Mortgage Fraud

As the U.S. housing market hits record highs, mortgage fraud appears to be rising from California to Florida, according to mortgage industry researchers and federal law enforcement agencies. "Criminals are opportunists," says William Matthews, co-author of a recent report on mortgage fraud by the Mortgage Asset Research Institute. "If you've got a booming market, they're going to get away with more fraud."

While it's unknown how many fraudulent transactions take place in the $3 trillion mortgage market, the institute found that 26 states had serious mortgage fraud problems. Fraud is costing the industry at least tens of millions of dollars a year, Matthews estimates.

According to an FBI report in May on financial crimes, "Mortgage fraud is pervasive and growing." Lenders last year reported to the FBI 17,000 suspected incidents of mortgage fraud, and the FBI's cases have grown from 534 in 2004 to 642 in the first half of 2005. At the IRS, criminal investigations of mortgage fraud from 2001 to 2004 have nearly doubled to 194 cases.

The co-founders of a company called the Dorean Group ran a nationwide Internet scam that defrauded banks, lenders and homeowners, according to a 46-count indictment announced two weeks ago by the U.S. Attorney's office in San Francisco and the FBI.

According to court papers, the men — Dale Heineman and Kurt F. Johnson advertised on websites for homeowners in deep debt. They filed quitclaim deeds in county recorder offices that signed over to them the titles on hundreds of homeowners' properties, the filings allege. Then the men told homeowners to refinance their properties, and the new loan proceeds would be split among the defendants and homeowners, according to court papers. The charges in the indictment concern 17 properties valued at $5 million in nine states. The FBI is continuing to investigate more than 480 properties in 35 states, with a potential value of $88 million in loans, that may have been affected by the alleged scheme. Heineman and Johnson were previously arrested on related charges by Utah state prosecutors and are being held in the Salt Lake County Metro Jail. They could not be reached for comment Tuesday.

In Kansas City, Mo., 17 people — posing as mortgage brokers, home buyers and sellers, appraisers and title-company employees — ran "a massive scheme of fraudulent real estate transactions," according to a lawsuit filed by ABN Amro Mortgage Group in federal court in June.

In a suspected "flipping" scam involving hundreds of houses, the defendants bought foreclosed homes at cheap prices, artificially inflated their values through false appraisals, then quickly resold them, the lawsuit says. They illegally profited from commissions and fees, the lawsuit says. ABN Amro, which underwrote and bought nearly 1,000 loans from the defendants, alleges that it was defrauded of millions of dollars.

In August, 37-year-old attorney Chalana McFarland of Atlanta was sentenced to 30 years in federal prison after a jury convicted her of heading a vast mortgage fraud ring that skimmed $20 million from inflated mortgages on 100 Atlanta homes, according to a Justice Department press release.

McFarland worked with 20 co-conspirators employed as real estate agents, mortgage brokers and loan processors. The ring used fake identities, fraudulent documents, shell companies and "straw" borrowers to buy suburban houses, then quickly resold the homes at artificially inflated prices, according to the Justice Department press release. The co-conspirators have pleaded guilty to fraud charges or have been sentenced to prison for several months to five years.

Mortgage fraud is hard to detect because 80% of the cases involve industry insiders, the FBI report says. The scams are tough to spot in hot markets such as California, where huge increases in home prices can hide illegal profits, says Rachel Dollar, an attorney and editor of Mortgage Fraud Blog. "By the time the properties go into default and the lender forecloses on it," she says, "the properties have appreciated so quickly that lenders don't lose money."

Federal and state authorities hope to thwart fraud by staging undercover investigations, wiretaps and stings. The mortgage industry is using computer software to hunt for unusual lending and financing that might be fraud. In Georgia, lawmakers recently adopted a law that makes mortgage fraud a criminal act. "For a long time, mortgage fraud wasn't really discussed much," Dollar says. "But now the industry recognizes that lenders are victims, and something needs to be done."

Oklahoma City Realtor Lark Dale last year was amazed to receive a $117,000 offer on a longtime rental property she listed in a Putnam City neighborhood. She'd had two previous offers from investors for $85,000 and $90,000. The prospective buyer - whose brother was his mortgage broker - wanted the seller to hike the sales price 3 percent to 5 percent to participate in a down payment assistance program, Dale said. But when a second appraisal came in at $145,000, her seller refused. "We thought the deal was fishy and didn't want any part of it," she said.

Such deals smack of mortgage fraud, industry observers say. Among common fraudulent practices are loans inflated for profit by real estate insiders, or when fake financial data is used to secure a loan for someone whose credit history is lacking. Lenders take the biggest hit, with annual losses from federally insured loans estimated at $606 million nationally. But homeowners and neighbors also can suffer, stuck in fraudulently appraised homes they can't sell or afford, or with falsely elevated property taxes.

