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Winning mortgage fraud convictions: the number of convictions in mortgage fraud cases is exceedingly Sow, particularly when consumers are the defendants. What can the industry do to turn those numbers around?

There's no doubt there have been some bad mortgages made over the past decade, and many have involved fraud. A review of the numerous news headlines and articles covering fraudulent loans over the past 10 years shows that many point the finger at the mortgage lending industry. Very few news accounts highlight the fact that some of these nefarious plots and money-grabbing scams were carried out by consumers. * Who was behind the fraud? Mortgage brokers, lenders, banks, rating agencies, due-diligence providers, title companies, appraisers and Wall Street investment bankers. At least that's what most of the articles and news broadcasts would lead you to believe.


Consumers commit mortgage fraud, too

Consumers were not involved in any way, according to these news reports; they were just the victims.

Apparently brokers filled out the applications for them and lied about their income, their assets and removed all the credit problems they hack And then to hide all these misstatements, they forced consumers to sign these documents blindfolded so they couldn't see what they were signing.

I'm not serious, of course. But the reality is that most oi the information made public about mortgage fraud--including who is arrested, found guilty and sentenced to jail--focuses on those associated with making a mortgage loan.

Very rarely do we read about fraud committed by consumers.

Why do you suppose that the number of consumers convicted of mortgage fraud is so very small?

Although there have been myriad television shows that portray desperate consumers robbing banks to get money to pay bills--because only the banks got "bail-out money"--there's been very little news coverage that highlights the problems that consumers themselves created. Nor has much been done to punish those whose excessive greed was a driver in the mortgage mess.

A study released by the Federal Reserve Bank of New York late last year found that speculative investors in real estate played a large part in the quick run-up and subsequent devaluation of housing prices. The study concluded that; in fact, speculators--or in other words, consumers--are responsible for more of the financial crisis than previously thought. While the New York Fed may think that, the public sure doesn't.

Why is it that the public seems unaware that consumers, too, share some blame for the mortgage mess we re in?

Law enforcement recognizes that many consumers were aware of what was going on and actually participated in the fraud. In fact, because of the effort that has been put into educating the Federal Bureau of Investigation (FBI) and other law-enforcement agencies, law enforcement has been able to identify many of the larger scams that occurred in the states that were hit the hardest.

However, once the arrest is made, it is up to the prosecution to get criminals convicted. And that's where I think the system breaks down.

If you consider the number of consumers tried for mortgage fraud and then look at the percentage convicted, it's clear there's a disconnect somewhere.

Why aren't there more convictions?

There aren't any widely available statistics on the percentage of convictions won in mortgage fraud trials. But other veterans of mortgage fraud trials see the same problems that I do.

There are a number of factors working against convictions in mortgage fraud trials, according to Ann Fulmer; vice president of industry relations with Interthinx, a risk-mitigation company headquartered in Agoura Hills, California. The slow pace of the investigations in trials, as well as the number of criminal cases that get filed in comparison with the actual incidence of mort gage frauds that have been perpetrated, tend to limit the number of convictions.

"Typically there are relatively light sentences handed down, as judges often don't consider the damages to the larger neighborhood and economy," notes Fulmer, a former prosecutor.

A consumer accused as a one-time participant in mortgage fraud may be much more valuable as a witness against the people who orchestrated and profited most from the fraud, Fulmer adds. "Prosecutors tend to either threaten criminal action without really intending to file charges, or they agree to cut those folks a deal in order to obtain testimony against the ringleaders," she says.

"All of these factors encourage consumers and career criminals alike to believe that they will not be caught, prosecuted or punished. And far too often, they are right," Fulmer says.

Anatomy of a mortgage scam

I'll discuss in very general terms a mortgage fraud case that demonstrates just where I believe the system breaks down. In this case, an individual, recently fired from his job, is looking for a way to make some cash quickly and easily. It's suggested to this individual that he take the equity out of his house by getting a new mortgage and then use that money (or living expenses.

He laughs off this idea, as he doesn't even have a job--so how will he obtain a mortgage? That is, until the individual is told that the "lender doesn't care." All he has to do is state on the lending documents that he is employed at a particular job, and he will get the cash. Sure enough, it works and he soon has enough money to live quite comfortably until he finds another job.

But this person is no dummy He quickly realizes that if he can find other houses where he can strip the equity, he could make plenty of money. The only question is, how? He decides to take some of the equity from his current house to buy another house, wait a bit and do the same thing again.

This particular scammer then proceeds to find home owners who are desperately trying to sell homes, such as those with estate homes, or homeowners ready to move into another property they've already purchased. He offers those sellers a deal: He will pay cash for the house if they agree to sign a contract with a selling price much higher than what he is actually paying. Then he asks another friend to sign that contract as if he were buying it.

It's easy from there. The scammer finds a broker who "helps" his friend apply for a mortgage on the higher price, an appraiser to inflate the value and a title attorney to pay the money from the transaction to him rather than the sellers. Once he has that first deal done, it is easy sailing.

