Mortgage Fraud: Retail and Wholesale

The mortgage financial disaster is coming to the attention of the government, slowly and late. (I don't say "subprime disaster," because indications are that it will spread wider than subprime.)

I have read many articles and announcements about the proposals to help strapped borrowers, but none of these have mentioned the widespread problem of mortgage fraud.

There appear to be many types of mortgage fraud, not mutually exclusive. These include:

1. Appraisal fraud, where the value of a property is inflated.

2. Stated income fraud, where the borrower's income is inflated.

3. Occupancy fraud, where the borrower states that the home will be his primary residence (getting him a lower mortgage rate), but actually does not plan to live in the house.

4. Identity fraud to get mortgages.

Here is an article, describing several other types of mortgage fraud.
http://tinyurl.com/2brcwp


Perhaps the most crucial step in any fraud investigation is finding the people who packaged the phony loan. Mortgage brokers, financial advisers and appraisers are rarely listed in public records of transactions. Authorities have no practical way to track them from deal to deal or detect patterns....

This year [2005], when the state [Illinois] required loan originators for the first time to take a test and undergo a criminal background check, only 15,000 of those 29,000 brokers took that next step and applied for a permanent certificate, state officials say. Of those, 40 percent failed their exams, and roughly a third had criminal backgrounds....

It might help law enforcement officials like Fennessey if there were mandatory reporting of possible fraud in the home loan industry.

The FBI has asked for a home loan equivalent of the suspicious activity reports required of other banking officials who suspect fraud. But mortgage industry groups counter that burdensome and expensive reporting requirements could ultimately choke off credit to homeowners.

Beyond the first line of financiers, the trail becomes even more difficult to follow. In the multibillion-dollar secondary market, home loans to low-income borrowers are pooled and then offered as securities to Wall Street investors.

Big institutional investors sometimes hold a pool of these subprime loans for just minutes before reselling it. Since no single foreclosure represents a significant loss to any of these investors, the owner of a delinquent loan has little incentive to assist a borrower, to hold an unscrupulous loan broker accountable, or to report suspected fraud to authorities.

As Fennessey puts it: "A lot of these mortgage companies just write off the loss and walk away. Then whose mortgage is it?" [end quote]

Fraud is illegal. It is entirely different (and does not exclude) legal predatory lending practices.

Mortgage fraud has been on the radar screen for quite a long time. The FBI has been actively investigating it since 1999.

http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm


The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders. Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan....

Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. [end quote]

The Mortgage Bankers Association, in cooperation with the FBI, has established a website as a clearinghouse for mortgage fraud information. The SEC has also begun to investigate mortgage fraud, but from the angle of investigating banking insiders, which is different than borrowers perpetrating fraud on lenders.

http://mbafightsfraud.mortgagebankers.org/

Mortgage fraud is in the news this week.
http://tinyurl.com/2gw59l


FBI to Focus On Area Mortgage Loan Fraud
Agency to Host Investigators, Law Enforcement Officials

By Carrie Johnson and Tomoeh Murakami Tse
Washington Post Staff Writers
Thursday, December 6, 2007; Page D01

The FBI today will launch a mortgage fraud task force in its Washington field office, joining a widening net of state and local investigators digging into the market crisis.

Investigators are seeking to uncover evidence of overvalued home appraisals, shoddy lending practices and alleged irregularities in the packaging and sale of groups of loans that were marketed to ordinary investors, state investment funds and big Wall Street banks.

Today the FBI will host the top federal prosecutors in the District and Northern Virginia as well as investigators from the Department of Housing and Urban Development, the Internal Revenue Service and the Small Business Administration. Law enforcement officials from Loudoun, Fairfax and Prince William counties also will attend to devise strategies for attacking the issue across the region, an FBI official said....

The state probes piggyback on new authority by the Securities and Exchange Commission, which recently gained more oversight of rating agencies. The SEC has opened more than two-dozen investigations across the subprime lending horizon, according to an agency spokesman. On the list: whether large banks knowingly concealed real estate losses from investors, whether mortgage company executives engaged in insider trading and whether risks stemming from the loans were adequately disclosed.

Whether heightened government scrutiny following billions of dollars in investor losses will result in a spate of criminal and civil cases remains unclear at this early stage. [end quote]

Notice that the FBI investigation in this story is local to the Washington, DC area.

A big part of the problem is that each state regulates mortgage brokers, notaries, and the rules for recording real estate transactions. There are 50 different sets of regulations. Some states don't register or regulate mortgage brokers at all.

The FBI offices operate locally. Each will decide separately how many resources to devote to mortgage fraud.

Crime is generally a "retail" problem. Bank robbers, gun runners, drug dealers, terrorists and ordinary white-collar criminals are, fortunately, only a small fraction of the general population, and there are millions of honest bank customers for every bank robber.

Because of this, the FBI runs a "retail" operation. They investigate and arrest criminals one at a time. Sometimes, their in-depth investigations reveal a criminal ring, and they can arrest a few at a time.

The problem with mortgage fraud is that it's a combination of "retail" and "wholesale" crime.

The FBI is playing to its strength in "retail" crime, by focusing on industry insider fraud. I'm glad they are intensifying their investigations.

However, they are not addressing the "wholesale" fraud of millions of "liar loans." As far as I can tell, nobody is.

John Mauldin has written:

http://www.gold-eagle.com/editorials_05/mauldin081807.html


"The loan application and review process for 'no-doc' loans was so lax that such loans are referred to as 'liar loans.' In a recent report by Mortgage Asset Research Institute, of the 100 loans surveyed for which borrowers merely stated their incomes on loan documents, IRS documents obtained indicated that 60% (!) of these borrowers overstated their incomes by more than half.

"The newer mortgage products, such as 'piggyback,' 'liar loans' and 'no doc loans' accounted for 47% of total loans issued last year. [end quote]

I searched for the original research paper, but couldn't find it.

Assuming Mauldin's report is accurate, the problem of "wholesale" income statement fraud is more pervasive than "retail" fraud. There are at least hundreds of thousands, perhaps millions, of stated-income mortgages.

Detecting income statement fraud would require the cooperation of the IRS. The IRS would be sooooo eager to take on a massive problem like this -- NOT!

Can you imagine the organizational rapprochement and computational cooperation it would require, between the FBI (which as already said they aren't interested in this angle of fraud) and the IRS? Even if they were both as eager to merge their resources as -- say -- porcupines in heat, the project of investigating and prosecuting hundreds of thousands of "struggling" homeowners would be next to impossible, due to political ramifications.

Which brings us to the government-sponsored mortgage bailout.

Of the (WSJ-estimated) 600,000 borrowers who qualify for the teaser mortgage freeze, how many committed fraud? Who will investigate whether the original mortgages were honest or fraudulent?

Will investors and (possibly eventually) taxpayers bail out fraudulent borrowers, along with merely imprudent ones?

None of this has been mentioned, in any of the announcements of the mortgage teaser rate freeze.

Wendy

Yes!! Nice information that you have shared with us.

Thank you very much