Fewer Loans, But Still More Fraud

By Kenneth R. Harney
Saturday, August 30, 2008

You might assume that with home purchases and new mortgage volume off by 30 percent or more in many markets in the past year, loan fraud would be down as well.

Wrong. A benchmark quarterly study released this week by the mortgage industry's principal compiler of fraud reports, the Mortgage Asset Research Institute, found that the number of cases jumped 42 percent between the second quarter of 2007 and the same period this year.

They ranged from hoked-up income verifications and credit reports to falsified employment records, financial assets illegally "rented" to buyers to beef up their loan applications, inflated appraisals, straw-buyer scams, and a wide variety of hanky-panky schemes among sellers and purchasers aimed at fooling lenders.

The highest numbers of fraud reports in the second quarter came from Florida, California, Maryland, Illinois and Michigan.

Tough market conditions appear to actually increase pressures to commit fraud, says Merle D. Sharick, vice president of the research institute.

"Mortgage fraud used to be a crime of opportunity," he said. "Now it's a crime of necessity for people who are desperate to maintain lifestyles they became accustomed to" during the housing boom years.

The Internet is a key facilitator of their activities, Sharick said, with dozens of Web sites hawking fake income and employment verifications, tax filings, credit scores, deposit verifications and other forms of deception. Some individuals have begun using free advertising services such as Craigslist to promote their wares, such as bank deposits that are available to home loan applicants to claim as their own on mortgage applications. In fact, the deposits remain in the control of the scammers; only the account identification is changed for a short time.

One Web promoter recently blitzed loan officers with e-mails touting "pay stub and job verifications -- show the income you need on paper." Recipients were directed to submit requests by text message. A Web site address also was listed but was not functional when I tried it in late August.

A scam that recently popped up online involved promoters trolling the Web for "straw buyers" -- people with good credit scores and incomes who would rent their names and asset verifications for home purchases by unqualified buyers. In one case, said Sharick, straw buyers were offered $7,500 per transaction for their financial identities. Legal title subsequently was transferred from the straw buyer to the actual purchasers, who otherwise would have been rejected by the lender. The straw buyers later could claim identity theft.

Web-based crooks tend to be nimble, creative and technically savvy. The Mortgage Asset Research Institute and private lenders may flag online vendors to the FBI or state financial crimes investigators. But by the time they focus in on the site, the sponsors often have covered their tracks electronically and moved on to new addresses and new pitches.

Some vendors try to skate to the edge of the law, selling pay stubs and employment verifications, or the software to manufacture them in bold print, while in fine print disclaiming any connection with improper uses of the documents or software. One site characterized its pay stubs as "novelty" products. "Although these stubs are authentic looking and will FOOL ANYONE -- EVERYTIME," said the site, the pay-stub software being sold is "not intended to be used to acquire a mortgage" or other types of loans.

At the other end of the spectrum, low-tech records systems maintained by some counties sometimes allow scam perpetrators to file fake documents that give them effective control of properties, at least temporarily, according to Sharick.

"There are 3,800 county courthouses out there," he said, many of them with outdated systems, low budgets and staff, and minimal defenses against sophisticated con artists. "For a $10 filing fee, nine out of 10 times [in those counties], they'll file whatever you want." For example, a faked lien release from a bank or mortgage company indicating that the debt against a property has been paid and that there is no further lien against the house.

That, in turn, opens the door for criminals to load large amounts of new mortgage debt against the property with fake identities, or even to sell it for cash. Other scam artists have begun hijacking the identities of law-abiding professionals -- appraisers, in particular -- and then submitting bloated valuations designed to squeeze higher mortgages out of lenders.

One bank flagged an appraiser on nine inflated valuations in its portfolio, according to Sharick. But even though the letterhead and documentation were identical to the appraiser's, he had not performed any of the appraisals. It appeared that the scammers had scammed him as well as the bank.

Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.


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