Stop mortgage fraudMichael S. Richardsonmortgage fraud I have been in business for almost 26 years and was a successful business owner until I became a victim of mortgage fraud. I owned a mortgage company and a real estate company, and I lost both as a result of mortgage fraud. As you might imagine, I was devastated. The guilt by association has made me feel at times shameful, depressed and alarmed. I have felt betrayed, violated and taken advantage of by white-collar criminals. As for the fraudsters, they are still out there working the system. The mortgage and real estate industries are driving down the same road as the Savings and Loan crisis in the 1980s. You have to ask why this issue is being swept under the table by many industry agencies and professionals. Although more executives talk about mortgage fraud today, they really do not invest in the proper steps to prevent it. Willful blindness is the heart of mortgage fraud, and it expresses the contention that the industry exhibits. The willful blindness to obvious mortgage fraud has been ignored at so many levels for so long by industry professionals, it has allowed mortgage fraud to flourish. If you are in the mortgage business, do you ever say the F-word in public? Do you even dare to bring the F-word up in polite conversation? After all, if you even mention the F-word, it makes any honest, hardworking mortgage professional quiver. The F-word is a dirty word in the mortgage industry, and for good reason. Dont get me wrong. Fraud isn't a factor in every mortgage loan or even in every mortgage or real estate branch. However, the outcome of even one fraudulent loan gone badly can affect the entire real estate industry, particularly individual practitioners. The ripple effect of fraud is as deep as it is far-reaching. The mortgage lenders and borrowers stand to lose much more than the cost of the damages when fraud appears. At risk are their very reputations in the industry or community, and the honest, hardworking people in the industry know that our word is our bond; our reputation is our bread and butter. Who of us, after all, can afford to lose that precious commodity? Where does mortgage fraud begin, and how do we prevent (or at least begin to stop) it? They say timing is everything and, in this case, there's never been an easier time to commit (or fall prey to) mortgage fraud. The unprecedented real estate boom over the last few years has led to the doubly dangerous refinancing craze that swept the nation. This one-two double whammy has sucker punched its share of lenders, real estate agents and consumers, resulting in widespread appraisal fraud whereby property values are greatly and unjustifiably inflated to prey on the unsophisticated buyer, who is then left holding the note on a property worth but a fraction of the value at which it had been improperly appraised. The homeowner is unwittingly the first to allow for fraud and the last to know about it. We know that fraud exists, who most likely perpetrates it and, in fact, the various ways in which fraud is committed. But how is the consumer, the potential homeowner, affected? The cost of fraud may not be felt immediately, but it's there, lurking under the surface and spreading out like pollution to infect millions of innocent homeowners in a variety of ways, both seen and unseen. I know, from my personal experience, the significant cost that fraud-prevention measures have added to my operational deficit, ending my businesses. The price of detecting, reporting and preventing fraud is not cheap, and there's no doubt that some of that cost (albeit as little as possible) eventually gets passed on to the consumer who comes looking for a loan. Could inflated appraisals really drive up the property taxes in a neighborhood? You bet! If the real estate boom has taught us anything, it's that perception really does become reality, especially if hyped by the media to the point that people believe popular opinion is the truth. In fact, if enough fraudulent properties are improperly appraised, the ripple effect is impactful and immediate. And who pays those higher taxes? Thousands of unwitting homeowners, you and I do, all of who would never consider committing mortgage fraud. These significant costs are just the local aftereffects. What about the bigger picture? How about the national level? Much of the information I've gathered has come from government sources, be they FBI agents, the U.S. Department of Housing and Urban Development or others. You know that when the government gets involved in a problem, not only is it big, but it is also costly. Someone has to pay those agents to track down fraud, someone has to pay to try the cases of all of those fraudsters and, for those convicted, someone has to pay for food, clothing and shelter. Who will bear the brunt of these costs? The answer is the same as before: thousands of unwitting homeowners, you and I, all of who would never consider committing mortgage fraud. There's no doubt that homeowners pay the price of mortgage fraud. The only way such costs can be avoided is to eliminate or greatly reduce the problem. That means we all are going to have to start thinking about it and thinking about it soon. Of course, that's just what happens on the consumer end. Mortgage professionals, as practitioners working within the industry, control the mortgage fraud equation. Unfortunately, the problem is as internal as it is systemic. The person behind the act usually isn't a professional thief or even the borrower. He's the loan officer, appraiser, real estate agent or title agent. In a large amount of fraud (80 percent by some estimates), it involves an insider. Is it any wonder? After all, loan originators and their team members have detailed access to the borrower's information in the transaction. From Social Security numbers to bank account information, it's all above board and on the table. Many of us treat such information as sacrosanct, keeping it under lock and key and using