A Just Pursuit.

A specialized firm set up to battle mortgage fraud and its attorney/founder are fighting mortgage scams by purchasing litigation rights. Then IMARC is tracking down the bad guys and nailing them in court.

MORTGAGE FRAUD IS NOTHING NEW TO THE MORTGAGE INDUSTRY, THE GOVERNMENT OR THE MEDIA.

Countless committees, hearings, studies, task forces, stories, exposes and in-depth reports have been devoted to the subject. But has all that attention really uncovered the true depth and breadth of the problem?

What's really going on out there? Do we really want to know? If we did know just how frequently fraud creeps into the mortgage business, what would we have to do about it? What would the government do? How would the industry and your job change if there truly was a vigorous and united campaign to wipe out fraud?

These are some of the fears surrounding mortgage fraud. Like all fear, it can mobilize or paralyze. Mortgage fraud is not going away--and with emerging technologies, it may only get worse. This is a story of how one company is taking on mortgage fraud and advocating for solutions that deal with the core issues that enable it to occur.

When someone defrauds a lender, the lender has legal rights. It can go after the individual or entity in civil and criminal court. By doing this, the lender vindicates its own rights and fires a shot across the bow to future culprits that there will be accountability--thus protecting the industry as a whole.

Unfortunately, this isn't always the way it works. Police and prosecutors don't have the desire or resources to pursue mortgage fraud, and in many instances lenders lack the resources--or the desire to expend them--to pursue action in civil court. One option for lenders that either can't or won't pursue their claims in civil court is to sell the litigation rights to a third party that can bring suit and, if successful, obtain a judgment and recover monetary damages.

Selling judgments is nothing new. In such instances, a person who has already obtained a judgment against a person or entity sells the right to collect the money. The purchaser merely tracks down the judgment creditor and collects.

Selling litigation rights is trickier. You're not just selling a debt--you're selling a potential debt. The purchaser still has to go out and try the case or get a settlement before the process of collection even begins. There is at least one company in the United States that is doing this right now in the mortgage field. Investor's Mortgage Asset Recovery Company, LLC (IMARC), Newport Beach, California, founded by attorney Bob Simpson and financier Gene Leyton, purchases the litigation rights to mortgage fraud claims. It's a financial venture, to be sure, but for Simpson it is also a vehicle for attacking mortgage fraud and advocating for solutions.

Getting started

"I did not see myself doing this when I was in college or even law school," remembers Simpson. Simpson grew up in Southern California. He earned an economics degree from UCLA, followed by a law degree from Duke University. He began practice in Salt Lake City with the firm of Ray, Quinney & Nebeker.

"I was doing corporate law, banking and mortgage banking issues," he says. Yet, Simpson felt unfulfilled. He liked real estate and decided to become a mortgage broker. So in 1986, he moved back to Southern California and dove in. "The secretary at about the third office I went to asked me how long I'd been a loan broker, and I really was tempted to look at my watch," jokes Simpson. He was very successful and worked as a loan broker for the next 10 years. "I liked my job. I liked helping regular people get loans. It was tangible success," he says. But that started to change.

"It was a few things, really," Simpson says. "I was in a position any number of times of trying to make a deal work that was not realistic. The borrower wanted to purchase, and the real estate agents wanted to make a sale, but the borrower was not qualified. I began to find myself competing against loan officers who never declined anyone. Also, the lifestyle was becoming invasive. I would get calls from agents during dinner or be asked to give up soccer games with my child on Saturday morning."

So in 1996, Simpson decided to pursue a different avenue within mortgage banking. He hooked up with Newport Beach, California-based Wolf & Pfeifer, a mortgage banking law firm. The firm was looking to create a division of its practice that prosecuted mortgage fraud cases. For the next three years, Simpson and co-counsel Janice Celotti prosecuted cases on behalf of industry clients. (Celotti is now manager of the borrower fraud litigation section at Severson & Werson, Irvine, California.)

"Bob did great work, and we still work together quite a bit on mortgage fraud cases. My firm may be more appropriate for a particular case or vice versa," says Michael Pfeifer, now managing partner with Pfeifer & Davidson, LLP, Orange County, California.

Simpson enjoyed his time at the firm but wanted to create his own company to prosecute mortgage fraud. "It was a financial decision, but I also became aware that most of the cases involving smaller amounts of money--say, under $50,000--were not being prosecuted. This resulted in unserviced clients and mortgage loss going uncollected," says Simpson.

So Simpson, with the help of financial backer Gene Leyton, created IMARC. Leyton, mayor of Brea, California, from 1989 to 1990 and a former city councilman, has a long history in hard-money automobile financing dating back to the 1960s. He created and owned County Financial Services (CFS), Newport Beach, California, and became an expert in auto finance. His expertise was particularly acute in collections, utilizing skip-tracing and other methods.

