Mortgage fraud is growing, FBI says
Number of reports nearly tripled by September; Many involve hyped appraisal; Lenders also say people are lying about pay, jobs
By John Handley
Chicago Tribune
Originally published January 23, 2005
Victimizing both homebuyers and lenders, mortgage fraud is a big problem and it's growing, a byproduct of a go-go real estate market and technological advances that have led to easier transactions and identity theft.
FBI figures track the rising tide of mortgage fraud: Nationally, the bureau received 17,127 reports of mortgage fraud in the fiscal year that ended Sept. 30. In the preceding fiscal year, 6,936 reports were received.
The FBI opened 533 mortgage fraud cases in the first nine months of fiscal 2004, compared with 436 in all of fiscal 2003.
Lenders themselves are reporting increased fraud, though they are reluctant to reveal the extent of their problems, according to the Mortgage Bankers Association. But some smaller lenders may be going under because of fraud, an association spokesman said.
In the late 1990s, Baltimore suffered from a series of crooked real estate schemes known as "flipping."
Under a flipping scheme, a property is quickly resold - or "flipped" - at a price jacked up by a fraudulently high appraisal. The buyer is left with a house that is less valuable than the loan amount. In many cases, the mortgage goes into default and the lender absorbs the loss.
Robert L. Shield, senior vice president at Draper and Kramer Mortgage Corp. in Lombard, Ill., said a rapidly appreciating price is not always a sign of fraud.
"Many homes are worth more today than they were a year ago. But rapid appreciation should be checked out by asking appraisers to check out the value."
But other forms of mortgage fraud have increased in the past several years, said Shield.
And the perpetrators often are everyday homebuyers. "The majority of fraud we're seeing involves buyers who falsify their job and income so that they appear more qualified to get a mortgage."
"Mortgage fraud is big and growing," added Maxwell Marker, supervisory special agent at FBI headquarters in Washington. He spoke at a seminar on mortgage fraud at the annual convention of the Mortgage Bankers Association in San Francisco last fall.
"In today's active real estate market, a lot of property flipping may not look out of line. While a $100,000 loss in L.A. might not be significant, it's important in a small town," Marker said.
Marker advised anyone suspecting mortgage fraud to contact their local FBI office or the FBI headquarters.
There were $2.75 trillion in mortgages originated in 2004, including refinancing, according to Freddie Mac, the giant secondary mortgage market company.
Erik Stein, executive vice president for fraud prevention with Countrywide Financial Corp. in Calabasas, Calif., said: "All major cases of mortgage fraud where a lot of money is lost involve the collusion of real estate professionals."
Mortgage fraud is limited only by the imagination of criminals, according to Tim Doyle, director of government affairs for the Mortgage Bankers Association.
"We have no data on the dollar losses, but the industry association has noted dramatic increases in the number of mortgage fraud reports from our members," Doyle said.
"Lenders don't want to disclose fraud, that they are being taken advantage of. This has been a growing concern in the last year."
Doyle says flipping is one of the most prevalent types of mortgage fraud. "Duped homebuyers are paying exorbitant prices, but they don't find out the property was overpriced until they go to sell it," he said.
Chris Swecker, the FBI's assistant director of the Criminal Investigative Division, explained the mortgage fraud problem last fall at a hearing before a U.S. House subcommittee:
"There are many mortgage fraud schemes, but the FBI is focusing its efforts on those perpetrated by industry insiders."
Swecker identified those insiders as appraisers, accountants, attorneys, real estate and mortgage brokers, mortgage underwriters and processors, settlement/title employees and loan originators.
"Zero tolerance within the industry combined with a mandatory system of reporting fraudulent activities to the FBI and [the Department of Housing and Urban Development] will be a major step in addressing mortgage fraud," Swecker said.
"If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market," he said.
Swecker said the FBI has implemented methods to uncover mortgage fraud, including the development of a computer program to detect property flipping.
Fraud also has spawned a private-sector response. Appintelligence Inc., based in Weldon Spring, Mo., makes software products for mortgage fraud detection and prevention.
The Chicago Tribune is a Tribune Publishing newspaper.
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