it for one purpose and one purpose only. To those who would perpetrate fraud, however, such information becomes the key that they use to unlock the door to fraud. Every part of the mortgage lending process presents another window of opportunity to unscrupulous loan originators, who, by the very nature of their job descriptions, come in contact with builders, real estate agents, borrowers, processors, underwriters, appraisers, lender account reps and title closers. Each one of these positions or areas needed to get a mortgage leaves an opportunity for fraud! The American epidemic Consider that phrase for a moment. "Epidemic" may sound like a strong word to you, but after considering the latest figures on real estate fraud, it is my sincere belief that that word is, in fact, not quite strong enough! According to the FBI's May 2005 Financial Crimes Report to the Public, the number of mortgage fraud reports filed has escalated nearly 150 percent since 2003. The report also showed that 80 percent of the cases involved either overstated property appraisals or non-existent properties. Early estimates are that in 2006, mortgage fraud could increase by as much as 60 percent, since home sales are slowing and interest rates are rising. Mortgage fraud statistics point to nothing short of an epidemic. And yet what do we really know about fraud? In point of fact, it's not what we know about fraud that's dangerous; it's what we don't know. What's worse is the staggering amount of opportunity with which the American real estate mortgage industry provides to those who commit fraud. According to the Mortgage Bankers Association of America (MBA), more than $2.7 trillion in new loans were originated in 2005. This staggering number includes about 20 million new mortgages required to cover new and existing home sales. Those are big numbers and now, even the MBA is including the likelihood of fraud in their statistics, estimating that 10-15 percent of mortgage loans have some kind of fraud involved. This means that two-three million home loans originated in 2005 could have been fraudulent, equating to more than 7,500 new fraudulent loans every business day. If projections are accurate, that could mean 12,000 new fraudulent loans per day in 2006. Now that is an epidemic. Who benefits from such fraud? By my own calculations, loan officers and others in the mortgage transaction process accounted for roughly $8 billion in loan fees and commissions for fraudulent closed loans, while real estate agents and real estate companies themselves raked in more than $13 billion in commissions from those fraudulent transactions. The statistics on fraud may be sobering, but what's worse is the sparse amount of stopgap measures currently in place to prevent this all-too-common felony. Many of us come to the industry by way of other careers. With the real estate bubble growing exponentially and the resulting refinance craze declining with rising interest rates, it is not uncommon for experienced mortgage professionals to be working alongside relative newcomers from diverse careers. Clearly, the amount of money to be made in real estate (both residential and commercial real estate) lends itself to abuse. New employees mean new training is needed, and lack of new training leads to old mistakes. The growth of fraud is insidious; it creeps up on us, taking us by surprise until, before we know it, someone working with us, for us or above us is committing fraud. It's so easy, slick and, until now, largely un-enforced. All it takes is a number fudged there, a figure left out here, a bogus appraisal, a friend of a friend who plays it fast and loose with a client's verification of rent and a newly scrubbed credit report, and soon enough, a mortgage loan is approved and ready to close, but is, in fact, fraudulent. Once a white-collar criminal gets away with it, the process quickly becomes addictive. Success breeds more success and before long, such crafters of fraudulent mortgage loans clearly begin feeling that not only are they above the law, but also, in fact, they arent doing anything wrong in the first place. However, those of us who take our profession seriously and are in this business to help sincere, hardworking, law-abiding citizens obtain housing in a fair market and mortgages that work for them, can think of little worse than those who prey on the innocent, the righteous, the unsophisticated or the trusting. Fraud can happen to anyone, including employees, buyers, sellers, investors and owners. It can happen anywhere, including big cities, small towns, storied and well-recognized firms and smaller mom-and-pop businesses. Now do you think epidemic is too harsh a word? According to the MBA, " ... the U.S. attorney and others have suggested that as much as 70-80 percent of mortgage fraud can be avoided through aggressive fraud awareness and detection efforts." Why do all mortgage companies not use the preventative tools available? That's where I come in. After my personal experiences with mortgage fraud earned me a doctoral degree from the school of hard knocks, I became a specialist in preventing mortgage fraud. Much like most people, I never thought it could happen to me. After all, I am a mortgage professional with more than 25 years of business experience. But it did, can and, if the statistics are any indication, probably will. Even after all that I've been through, I still work every day, full of hope that progress can be made in preventing mortgage fraud, because of all of the good, honest, hardworking people in the real estate and mortgage industries and for all of the people who deserve to buy a new home. They need good, honest help in accomplishing the American dream of owning their homes! We have to believe that good will prevail. Michael S. Richardson is the managing director of fraud prevention for NexWest Inc. and the author of "An American Epidemic: Mortgage Fraud - A Serious Business." He may be reached at (303) 339-4534 or e-mail [email protected].