In 1994 Leyton sold CFS, and began what he describes as "restless retirement." You can only play so much golf, and after being introduced to Simpson in 1999, Leyton decided to unretire and bring his expertise to the fight against mortgage fraud.

Leyton has a passion for holding people accountable. That, combined with his collections skills and Simpson's mortgage and legal acumen, makes IMARC a potent force in the battle against fraud. In the beginning, they had to hustle a bit, putting out the word about the new venture. Now the caseload has expanded significantly and the company has grown steadily over the last year and a half.

"We just moved to a new office and are expanding the number of employees we have with the company," Simpson says. In addition to purchasing mortgage fraud litigation rights, IMARC also does discovery work for law firms doing direct representation for industry clients. "We can do discovery work for significantly less than the law firm can, because we are specialists in screening cases and can cut through a lot of irrelevant stuff quicker," says Simpson.

How it works

Buying the litigation rights to a mortgage fraud claim is a lot like buying anything with a degree of speculative value. The first stage is bidding on the claim. Simpson's background, which combines a decade of originating loans across kitchen tables, and extensive litigation experience allow him to analyze these cases from a unique perspective. There are certainly legal issues to address, such s statutes of limitation and the burdens of proof to bring various causes of action. But just as important is the factual analysis that must be done. Who knew what, and when did they know it? Did the borrower trick the loan officer, or was everyone in on the deception? Does the Realtor always know about a hidden second? Under what circumstances would a Realtor not know? Is the borrower's sophistication relevant? What is the significance of the handwritten 1003 versus the typed 1003?

Simpson is reticent to reveal the magician's tricks. "All I can say is that screening cases and bidding correctly on the ones we do purchase is crucial," he says.

Once all the questions are asked and answered, IMARC is then in a position to decide if it wants to proceed with a suit. If it does, then it has to find the defendants. IMARC has an excellent skip-trace department that is very successful in finding the defendants, after which the case can take off. From there IMARC and the defendants either settle or fight it out in litigation.

Theft fraud

There are basically two types of mortgage fraud. The first is outright theft against the lender. A broker will make a loan to a purchaser for the legitimate purchase of a property. Then, using the purchaser's credit information, the broker will take out another loan--say, a Title 1 loan for $25,000--and pocket the money, leaving the consumer to fend off the creditor. "I'm looking at a situation where a woman did this 25 times-that we know of," says Simpson.

Another example of outright theft is where an individual either owns or will purchase a piece of property for, let's say $100,000, usually under the name of another person. Next, the person will steal the identity of an individual like you or me and create a buyer for the property. Commonly, the individual will put out an advertisement for an apartment for rent and, as part of the application process, potential tenants submit to a credit check. The fraudster finds an individual with appropriate credit and either uses that person's identity or creates a ghost buyer using the vital statistics of the individual whose credit he or she has stolen.

The thief obtains a mortgage loan for $300,000 or more to finance the nonexistent purchase of the property--and will even make the payments on the loan for a while, usually to buy time to complete similar acts of fraud. After a while, the thief stops making payments and flips the property between various false identities. Finally, the lender forecloses and the thief makes off with about $200,000 per scam.

"I saw on a television special where somebody made off with S7 million over two years at a casino," says Simpson. "A bank heist of $4,800 gets FBI attention. [But] you can make off with $100,000 a month easily in a land-flip scam and nothing gets done about it. Mortgage fraud is probably the most unaddressed form of theft in the nation," he adds.

Simpson says that immigrants and minorities are a major target of theft fraud. "They do not have the level of education and experience, on the whole, that other demographic groups have. As well, the lack of proficiency in the language can be a real setup for victimization," he says.

"No one really knows how much the total [monetary value of mortgage fraud that occurs] is in individual areas or nationwide," says Jim Croft, executive director of the Mortgage Asset Research Institute, Inc. (MARI), Reston, Virginia.

Disclosure fraud

Borrower: "I own part of the business, but I'm not an employee."

Agent: "Don't tell me that! I need you to be an employee, not an owner!"

Borrower: "Why? I mean, I make enough money and I'll make my payments--so what's the problem?"

Agent: "If you're an owner, I'll need all kinds of financial statements and stuff like that, and it'll jeopardize the loan. So-you're an employee, right?!"

Borrower; "Absolutely!"

Agent: "I'll need some documents from your business showing you as an employee. Is that a problem?"

Borrower: "I'll take care of it."

This was an actual conversation that took place at a California Pizza Kitchen restaurant. At the very next table, Bob Simpson was nearly choking on his pie. "I was just eating lunch and overheard the conversation," he says. "It's endemic to the industry."