Fast-forward 30 months, the time law enforcement caught up with the scammer, he "owned" numerous houses and had up to 15 people buying houses and quitclaiming, or signing quitclaim deeds to transfer any interest in the properties to him.

In some of the transactions, he paid these straw ers outright- When they requested it, he allowed them to keep partial ownership of the house for a few months to a year, and then sold it for much higher profits.

This individual--who is in no way fictitious--and his brokers, title attorney, appraisers and straw buyers bought and sold more than 70 properties. The last house he purchased was estimated to be worth around $2 million. Not bad for someone who less than two years before had been fired from his job and had no money.

Ultimately, law enforcement caught up with this scammer and his ring and arrested many of them. The brokers agreed to plead guilty and testify against the others involved in the mortgage fraud schemes, as did some of the appraisers and members of the title attorney's staff. The others pled "not guilty" and went to trial.

So, what do you think happened? Are these individuals in jail today?

I'm sorry to say those who pled guilty are in jail, but after two lengthy trials, only two of 15 straw buyers were convicted. The rest walked away free.

How can it: be that most of the straw buyers and assorted other individuals associated with this scam were not convicted? There was a mountain of evidence against them, detailed testimony about their illegal activities, as well as lenders' testimony explaining how they were harmed. What allowed these individuals, who in my opinion were clearly guilty, to walk away free?

1 believe the answer is threefold.

The prosecution

If the particular state where the fraud occurred has tough fraud laws, the case may be tried in the state courts. However, many of these cases end up in federal court for prosecution because the illegal activities are covered by federal statutes. In either case, prosecutors must not only have a good understanding of the law, but also how the mortgage banking process works.

The best prosecutors understand the mortgage process, as well as credit analysis and the documentation involved. For example, in the case described earlier, the straw buyers lied about occupying properties as their primary residences in order to get too percent financing. Their defense was that there was no lying involved--they did not need to lie about occupying properties because they would have qualified for financing anyway.

Further, the defendants stated that the brokers forced them to use this financing so the brokers could receive a higher yield-spread premium. Whether this was accurate or not, the prosecution did not understand what a yield-spread premium was, nor how to explain it effectively to the jury.

The prosecution's inability to clearly explain the premium greatly helped the defense in this case. It was easy for the defendants' lawyers to make the straw buyers come across as innocent victims of the mortgage brokers.

That leads me to one of the biggest issues I see with the prosecution of mortgage fraud cases: The prosecutors are often unable to present a case from the eyes of the lender. While many lenders have provided information and testified in mortgage fraud trials, the questioning by the prosecution often fails to give a comprehensive overview of the real issues.

In the fraud case I've described, the fact that the sellers of these properties were involved in the scam by signing a fraudulent sales agreement was never discussed. Nor was the fact brought up that the straw buyers purchased as many as five properties in one week, all of which were to be owner-occupied.

Instead, the defense was able lo paint a picture of unsuspecting victims who were at the mercy of conniving brokers and lenders out to make a fast buck.

Lack of understanding by juries

Jurors who do not understand the nature of mortgage fraud crime or how it impacts them tend to sympathize with the defendants. Far too often, jurors identify with the defendants because the claims the defendants make register in their minds as exactly the issues the jurors had when they obtained a mortgage. It is not uncommon to see jurors nodding their heads in agreement as the defendants tell tales about being told "not to read the documents--just to sign them,"

Simply put, the mortgage process is not understood by the average member of the jury who has either never gone through the mortgage process or, at most, has gone through it once or twice. It is easy to understand how to jurors, it appears the mortgage process is complicated and disproportionately favors lenders.

Defendants are very good at positioning themselves as the victims. In the case I've described, the defendants went to great lengths to weave stories about painting the walls and planting flowers to beautify their new homes. They wanted the jury to believe that they weren't trying to make money illicitly; they were just trying to take care of the house they bought.

Jurors never heard the part about how the straw buyers sold the houses within nine to 12 months and made $100,000 to $200,000 on each property. They never heard the part about how the ringleader made half of the profits, even though he wasn't listed anywhere on the application or the loan documents.

Equally important, they never heard or were made aware of the devastating impact the scam had on their community. Sure, they knew that housing prices had dropped dramatically and they had lost a lot of equity on their own homes, but they didn't comprehend that these straw buyers were a major factor behind the housing downturn. They know that their community tax base has been decimated, causing significant cuts in education, safety and other community budget items. However, they don't see the relationship between those things and the individuals sitting at the defense table. There needs to be a way to convey this to jurors.

Mortgage industry insiders testifying for the accused

Probably the most egregious activity in this trial process is the testimony by members of our industry on behalf of accused mortgage fraudsters. It is particularly offensive that these individuals are providers of quality-control reviews, fraud analysis or are diligence solution providers. People in those roles have always been at the forefront of fighting this crime. Yet in many cases, including the one I've described, they actually testify in defense of the accused. This testimony is made even worse by the fact that quite often, they are ignorant of standard underwriting requirements or they stretch the industry standards to support what the accused individuals did.

For example, in the case at hand, one quality-control provider testified that quitclaim deeds, whether approved by the lender or riot, were perfectly acceptable because they gave the lender someone else to pursue if the original borrower failed to pay.

