companies, and lenders. There is no single state or federal law that deals with the end-to-end real estate transaction. Hence, there is no enforcement body with overall investigative and/or prosecutorial responsibility. Sometimes the FBI is involved. Sometimes it’s the Secret Service. Or the investigation may originate with state regulatory agencies. In Florida, it might be the Department of Financial Services or the Department of Business and Professional Regulation. The State or Federal Attorney General’s office could be involved, or it might be local law enforcement. You get the picture.

I’m not the brightest bulb in the chandelier. If I can see the wide open holes in the system, so can others. And they have. In an article on the subject in today’s Wall Street Journal, an industry analyst suggests that fraud may account for half of all foreclosures in some regions of the country. Arthur Prieston, chairman of the Prieston Group is quoted as saying, “We’ve created a culture where a great many people know how to take advantage of the system.” The article cites one case in which a phone technician with only $35 thousand in assets was able to buy an Atlanta mansion for $1.8 million.

Fraud compounds the problems of foreclosures. Phony appraisals artificially inflate the value of all surrounding property, creating “false” equity and making it difficult to correctly value “comparable” properties. It could take months for the market to adjust to realistic home values. Unwittingly, adjoining property owners may have borrowed against their “false” equity only to find later that their home did not appreciate as much as they thought and that they now owe more than their house is worth. And the homes involved in the initial fraud end up in foreclosure, causing a blight on the neighborhood.

Some regions have set up Mortgage Fraud Task Forces. Miami, Dade County and the US District Attorney’s office in South Florida have done so, resulting in recent high profile indictments. Every region in Florida should take the same step.