The FBI recently released its 2010 Mortgage Fraud Report and the findings are startling. Mortgage fraud continued at high levels in 2010, perpetrated by individuals whose main concern should be protecting their clients’ interests. The FBI’s long list of villains includes licensed and non-licensed mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives and trust account representatives. Their schemes are well thought-out and intricate, making it difficult for the FBI to track down these criminals.
It’s unknown how much money has been lost due to mortgage fraud, but one thing is clear: the sluggish housing market and rough economy are the perfect breeding ground for mortgage fraud schemes. According to the report, the housing inventory is at the same level it was during the peak of the housing crisis in 2008 and delinquency rates and foreclosures continue to increase in both prime and subprime markets. Criminals use foreclosure rescue and loan modification programs, along with short sales, to target distressed homeowners and take advantage of these dire circumstances.
Perpetrators of mortgage fraud are smart and generally well-connected, making it difficult for both the FBI and lenders to catch these criminals in the act. Cons involved everything from loan origination, settlements, investments, short sales and commercial real estate loan schemes to fake foreclosure rescue programs, advance fee schemes, builder bailouts, equity skimming and bankruptcy fraud. These fraudsters may have anyone on the take, from rogue appraisers to shifty real estate agents. While most real estate professionals want to do their job and help their clients to the best of their ability, criminals looking to perpetrate mortgage fraud know how to find the ones that aren’t so honest.
In fact, 43 percent of the FBI’s field offices reported real estate investment cheats in 2010. To pull off their schemes, perpetrators persuade investors or borrowers to purchase properties at fraudulently inflated values. This usually involves the work of a dishonest appraiser, who attests to the property’s inflated worth and includes exaggerated comparable properties as evidence of the home’s overpriced value. Victims pay artificially bloated rates for a property and lose money when they discover the home’s true value and criminals walk away with the extra cash.
So what’s being done about this epidemic of deception? The FBI report provides four possible solutions to the problem of fraud. The first, the Dodd-Frank Act (DFA) will establish the Consumer Financial Protection Bureau (CFPB) and set strict standards and regulations for processing mortgage loans.
The CFPB should accomplish four things:
1. Regulate strict guidelines for appraisers and licensing to appraisal management companies.
2. Oversee and assume total responsibility for consumer financial protection laws.
3. Add more layers to disclosures, licensing and process regulation with loan originators, reverse mortgages, mortgage companies and advertising practices.
4. Harmonize the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosure.
The CFPB, in combination with the Federal Trade Commission’s (FTC) Mortgage Assistance Relief Services Rule (MARS) and the Secure and Fair Enforcement Act (SAFE), requires lenders to disclose changes made to loans during modification, and demands that states have licensing and registration systems in place for all loan originators. This should make it more difficult for lenders to participate in fraudulent activities under the radar.
Even with these new regulations and the FBI’s enhanced efforts to crack down on mortgage fraud, it’s unlikely that the deception will disappear completely. According to the FBI’s own report, the depressed housing market and high unemployment rate will continue to serve as a breeding ground for mortgage fraud. Offenders will continue to modify old schemes and adopt new ones in response to stricter lending practices.