This same individual also testified that there was no difference in the way lenders review primary residences and investment properties. He stated that lenders did not look at the underlying costs of owning investment properties, nor was there any additional risk. Therefore, the only reason the interest rate was higher was to get more money for the lenders.

The fraud specialist in the case testified that mortgage brokers are the primary cause of fraud, and that if it weren't for brokers, borrowers would never be involved in mortgage fraud. In fact, this defense witness stated that in his experience as a fraud examiner, he never found a fraudulent loan that didn't involve a broker or a lender changing information on the application, or creating false documents to justify an approval.

In addition to his testimony as a fraud expert, the same witness claimed to be an underwriting expert. In this capacity, he testified that when the seller agreed to pay a percentage of the closing costs, that this was money given to the borrower, which could be used in any way he saw fit, such as covering down-payment costs.

Finally, there was the due-diligence expert who provided the jury with information on the lender's ability to drive the occurrence of fraud. She testified that loan-file reviews on loans marked for sale to investors did not focus on the borrower's repayment ability, but on how much money the lender was going to make on the loan. She provided testimony that it was the lender's greed that caused all the problems for the defendants.

What can be done?

If we really want to stop this fraudulent activity and clean up the industry, things need to change. Mortgage lenders have worked diligently to find ways to identify fraud before it occurs, and to educate law-enforcement officials and staff about what fraud is and how it harms us. Yet the general public still views the lending industry as the "bad guys" who get what they deserve.

We have to change that perception if we want to get convictions on every individual who commits the crime of mortgage fraud. That includes consumers.

While new legislation has been passed dealing with mortgage fraud, the problem remains that the jury system presents the opportunity for defense attorneys to portray the victim as the criminal.

There are a few steps the industry can take.

* First, we have to recognize that the mortgage industry has a serious image problem and we need to change it. Consider what the Realtor[R] community has done throughout this crisis. It has put advertisements on television, on the Internet or wherever the public can be reached, showing the world what a wonderful job Realtors are doing and how important they are to the community. As a result, most consumers now have a very positive feeling, in general, about Realtors and the work they do.

The mortgage industry needs to get a similar message out. Not only will this help our image, but educating consumers on the importance and value of the mortgage will only help when jury panels are selected for mortgage fraud trials. A consumer educated about the mortgage process is far less susceptible to the distortion of the facts presented by some defense attorneys.

* Secondly, we need to educate not just law enforcement, but prosecutors as well. Prosecutors need a good foundation in the mortgage business to understand how the industry operates, as well as how lenders, too, can be hurt by mortgage fraud.

They need to understand our laws and regulations so that they know when violations and problems occur. They need a good understanding of how credit policies and the secondary market work, and then they need guidance about how to apply this knowledge to the law.

In the case I've described, the jury never understood the scope of this fraud because the prosecutors were concerned that if they presented the magnitude of the fraud, the defense would use it against them by focusing on the money the lenders purportedly made--not how much they lost when the loan went bad.

The prosecutors should have been knowledgeable enough about how these kinds of fraud work to be confident in their presentation of the full scope of the case and armed to address any defense arguments.

* Most importantly, we need to stop members of our own industry from testifying in support of these alleged criminals. I think the saddest part in all of this is that individuals purported to be "experts" in the mortgage business are often the least knowledgeable, yet they are paid to testify about it.

While great strides have been made in eliminating individuals and companies in the mortgage industry that became involved in fraud, not much has been done to prevent these or other individuals from testifying in support of those who commit mortgage fraud. This needs to be addressed.

Stopping mortgage fraud means more than just preventing individual cases of fraud. The industry needs to expand its efforts by educating the legal community and consumers about what we do for them as individuals, and how we help grow communities.

Consumers and the legal community alike need to understand how unscrupulous individuals can steal money from lenders. They also should be made aware of how this sort of activity hurts both individuals and communities.

So what's the take away? The industry must convince both consumers and the legal community of the serious nature of mortgage fraud, and provide more education and guidance to prosecutors to help them convict the criminals. All parties need to understand that the criminals in mortgage fraud cases aren't necessarily or automatically the mortgage banks or the mortgage brokers. Consumers commit these crimes, too.

Then, and only then, will we have a real chance of stopping mortgage fraud. MB

Prosecutors must not only have a good understanding of the law, but also how the mortgage banking process works.

Probably the most egregious activity in this trial process is the testimony by members of our industry on behalf of accused mortgage fraudsters.

A consumer educated about the mortgage process is far less susceptible to the distortion of the fact presented by some defense attorneys.

Becky Walzak is president and founder of Deerfield Beach, Florida-based rjbWalzak Consulting. She is also president of Indianapolis-based Looking Glass Group LLC. She can be reached at becky@rjbwalzak.corn.
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Title Annotation:Litigation
Comment:Winning mortgage fraud convictions: the number of convictions in mortgage fraud cases is exceedingly Sow, particularly when consumers are the defendants.
Author:Walzak, Becky
Publication:Mortgage Banking
Date:Mar 1, 2012
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