Good news. There are no new mortgage frauds. But the bad news is that the old schemes are becoming more intricate, and the criminals who work them are more active then ever.
"Mortgage fraud is so easy, even a caveman can do it," says Scott Broshears, the FBI's mortgage fraud coordinator.
No wonder fraud has become the F-word in the home loan business.
The Financial Crimes Enforcement Network fielded nearly 15,000 mortgage-related suspicious activity reports in the first quarter of fiscal 2008, which ended Dec. 31. And Special Agent Broshears expects the pace to quicken.
"We'll get over 60,000" suspicious activity reports this year, he said at a recent conference in Chicago. By comparison, the agency received a record 46,700 reports in fiscal year '07, up from 35,600 in '06.
The FBI's estimate jibes with a letter the Mortgage Bankers Association sent to members warning that mortgage fraud is "a burgeoning crime." But the number of reports is probably only the tip of the fraud iceberg because only federally regulated institutions must file them, whereas the bulk of all home loans are made by lenders not required to comply with the government dictum.
Swindles more complex
Still, the basic scams haven't changed, said Ann Fulmer, industry relations manager at Interthinx, an Agoura Hills (Los Angeles County) firm that helps lenders flag fraudulent loans. "The same old (stuff) has been going on forever."
But the swindles are growing more complex, according to MBA Chairman-elect David Kittle, president of Principle Wholesale Lending. "The deviousness of the schemes continues to evolve," he said.
Like builder bailouts to move remaining inventory. Under the old scam, builders, using inflated appraisals, would sell a $100,000 house for $120,000 and use the extra money to fund the buyers' down payments and closing costs. Now they are offering all kinds of "lavish (buyer) incentives" they hide from lenders.
Builders used to give away microwaves. Now, says Jenny Brawley, fraud investigations manager at Freddie Mac, they give away cars, swimming pools, two years' worth of homeowner association dues, four years of mortgage payments, even five years of guaranteed rental income.
Gifts inflate prices
These incentives not only are built into the inflated purchase price, they are not disclosed to the loan officer or the appraiser. "In fact," says Brawley, "there is an organized effort to conceal them" from lenders, who end up providing loans for more than the property is worth.
The fraud specialist also is seeing a lot more involvement in these types of schemes from real estate agents. "They're the ones shopping these loans to lenders," she said.
Rescue scams aimed at owners facing foreclosure also have a new twist. Under the old ruse, troubled owners are tricked into signing their homes over to the perpetrator with the promise that they will be able to get their homes back when they get back on track.
Owners are told to make their payments to the con man, who will forward them to the lender. But the con man never makes any payments. Instead, he collects money from the hapless owner and the house eventually goes into foreclosure.
Now the scam artists are going a step further. Rather than simply let the house go back to the lender, they are selling it to an unsuspecting buyer who uses another lender. Now, they are collecting "rent" from the original owner and a payoff from the sale of a house they took under false pretenses.
Now comes 'puffing'
Then there's "puffing," a new wrinkle on the flipping scam. Instead of buying a house on the cheap from a seller who wants out desperately and selling it an inflated price the next day, the drifter offers to buy the place at an inflated price with the buyer agreeing to kick back the difference at closing. Now the con collects on both ends, says John Gray, a fraud prevention specialist at Bear Stearns, the Wall Street investment banking company: Once when he buys and again when he sells.
Phony investment clubs also are growing in popularity. Gray says, "I can't tell you the number of deals we see" in which investors are lured into joining with others to put their money into buying houses at distress-sale prices with the promise of big rewards when the houses are sold.
Of course, the houses are never purchased. But if they are, they are sold at inflated values to fictitious buyers. So now, the thief not only has money from the unsuspecting investors, he pockets the proceeds from the sale as well. "It's amazing," said Gray. "Guys are coming in through the front door and again through the back door."
Another disturbing trend: Organized crime is using mortgage fraud to pad its bank accounts and launder gains from other illegal enterprises.
Traditionally, fraud has been used to obtain houses, says Merle Sharick, vice president of the Mortgage Asset Research Institute, which provides information services and helps prevent fraud.
Sharick is still seeing a lot of that, perhaps more so than anyone ever believed.
Housing fraud - fibbing on loan applications, overstating incomes, faking employment histories and making other false statements in order to qualify for the would-be borrower's dream house - "is a much bigger deal than we thought it was," Sharick said.
But John Arterberry, executive deputy chief in the Justice Department's fraud section, says now, even street gangs have discovered the mortgage sector and are manipulating it to the tune of billions of dollars.
"Organized crime is always looking for an opportunity," Arterberry says. "It's incredible how good their radar is. If they find a chance, they are going to exploit it."
Gray of Bear Stearns says mortgage fraud was always pretty much a white collar crime. But now he, too, is seeing more perpetrators with violent criminal histories like assault or even attempted murder.
"We never used to see this," he says. "But now this is the best place to make money."
No one knows for sure how much all this is costing lenders and investors. But the tab is probably far higher than the authorities believe. Broshears, the FBI's point man on mortgage fraud, estimated that the feds' investigation is likely to uncover some $3 billion in mortgage losses. Previous government estimates have put losses somewhere from $1 billion to $2 billion.
But analysts at Interthinx, the California fraud detection company, recently called into question some $11 billion in loan applications - just from its own clients. The analysts found more than 42,000 applications in the second half of last year that contained significant misrepresentations of the borrowers' incomes. The questionable applications were from borrowers who submitted applications to more than one lender and said their incomes had jumped more than 15 percent over a prescribed period.
Lew Sichelman is a Washington, D.C., freelance writer
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