Complaints of mortgage fraud are "way up, just by the shear numbers of mortgage brokers in the industry," said Jack Stone, deputy director of the Oklahoma Department of Consumer Credit. There are 400 brokers in Oklahoma and 1,600 loan originators.

Some studies estimate 10 percent of all mortgage loans and 25 percent of all foreclosures involve some sort of fraud. According to a recent report from the Federal Deposit Insurance Corp., foreclosure rates in Oklahoma are near 10-year highs and mortgage loan past-due rates are the ninth-highest in the nation.

The number of mortgage fraud cases the Internal Revenue Service initiated nationwide doubled from 107 to 215 from fiscal year 2001 to fiscal year 2003, said David Stell, Oklahoma IRS spokesman. In 2004, the most recent data available, there were 194 cases and three-year highs in the number of cases recommended for prosecution (148), indictment (102) and conviction (89). Violators face jail terms and up to $10,000 in fines.

The IRS in May issued a ruling that will help stop much of the fraud involving down payment assistance programs, industry observers say. The agency ruled organizations that provide seller-funded down payment assistance to home buyers do not qualify as tax-exempt charities. "We found organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangements," Stell said.

The ruling does not affect down-payment programs that use government grants. Still, mortgage fraud is pervasive throughout Oklahoma, Kansas City-based fraud prevention consultant Kevin Barnes said. Based on phone surveys he made as a mystery shopper, nine of 12 mortgage brokers in Oklahoma City were willing to commit fraud. Eight of 15 brokers in Tulsa and three of eight Realtors in Tulsa also were willing, he said.

Barnes should know. He was convicted and jailed for mortgage fraud and now works to prevent it in the industry. "I was lured by a six-figure income and knew darn good and well what I was doing was wrong," Barnes said. Over five years, Barnes, a husband and father, said he was involved in a fraud ring of lenders, appraisers, Realtors and title company employees that made about $124 million in bad loans.

Eighty percent of fraud originates with industry insiders, Barnes said. Bad lenders help prospective home buyers overstate their incomes, he said. Some fabricate second jobs for borrowers; others might not disclose the buyer has $1,700 monthly child support payments. "It's no wonder people get into homes and can't make the payments and foreclose," Barnes said. "But many lenders just consider that part of the cost of doing business. They may have issued loans with higher interest rates up front, so they got that money."

Staying safe Tips to protect you from becoming a victim of mortgage fraud: Get referral for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county or city regulatory agencies. If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem. Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques. Look at written information to include recent comparable sales in the area and other documents such as tax assessments to verify the value of the property. Understand what you are signing and agreeing to. Otherwise, reread the documents or seek assistance from an attorney. Make sure the name on your application matches the name on your identification documents. Review the title history to determine if the property has been sold multiple times within a short period. It could mean the property has been "flipped" and the value falsely inflated. Never sign any loan documents that contain blanks. This leaves you vulnerable to fraud. Source: The Federal Bureau of Investigation

Not so for Arvest Bank, said Todd White, senior vice president of loan production. "We're not above being taken advantage of," White said. "But, we tell our associates we have a no-tolerance policy, and there's no loan worth ending a career on."

Arvest, as do other lending institutions, trains its employees to guard against fraud. "If, for example, a buyer wants to refinance and cash out of a home that was purchased 18 months ago and appreciated dramatically, we challenge our employees to make sure the value is there. Why did this house appreciate 50 percent when comparable houses appreciated 5 percent a year? "And if a borrower insists on using a certain appraiser, that's a red flag. We tell our employees to look closely at the appraisal and that they might want to drive by and look at the house."

Oklahoma City appraiser Lonnie Stephens doesn't take offense. He's seen his share of fraud. Just last month, a lender called and needed a newly constructed house reappraised. "The first appraisal said it was complete and from the street it looked finished," he said. "But none of the interior was done."

The lender looked shocked when Stephens told him about the incomplete appraisal but wouldn't give him the name of the first appraiser so Stephens could file a complaint.

Stephens said lenders frequently tell him upfront what appraisal value they need, he said. "They might say 'Well, this property's got to appraise for $100,000.' If I call back and tell them it's only a $90,000 house, they probably get off the phone and call someone else. I don't know," he said.

The Oklahoma Real Estate Appraisal Board has received 98 complaints and plans to contract three investigators to address them, said Marc Young, spokesman for board chairwoman and Insurance Commissioner Kim Holland. The board also has doubled its budget to $110,000 for prosecuting attorney fees and, effective Nov. 1, will levy up to $5,000 in administrative fines for violations, along with license revocation, suspension or probation. Oklahoma has more than 1,600 licensed appraisers. "Many entered the industry in the past five years when the interest rates were low and people were refinancing," Young said. "And today's market can't support them all."

Edward Iwata. Fraud booms with mortgage market. . Posted 10/4/2005, Updated 10/12/2005. Paula Burkes Erickson, Business Writer. Fraudulent loans cost industry, consumers. The Oklahoman. Sun August 13, 2006.

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