WASHINGTON – Record-low interest rates have helped make home buying a realization for more Americans, while rising home prices have allowed home sellers to reap windfall profits. But in the wrong hands these same factors have also helped savvy fraudsters commit an increasing rate of fraud against borrowers and lenders to levels high enough to pose what some experts have described as a “growing threat” to the mortgage industry. How serious is the problem? Consider this: according to the Federal Trade Commission, mortgage fraud is estimated to have cost businesses nationwide nearly $48 billion and consumers about $5 billion in the last five years. On March 11, the Mortgage Bankers Association held a one-day summit to address mortgage fraud. Entitled “Protecting the Real Estate Finance System: Combating Mortgage Fraud Against Lenders,” the summit brought together a cross-section of mortgage industry players to identify a series of recommendations to address the issue. Among the presenters was the FBI’s Chris Swecker, assistant director of the agency’s Criminal Investigative Division. The FBI official testified in October before the House Financial Services Subcommittee on Housing and Community Opportunity about mortgage fraud and the FBI’s efforts in combating it. Reiterating his comments at the summit, Swecker told attendees that mortgage fraud is a top priority for the FBI, and “prevention of mortgage fraud should be our collective goals. It is vital that policy makers, law enforcement and the public understand the reality and magnitude of the problem and work together to address this issue.” Also addressing attendees at the summit were MBA Chairman-elect Regina Lowrie, president/CEO, Gateway Funding Diversified Mortgage Services who said concern about mortgage fraud “against our home finance industry has reached such heightened levels that top management of lenders has to decide how they are going to address this growing threat and protect their company, their employees’ jobs and the borrowers they serve.” Ann Fulmer, president of Georgia Real Estate Fraud Prevention & Awareness Coalition (GREFPAC) called fraud against mortgage lenders “bank robbery without a gun.” CUNA Mutual Mortgage’s Tom Pisapia, VP, secondary marketing said the diminishing refinance activity has a lot to do with the increase in fraud the mortgage industry is seeing. “Because there are fewer deals now, you need to make sure each deal sticks,” he told Credit Union Times. “Whenever the pie gets smaller and there are fewer deals out there, we start to see more creative things by some people as a way to get the deal done at any means. Flipping is just one of those creative techniques, but the mortgage industry is being hit on a number of different levels.” Prime Alliance President/CEO Joe Brancucci, VP/Chief Lending Officer, BECU, Tukwila, Wash. agrees with Pisapia’s premise about the causes behind the increase in mortgage fraud. He also adds another cause – greed. “There’s big money involved in this fraud,” Brancucci says. “The perpetrators have found the holes in the system and they’re abusing them.” The difference between mortgage fraud and other types of fraud, he says, and what makes it all the more dangerous, is “mortgage fraud tends to be more covert and more difficult to prove.” He explains that, “What’s pervasive in the mortgage industry now are people are going in and creating flipping schemes in certain neighborhoods. They’re over inflating prices and that’s creating an artificial market. While in the real market property value is based on a willing seller and buyer, flipping creates an artificial market by creating a series of transactions that make it seem like the price is set by a willing buyer and seller. In most flipping cases in fact, the buyer is an unsuspecting and usually uninformed person who’s willing to pay any price to get into a particular home.” The good news for credit unions, said Brancucci, is since most of them are local they’re very attune to neighborhoods and the prices and values of real estate. But that doesn’t mean CUs are immune to mortgage fraud. Brancucci said as CUs develop relationships with mortgage brokers, they need to understand how to manager the mortgage broker relationship. They need to understand who they’re doing business with, he stresses. Pisapia said CUNA Mutual Mortgage hasn’t seen many incidents of mortgage fraud, and he attributes that to CUNA Mutual Mortgage’s policy of relying on full-blown, hands-on appraisals and using local appraisers it’s familiar with. The company, said Pisapia, does not use Web-based alternative valuation models. In addition, said Pisapia, credit unions “in general” don’t deal with loan brokers “so that eliminates another entire piece of the fraud pie.” With the high incidence of mortgage fraud, Pisapia said investors are scrutinizing appraisals more now. They’re also concerned with the housing bubble, he said, and don’t want to find themselves left holding loans based on inflated appraisals if the housing bubble bursts. Among the key recommendations summit attendees offered to address the mortgage fraud crisis were: * explore the feasibility of sharing corporate policies, practices and information to further the development of “best practices” for the detection and prevention of mortgage fraud; * advocating for more federal and state resources that would be devoted to investigating and prosecuting mortgage fraud; * educate mortgage lenders and law enforcement on the importance in pursuing mortgage fraud investigations; and * develop initiatives to increase the accessibility of public records for use by mortgage lenders and fraud prevention service providers in combating mortgage fraud. MBA plans to release a full report by the end of March that will include all the recommendations. In addition, on March 31 the MBA will launch a Web site, “The Mortgage Fraud Against Lenders Resource Center” to help lenders identify, communicate and prevent mortgage fraud. Designed to be a one-stop shop for the mortgage banking industry, the Web site will contain media updates, reference links, state-by-state fraud reporting reference pages, and a searchable database of media reports about fraud violators. CUNA Mutual Mortgage’s Pisapia said the company is looking at several third party online fraud detection tools because “we want to stay a step ahead.” He said CUNA Mutual Mortgage “has done its homework” and is looking to integrate third party information into the appraisal process. Pisapia expects that to be completed by the end of 2005. In addition, Brancucci who is also chairman of the Fannie Mae Credit Union Advisory Council, said Fannie Mae is developing an anti-fraud lenders service which Prime Alliance plans to incorporate into the PA platform by the third quarter 2005. In addition, Fannie Mae’s Alfred King, director of public affairs said the housing Government Sponsored Enterprise took several steps last year to address the issue including implementing fraud tools in its Desktop Underwriter system “to help lenders do a better job ferreting out fraud.” In November, Fannie Mae also put in place guidelines that notify lenders when red flags become evident that signal possible property flipping. -firstname.lastname@example.org
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