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Fraud--and the victim is you.

MORTGAGE FRAUD HAS MOVED INTO the headlines, with a recent article in USA Today stating in bold type that the FBI considers the problem an "epidemic." An Associated Press headline also recently announced: "Mortgage Fraud is Rampant in U.S." Just through September, the FBI had opened 533 mortgage fraud investigations this year--more than three times the number started in 2002.

"You can find [mortgage fraud] anywhere in the country," says Chris Swecker, FBI assistant director for criminal investigations. The Mortgage Bankers Association (MBA) and our members have been working closely with the FBI, since we share its concern about this growing problem. Mortgage lenders have lost billions of dollars due to fraud in recent years.

Syndicated real estate columnist Kenneth Harney reports, "Mortgage fraud is now one of the hottest con games going." He notes that industry studies claim "between 10 and 15 percent of all homeloan applications involve some fraud or misrepresentation."

MBA recently had a chance to testify before the House Subcommittee on Housing and Community Opportunity at a hearing examining the growing problem of mortgage fraud. Marta McCall, senior vice president for risk management at American Mortgage Network Inc., San Diego, spoke for all lenders when she testified that "Mortgage fraud is a growing part of our residential mortgage system that costs the industry and consumers millions of dollars each year."

To illustrate the toll fraud can take on innocent lenders, McCall shared the story of one small mortgage company in the Southwest. This small lender with a solid reputation was defrauded by a single crooked loan officer The loan officer was debarred from Federal Housing Administration (FHA) programs for one year, but is still working in the industry. But the company was debarred from the FHA program four years after the fraud was committed, and forced to close. As McCall said, "Owners who had built up the company lost their investment, and over 30 employees lost their jobs because of the crimes of a single person."

Lenders have experienced increases in both the number and variety of fraud schemes used against them. One common tactic, known as "flipping," involves obtaining an inflated appraisal and then selling the property for a large profit. Fraud perpetrators often hide behind "straw borrowers," who unwittingly may be given falsified financial and credit histories in order to qualify for a mortgage on the property being flipped. Stolen identities also are used to help fraudsters obtain loans.


Such criminal acts often result in foreclosures on overvalued properties. Subsequent losses can result in serious financial damage for lenders at a time when margins are already being squeezed.

Fighting fraud requires a multi-pronged approach. Lenders should work with law-enforcement officials to root out the problem, because fraud often is conducted by a criminal ring that includes originators, real estate agents, appraisers and closing attorneys. Mortgage industry participants also need to share information, to make it harder for fraud perpetrators to find new companies to victimize. Lenders should keep developing new ways to uncover fraud within their firms. Finally, law enforcement can help by letting the industry know what its investigations are uncovering, so that companies can act aggressively against fraud. As McCall testified, "MBA believes there is no substitute for strong law enforcement that aggressively prosecutes those who commit mortgage fraud and sends a clear message to those who contemplate it."

Fraud is on the rise

Several factors are behind the increasing incidence of mortgage fraud. Market changes over the past decade have fostered the rise of a growing number of large national firms. Large operations produce efficiencies, yet they can weaken some traditional safeguards.

Lenders today find it's harder to monitor the reputation and professional standards of every mortgage broker and appraiser with whom they deal. Opportunities for fraud can be exploited more easily than in the days when lenders personally knew many of the professionals they worked with.

Higher home prices also add to the temptation to commit fraud. Increased dollar amounts attract organized crime, as it seeks to launder illegally earned cash through real estate transactions. Additionally, the end of the refinancing boom has some unethical industry participants looking for ways to keep their income at the same level it was a year or two ago.

Lost in many of the news stories about fraud is the fact that fraud's toll falls hardest on lenders. The financial damage produced by fraud isn't shared by the secondary market, because lenders are obligated to repurchase fraudulent loans. Even when the parties who commit fraud are caught, they typically don't have the financial resources to compensate lenders for their losses.

MBA members have found that insurance against fraud isn't readily available. Lenders also can face a public-relations nightmare if consumer groups accuse them of allowing innocent homebuyers to be taken advantage of by a fraud ring, even though the lender was victimized as well.

The FBI's Swecker notes that the bureau is "working closely with all the industry's professionals--mortgage brokers, Realtors, accountants, appraisers, loan officers and title companies--who are as anxious as us to weed out the bad seeds."

MBA also endorses the MIDEX database, which records law enforcement and regulatory actions against fraudulent activity, as well as reports from mortgage lenders about specific alleged incidents. MIDEX is available from the Mortgage Asset Research Institute Inc. (MARI), Reston, Virginia (

MARI also is helping MBA pilot the Mortgage Fraud Alert System (MFAS), through which MBA members can report the date, location and type of alleged misconduct or misrepresentation they've encountered. Other lenders then can increase their oversight and due diligence in those areas.

MBA will continue its efforts to thwart those who are tempted to illegally enrich themselves at your expense. We believe the time has come to get tough with this blight on our business. You don't deserve to be victimized, and together we will fight back.


MBA President and Chief Executive Officer
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Title Annotation:1919 Pennsylvania Ave.
Author:Kempner, Jonathan L.
Publication:Mortgage Banking
Geographic Code:1USA
Date:Nov 1, 2004
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