The second type of mortgage fraud is the kind that does not involve any intent to steal money. Yet it, too, is a major part of the reality of mortgage fraud in America. This kind of fraud involves many types of technically fraudulent practices. Listing an individual who is an owner of a business as merely an employee to avoid having to disclose lengthy financial statements is one example of it.

Declaring a loan from a parent or other party a gift to avoid the existence of an additional creditor is another. "Typically, a parent or grandparent will loan an individual or a couple money toward the down payment. There is an expectation of repayment, but not in the traditional creditor-debtor sense. The existence of this so-called loan can really jeopardize a mortgage," says Simpson.

Also, the nominal inflation of the purchaser's actual income is common. "The problem [and how it's dealt with] is the opposite of what we do to detect theft fraud," says Simpson. "We do almost nothing to identify and prevent mortgage fraud that involves what I call 'true fraud,' where there is no real borrower or there has been identity theft and the loan is outright theft against the lender. On the other hand, we put such arduous conditions on legitimate borrowers to qualify that we force most brokers to engage in what is technically fraud. We see cases where loan brokers stick false documents in the files of borrowers, and the borrowers never know it. There is such pressure to keep borrowers and real estate agents happy, that the rules get broken all the time."

Potential solutions

There are some things that both the government and the industry could do to reduce--if not eliminate--mortgage fraud. First and foremost is the need to deal with identity theft. "It's the key to most mortgage fraud theft," says Simpson resolutely.

Without our identities and vital statistics, thieves would not be able to borrow money in our names or create ghost buyers using our information. With the advent of the Internet and technology, the potential for identity theft is even greater. Greater care on the part of individual consumers with regard to concealing vital statistics is obviously needed, but better encryption and privacy protections on the part of technology providers is also necessary.

Another way to fight fraud is to use the variety of technological tools available to catch suspect transactions and parties. Companies such as New City Asset Management, Inc., St. Charles, Missouri; Affinity Corporation, West Hills, California; and MARI offer such products. The problem is that they usually identify individuals and properties that have already been involved in fraud. It would be much better to catch an individual before he or she commits fraud the first time.

Verification of borrower income directly with the Internal Revenue Service (IRS) would be a great way to ensure that applicants are who they say they are, earn what they say they earn and earn it where and how they say they do.

This is possible right now under the IRS 4506 and 9501 programs that allow verification. "The problem is that they are paper-driven and thus extremely slow--three days for institutional participants and up to two weeks for individual lenders, longer during tax season," says Marta McCall, attorney and senior partner at McCall & Associates, San Diego, and past chairperson of the California Mortgage Bankers Association's Mortgage Quality and Compliance Committee. "What is needed is an electronic system that can be done on the spot. There are privacy concerns from civil liberties groups, and so far the technology is not cost effective." The use of retinal scans and fingerprints is also an option for verification, but so far these methods have not materialized as a cost-effective means.

The government also could take a greater role in fighting mortgage fraud. By making mortgage fraud a priority, the local, state and federal governments could assist the industry in holding perpetrators accountable. Department of Housing and Urban Development (HUD) loans are a great source of fraud, according to Simpson. "We find many cases of fraud perpetrated by people buying HUD foreclosures," he says.

Recently, IMARC sued a borrower and loan broker because of false W-2s and tax returns. When the borrower was served with the lawsuit, she contacted IMARC with an incredible story. A loan broker had contacted her and asked if she would like to own a property. She said yes, and 30 days later the loan broker showed up with a key to a house she had never seen.

The loan broker had created and signed all the loan documents for her. As it turned out, the house was a HUD repossession purchased by the crook for $40,000 and sold to this woman for $100,000 Her down payment, of course, was faked by the broker. "This is not an infrequent fact pattern," says Simpson. "Cheap HUD properties are being purchased by unscrupulous brokers and real estate agents and sold at double their value, or more, to unsophisticated buyers." The buyer in this case was just 19 years old. Now, thanks to the broker, she has a notice of default on her credit and may not be able to buy a home legitimately for many years to come.

According to Simpson, by beefing up investigation of loans and purchases, HUD could prevent a lot of fraud. As well, he feels that licensing those engaging in loans and sales of HUD properties would make tracking and verification easier. The industry could also get more involved in its own fight, he says. "The industry only [focuses on] production-just keep making money and all problems go away. The industry doesn't want to deal with this. It's bad public relations to admit you get ripped off a lot. People are paranoid of a massive governmental intervention, especially from HUD," Simpson says. Through a combination of consumer, government and industry commitment, Simpson believes, we can begin to get a handle on how to reduce and minimize-if not eliminate-mortgage fraud.

James A. Reilley is a graduate of San Francisco Law School and a freelance writer based in Sacramento, California. IMARC can be reached at www.mortgagefraudcom; Bob Simpson can be reached via e-mail at [e-mail].