We first felt it in the fall of 2005 as a minor tremor. Of course the stress had been building imperceptivity for many months. By December of 2005 the tension was described by Inman News as a “Pandemic.”
2005 will go down in history for many things. Its record of 7.2 million residential units sold may stand for years. But perhaps the most long-standing and distinctive feature of 2005 will be that it was the year that mortgage fraud became a prominent feature in the marketplace.
According to Inman News the FBI handled 21,994 reports of "suspicious"
The FBI reported over 750 pending mortgage fraud investigations in numerous states, up from 534 in 2004 and more than three times the number in 2003. At the time, the 2003 number was the agency's largest ever nationwide enforcement operation directed at financial institution fraud, including mortgage fraud.
With enforcement up, who do you think will be caught in this dragnet? Those who are plotting with illegal intent, and are planning for the risk of law enforcement intervention?
In light of this renewed effort in law enforcement, it is essential for all brokers and agents to understand:
• What mortgage fraud is
• How one might recognize it in action
• The nature of the law enforcement process, and
• The real danger of getting caught up in one of the many “stings” that are now being conducted in the marketplace.
Akin to predatory lending, the FBI defines mortgage fraud as "a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan."
According to Ralph Roberts, a Michigan real estate broker, who has become a nationally recognized anti-fraud advocate, the illegal behavior comes in several forms involving bad actors who:
• Pay "straw borrowers" or "investors" to sign and submit documents containing false qualifying information.
• Induce appraisers to inflate property values in order to obtain a larger mortgage loan for the "straw borrower."
• Submit bogus invoices for phantom "upgrades" or "renovations"
• Promise "investors" that properties will be leased or rented, and that they will pay all mortgage, insurance, property tax and homeowner association payments for those investors. (Of course these tenants never materialize and the payments are never made).
• Pay "straw sellers" to falsely claim ownership of a property, appear at a closing where the property is sold to "straw borrowers," distribute the mortgage proceeds inappropriately and subsequently appear at the next closing (sometimes within hours) to purchase the same property at a lesser amount, (this is, of course, the classic act of “flipping”)
• Provide buyers with funds for down payments that are falsely represented as being paid by the borrower.
• Create "false sellers" and "false borrowers" to assume false identities for the purpose of fraudulently obtaining mortgage loan proceeds.
• File false release, cancellation and assignment of security deeds on properties to eliminate the security interest of legitimate lenders in order to clear title prior to obtaining additional mortgage loans on the property.
While the above behaviors are the most common, like other popular crimes, mortgage fraud comes in an endless range of variations as more bad actors apply their creativity and innovation to the illegal activity.
Mortgage fraud has never been a sexy or glamorous crime. In fact despite its statistical growth over the past several years, until 2005 it had not received the full attention of law enforcement. Surprisingly, as the crime grows, more suspects are walking. There were 206 indictments in 2005, down from 241 in 2004. And there were 170 related convictions in 2005, down from 172 in 2004.
Today mortgage fraud is a priority within the federal and state law enforcement community. It is now receiving a level of treatment that will redefine the crime.
Public education about criminal behavior is often frustrating and non-productive because the public fails to see the relevancy of the crime. The vast majority of real estate and mortgage professionals would not willingly participate in mortgage fraud. But they might be involved unknowingly. In order to make their newfound seriousness “relevant”
Activities that constitute violations of any criminal statute are like the four concentric circles of a target. In the middle “bull’s eye” are the worst offenders, the true criminal element. In the second ring there are the amateur criminals who are just opportunists. In the third ring are those who just practice in a sloppy manner. And in the fourth ring are those who are just trying to “get by” in a complicated world.
A classic example of this target concept is our common experience of speeding in a car. The “bull’s eye” group goes 95 in a 55 zone and everyone is offended. The second group goes 85 and everybody notices. The third group goes 75 and everyone wonders. The fourth group however believes in the “7 over” rule and believes that 62 MPH is really all right.
Unfortunately many professionals whose arrest will make the enforcement effort “relevant”
Most distressing is that many of these “technical”
Brokers should immediately review the mortgage procedures being used by in-house mortgage programs, and more to the point, by agents who may be using mortgage resources of a lesser more personal quality.
It is time to once again consider the benefits of a strong core mortgage program.
Don’t slide into simple violations that become the basis of an appearance on the front page of the local newspaper and an appointment with a federal judge. Beware. Review and exercise your management and control procedures.
The time is now to prepare to protect ourselves, and our clients. We an not stop the aftershocks. But we can build solid and flexible policies to keep our structures from crumbling.
