Mortgage Lender Fraud Increase Seen By Law Enforcement

Mortgage fraud is back in the news. However, this time it is the lenders rather than the borrowers who appear to be the main targets of the scams.

The Wall Street Journal quotes The Federal Bureau of Investigation as stating that mortgage fraud led to losses of $1 billion last year, more than twice that recorded in 2004. There is apprehension that some of the fraud that was perpetrated during the recent housing boom has yet to surface. Financial institutions filed 25,000 Suspicious Activity Reports - which can cover problems other than the mortgage related - up from 5,000 in 2002.

Chip Burrus, assistant director of the FBI's criminal division states that some criminal gangs involved in drug dealing and other street crimes have been attracted by the large sums involved in mortgage fraud. "It's more profitable and less risky," he said.

One of the largest property owners in Buffalo, New York was recently sentenced to a year in prison and paid $1.5 million in restitution, mostly to Freddie Mac after a pleading guilty to mortgage fraud. The man obtained over $4 million in home equity lines of credit which he maxed out, stopped making payments on the lines and let the houses go into foreclosure.

After a recent series of Boston Globe investigative articles on the mortgage industry the Massachusetts Division of Banking has issued 17 cease and desist orders against mortgage companies and brokers all over the state. Most of the orders concerned falsifying information to allow borrowers with insufficient income to qualify for loans although some were for operating unlicensed companies or unlicensed branches of duly licensed companies.

A Pennsylvania mortgage lender established a phony property management company in order to falsify rental histories for borderline borrowers. When a verification of rents was needed for loan documentation and the borrower had no history or a poor one, the management company - which wasn't renting or managing anything - provided the false information. Many of the borrowers, unable to afford payments, eventually went into foreclosure.

The biggest recent case has allegedly victimized one of the nation's largest mortgage company but also around 100 persons living in Virginia who took out loans to buy homes in Indiana at inflated prices.

Countrywide Mortgage has filed suit against 15 parties in the circuit Court in Macon County, Indiana alleging that the company may have been tricked into lending as much as $40 million dollars (figures elsewhere say $80 million.) The defendants include eight individuals an appraiser, a property management company, and several mortgage and lending companies. According to The Wall Street Journal, another large lender, Argent Mortgage Company may also have been caught up in the scam. Some of the bad loans also appear to have been acquired by Fannie Mae.

The principal targets of the lawsuit are the Penn family; Beulah, a lay minister in a church in the small town of Martinsville, Virginia; her daughter Sharon, a local hairdresser; and Beulah's son Robert. Robert Penn, operating through a number of companies he had formed, allegedly signed purchase agreements on a number of properties in Indiana at highly inflated prices. The two Penn women then apparently used friendships and business contacts within the community of Martinsville, Virginia to assist in the scheme. Martinsville, a small town in the Piedmont had fallen on hard times after many of the textile mills moved overseas and furniture factories closed. The Penns convinced friends and parishioners of their church to participate in a "no risk" investment to buy the properties, mostly located in the Indianapolis area. They were told there was no financial investment involved; they merely had to allow use of their names and good credit and sign some documents.

Robert Penn then allegedly completed purchase of the homes he had under agreement in the names of his Virginia investors. He paid the sellers of the homes only the actual market value while recording highly inflated values on the purchase and loan documents. The loans were handled through mortgage companies which were apparently either owned or controlled by Penn.

The Times reports that many of the Virginia investors received small payments from Penn early on, but most initially had no idea that they were suddenly property owners in Indiana - some owned multiple properties and owed hundreds of thousands of dollars. Some did not realize what had happened until they applied for new credit and were told they could not qualify for more debt or when they started getting collection notices from Countrywide. Several claimed that, while they had signed papers, they were given no opportunity to read them before signing. The houses, most located in rundown areas, are generally estimated to be worth $30,000 to $40,000 while the loans are usually three times that amount. The Virginia borrowers are liable for the debts and most say their credit histories are in ruins.

State and federal authorities are said to be investigating the situation, but no criminal charges have been filed.

The borrowers, of course, are not completely blameless. It is hard to believe that anyone in America today has not heard the old cliche about free lunches and you also have to know that greed played as large a role as naivete. But could the lenders pay better attention. Why, for example, didn't someone question why so many people from the same town in Virginia were suddenly buying property in Indiana - one of three or four states in the entire country with areas that have actually had negative appreciation in recent years. Several of these buyers apparently closed on multiple properties in a single day - not unheard of - but perhaps a flag if Countrywide were adequately reviewing loans. The gentleman in Buffalo who owned the lender $1.5 million on $4 million in loans was pretty clearly playing on the lenders lack of attention to their collateral. The documentation in a loan package uses consistent forms nationally and each file is assembled in a way so as to facilitate later review. Perhaps the big lenders need to hire more people to do this review before they release funds to the mortgage companies.

They may have an obligation to the community as a whole to exercise greater care. Mortgage Fraud Blog quotes United States Attorney Patrick L. Meehan as saying, "Mortgage fraud harms entire neighborhoods. Foreclosures affect everyone, not just the people who lose their homes but also their neighbors." Meehan noted that a recent study by The Reinvestment Fund found that, for every foreclosure in Philadelphia within a block of your house the value of your house will fall by 1% within a year.