Combating Mortgage Fraud During the Financial Crisis

July 2009

IN THIS ISSUE

— Bring Check and Skepticism to Closing: Signs of Mortgage Fraud
— The Effectiveness of Ongoing Reform Efforts
— In the next issue

GREETINGS!

Welcome to the July 2009 edition of our newsletter! In this issue, we’ll examine ongoing efforts to crack down on mortgage fraud, their effectiveness and possible areas for improvement.

BRING CHECK AND SKEPTICISM TO CLOSING: SIGNS OF MORTGAGE FRAUD

As the housing boom that began in earnest in the mid-1990s crested, the amount of transactions involving real estate – whether transfers or refinancing – skyrocketed. As activity surged, predators intent on making a quick, often dishonest buck stepped into the marketplace. These can include using outdated or misleading photographs as part of the appraisal process, or using related parties as “straw buyers” to inflate a home’s perceived worth before “flipping” it to another, unrelated party. As the Federal Deposit Insurance Corporation noted, filings of Suspicious Activity Reports related to mortgage fraud surged from nearly 5,000 in 2002 to more than 25,000 in 2005, and were only expected to increase.

As home foreclosures have skyrocketed, typically involving over-leveraged homeowners desperate to get out from under their four walls of debt, the opportunity for fraudsters has also surged. Although many mortgage brokers ply their trade fairly, simply acting to get their client the best possible deal, others see their insertion into the process as a means of making money at the expense of either party in the transaction.

THE EFFECTIVENESS OF ONGOING REFORM EFFORTS

The need for reforms within the mortgage industry to combat fraud is nothing new, but recent events have certainly placed its importance at the forefront of American domestic policy. When he was still a U.S. Senator – prior to announcing his national candidacy — President Barack Obama (aided by his future running mate, Joe Biden) authored the Stop Fraud Act, which would make a “mortgage professional’s” knowingly misleading a client for financial gain a criminal act, punishable by up to 35 years in prison and/or a $5 million fine. This sounds useful, but there is language similar to that near the bottom of every loan application that implies some measure of criminal penalty for fraud in mortgage applications, and this policy has been in place for several years.

While Obama touted when in the White House that his bill “requires the Government Accountability Office to evaluate and report to Congress on various state lending practices so that state regulations that undermine consumer’s rights can be identified and hopefully eliminated,” as of this writing no such report has been issued, either nationwide in scope or using regional case studies. This suggests that lawmakers don’t yet have an adequate way of understanding how their laws can and cannot be used effectively by the regulators charged with enforcing them, leaving the marketplace still ripe for fraud. Fraud examiners can determine the disciplinary and regulatory history of mortgage brokers and independent originators to give clients any history of a pattern and practice of questionable behavior.

IN THE NEXT ISSUE

In the next issue we’ll look at the tools an investigator can use when performing international compliance checks for due diligence and Foreign Corrupt Practices Act, as well as why and how various companies are sanctioned.