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
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
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
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
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
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]