Mortgage Fraud – What is it? How Did it Happen? Who Got Hurt?

A condensed version of this story appeared under my by-line in the May 27 issue of the Palm Coast Observer.

Palm Coast, FL – May 29, 2010Mortgage fraud is considered a white collar crime, a designation that makes it seem like there aren’t any victims. Nobody is shot, stabbed, beaten, or kidnapped. Even the punishments are lenient compared to say carjacking or armed robbery. After all, aren’t the victims just the lenders? You might be surprised to find out that you are a victim too.
Mortgage fraud played a major role in the recent housing bubble. Fraud was wide spread because it’s relatively simple, non-violent, and very profitable. When a buyer provides false information to obtain a mortgage for their primary residence, it’s called Fraud for Dwelling. If they obtain a mortgage simply to skim equity with no intention of paying back the loan, it’s called Fraud for Profit.
One case with which I’m familiar fits the fraud for profit category. The scenario: A seller receives an offer significantly above the listed selling price. For instance a $300,000 offer is presented to the seller of a house listed for $220,000. The seller is told that the buyer plans to spend the extra money to fix up the property and wants the additional amount included in the mortgage. The seller ignores the fact that the deal doesn’t "smell right" because the house has been listed a while without receiving an offer and the seller is anxious.
Once the sales contract is signed for $300,000, the listing price is changed to $310,000. That way, red flags won’t go up when the selling price is disclosed after closing. A straw buyer is recruited, someone with a clean credit record. An appraiser provides an inflated appraisal to support the mortgage amount. Loan documents are doctored as needed. The loan originator is in on the scheme too. At closing, the seller gets the agreed upon $220,000. The excess mortgage funds are distributed to the team with the help of a complicit closing agent. Though the house may be rented, few if any mortgage payments are made and the property ends up in foreclosure months or years later.
I’ve identified eighteen mostly 2006 local real estate transactions fitting this pattern. All went to foreclosure. Seven have already been taken back by lenders. Another is scheduled for an upcoming foreclosure sale.
The lenders were not the only victims. The deeds were recorded at the inflated transaction price. Those recorded sales legitimized an increase in "value" of nearby homes. A few fraudulent transactions can raise the value of entire neighborhoods. Quickly rising prices fueled a feeding frenzy, pushing prices even higher. Some homeowners took advantage of their newfound "phantom equity" by selling. If they traded up, their new purchase was at an inflated price as well, leaving them upside down in their new home when the market corrected. Many homeowners simply turned their "phantom equity" into cash by refinancing or getting an equity loan. They too found themselves upside down after the bubble burst. More than half the homes sold in Flagler County in the last year were either lender-owned or short sales.
Mortgage fraud played a part, helped along by a lack of oversight complicated further by regulatory, jurisdictional, and geographic boundaries. The Miami Herald reported in 2008 the results of their investigation into the mortgage origination business in Florida. They found that, "In the first 11 months of 2007, more than 10,000 applicants got licenses without the (required) federal check, including at least one convicted bank robber and a man who was sentenced to prison for money laundering." But even worse, while Florida requires that mortgage brokers be licensed, it allows lenders to hire loan originators, who do not require a license. Mortgage brokers who lost or were refused a license simply became loan originators.
The Miami Herald report found that between 2000 and 2007, "5,306 people with criminal backgrounds became loan originators…. including 2,201 who had committed financial crimes, such as fraud, money laundering, and grand theft."
"Even large lenders hired loan originators with criminal backgrounds. In at least 30 companies with 50 or more employees, more than one in five originators had a criminal record."
The most sophisticated schemes involved practically everyone along the transaction chain; sales agent, broker, appraiser, loan originator, title company, and lender.
Even homeowners who avoided the pitfalls suffered the consequences – neighborhoods with vacant unkempt homes, higher taxes, and lost wealth. Our tax dollars funded a lenders’ bailout, but many failed banks and investment firms were shuttered forever. The only winners were the crooks. Let’s hope they are eventually exposed and prosecuted.
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