Mortgage fraud, regarded as one of three main triggers of the housing crisis is still emerging with recklessness.
“The fraud has by no means gone away,” said Merle Sharick of the Mortgage Asset Research Institute (MARI). Mortgage fraud perpetrated by industry insiders accounts for 80 percent of all reported mortgage fraud losses, according to the FBI. The over-whelming majority of mortgage fraud is blamed on mortgage lenders and those associated with the lending industry.
As the nation suffers through the worst housing crisis in history with foreclosures hitting all-time records, prosecutors and others are laying blame on mortgage companies, Wall Street and other lenders for the crisis. With growing pressures to increase lending regulations in Congress, even lenders are concerned about the industry’s future and its affects on the national economy.
“Mortgage fraud has been a crime of opportunity,” said Sharick. “Now it’s become a crime of necessity.” Commission based positions including loan officers, mortgage brokers and loan originators earned high commissions during the real estate boom. But with the slowing pace of real estate sales in most areas of the country, incomes have come down, resulting in desperate actions by some loan officers and others related to the industry.
“There’s somebody involved in those institutions that is involved in the fraud. We’re finding that to be a huge issue,” said Sharick. MARI developed the Mortgage Industry Data Exchange as a weapon to defend its subscribers against mortgage fraud schemes. The company provides information on mortgage professionals and companies to assess risk management.
“The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes,” according to the FBI. Emerging schemes include seller assisted financing, builder-bailouts, foreclosure rescues and short sales, all of which have become common place in the slower housing market.
However, the most common form of mortgage fraud is illegal property flipping, which can include false appraisals and the falsification of other loan documents. A Mortgage Bankers Association study indicates that more than 60% of all Quick Qualifier mortgages initially developed for self-employed individuals made during the real estate boom stated exaggerated incomes to qualify for mortgages.
The fraud has been a long standing problem in the industry. Critics charge that during the peak of the housing boom the mortgage system was set up to promote and encourage outright fraud in order to close a loan, which have now resulted in millions of foreclosures. Home buyers were put into products like payment-option arms that were unsuitable.
An Iowa assistant attorney general, who investigated mortgage fraud, Patrick Madigan, says it makes no sense to conclude lenders are victims. Madigan designed the blue-print in the Ameriquest settlement case over its subprime practices more than two years ago, which involved “boiler room” cold-calling tactics.
Society has leaned toward blaming the borrower, according to Madigan. But the responsibility in more and more cases lies with the lender. “It’s ridiculous,” he said, “Our investigations have shown that most of the fraud happens at the suggestion and direction of the loan originator, who had significant financial incentives to close the loan, no matter what misconduct was required.”