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FBI Reports Mortgage Fraud Running Rampant

by Barbara Hurst, BOL GuruGuru Bios

According to the FBI, reports of mortgage fraud in this country have tripled so far this year, creating a situation that has the potential to be epidemic.

Through the first nine months of 2004, mortgage companies and banks reported more than 12,100 instances of suspicious activity compared to 4,220 in all of 2001. The FBI currently has 533 pending mortgage fraud investigations compared to 102 in 2001.

The situation came about mainly because of the lending and financing boom that accompanied low interest rates in the last few years, the FBI said. And while several "hot spots" were identified in the report (Florida, California, Nevada, Michigan, Missouri, and Illinois), the FBI said fraud is occurring nationwide.

The law enforcement agency has targeted mortgage crimes for extra attention in the coming months. Since early August, this increased effort has resulted in more than 151 charges with potential losses to banks and other businesses of about $3 billion.

A look at one case illustrates one of the most common schemes: flipping. In this case, multi-levels of players, from initial property purchasers, to runners that found new buyers, to mortgage brokers, appraisers, and a real estate attorney who doctored loan documents was involved.

According to the indictment in the case, several defendants purchased distressed properties in low-income neighborhoods from the years 1998 to 2002. They then hired runners to find potential new buyers. The runners were paid finders' fees for successful sales.

The sellers enticed prospective buyers by not requiring down payments, offering cash at closing and offering help with financing to people having a tough time getting credit. The prospective buyers were then referred to mortgage brokers, which the indictment accuses of producing false and fraudulent loan applications. The brokers used instruments such as bogus down payment information, fraudulent income information, and false documentation to show improvements to the property that were never made. Appraisers involved in the scheme would then generate false and fraudulent appraisals that support the loan amounts for the artificially inflated property values. Once the unwitting lenders approved the loans, the buyers were referred to a lawyer involved in the scheme, who generated false real estate closing documentation to conceal the amounts and the fraud. Everyone involved in selling and qualifying the property then received profits from the inflation of the property value, which the lawyer paid out by transferring the loan amount into a client trust account and writing out checks.

About 200 properties and $15 million in fraudulently obtain loan proceeds are purported to be involved.

Other common types of schemes, according to the FBI, include false credit histories, fake identities and the use of "straw buyers" to conceal the true buyer's name and forged loan documents.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 14, No. 07, 10/04

First published on 10/01/2004

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