Mortgage fraud regulation change with teethCharlie W. Elliot Jr., MAI, SRAmortgage fraud, loan fraud, FBI, Eliot Spitzer
One must be out of touch not to have heard about mortgage fraud
in recent weeks and months. There seems to be much more talk than
action taken to do anything about it. It is reminiscent of the old
adage, "Everybody talks about the weather, but nobody does anything
about it." There is one big difference here in that there is
precious little that we can do about the weather; however, there is
much that can be done about loan fraud, given the will of the
powers that be to seriously address the problem. This is not to say
that nothing is being done to prevent fraud, but suffice it to say
that too little is being done.
Exactly what is fraud? While taking a college
business law course too many years ago to count, I seem to recall
the definition of fraud as being "the misrepresentation of a
material fact for personal gain." The FBI has reportedly broken
down mortgage fraud into two segments: fraud for profit and fraud
for property. Fraud for profit is estimated to account for 80
percent of mortgage fraud and consists usually of insiders, such as
lenders, lawyers, real estate agents and appraisers, committing
fraudulent acts to make a profit. Fraud for property is estimated
to account for the remaining 20 percent of mortgage fraud. It
occurs when buyers of property misrepresent facts, such as income
or assets, in an attempt to qualify for a purchase loan, which they
intend to repay.
As an industry professional, I would choose to break down
mortgage fraud in a different way. I would classify it in two ways,
also. The first would be "blatant mortgage fraud," and the second
would be "subtle mortgage fraud." Blatant mortgage fraud is the
type exhibited when money is stolen outright, as in the case of a
closing where participants abscond with the proceeds designated to
pay off an existing loan. Subtle mortgage fraud would fall into the
category of such practices as overstating borrower income, ignoring
a negative credit rating or pressuring appraisers for a higher
appraised value on a property. I suggest to you that the latter is
the most prevalent form and perhaps, on balance, the most
monetarily damaging. Furthermore, subtle fraud is more difficult to
detect and less likely to cause a major concern when uncovered.
Listed below are a number of news reports and professional
opinions that offer some idea as to the magnitude of the
•The FBI reported that mortgage fraud quadrupled from
4,225 reported cases in 2001 to more than 17,000 in 2005.
•Georgia Attorney General Thurbert Baker reports that
dealers are leaving the drug trade to enter the loan fraud arena as
a safer alternative.
•The FBI also reported that mortgage fraud has the
potential to be an epidemic that could have as much impact as the
Savings and Loan Crisis of the 1980s.
•Rebecca Hauck pleaded guilty on May 15 in a federal
district court to a mortgage fraud scheme involving victims in
Georgia, Florida, Alabama, South Carolina and North Carolina, where
she stole their identities and placed mortgages on their
properties. She was charged with 42 counts of various forms of
•In April 2006, New York Attorney General Eliot Spitzer
indicted eight individuals who allegedly participated in a scheme
that defrauded residential mortgage lenders of tens of millions of
dollars over the past five years. The 83-count indictment involved
hundreds of falsified mortgage applications, the purchases and
financing of properties through straw buyers. It was accomplished
with the assistance of attorneys and appraisers.
•According to the FBI, lenders lost more than $1 billion
in 2005, up from $429 million in 2004.
•A number of cases involving al Qaeda allegedly funding
Middle East operations through mortgage fraud is in the news. My
search of Google News with search words "al Qaeda" and "mortgage
fraud" generated 160,000 hits.
•I was a recent participant on an industry loan fraud
discussion panel that was made up of a number of industry
professionals, and it was the consensus of many of the participants
that as much as 25 to 30 percent of all loan transactions are
affected by some form or fashion of fraud.
While there is no ethical or moral justification for such
behavior, we find a wide array of barriers to eliminate the
environment that tolerates and promotes fraud. In many cases, these
barriers are established and supported by those very people
responsible for monitoring and regulating the financial health of
our system. From my vantage point, it appears to be not much
different from that of our immigration problem. It stems from a
very multifaceted and complex system involving government,
politics, money, lobbyists and power. We see many people who are
responsible for monitoring the system looking the other way, in
many cases to protect their jobs and the positions of those who
protect thema kind of "I scratch your back and you scratch mine"
situation. There is one primary difference, however, in that merely
scratching someone's back is still legal. Fraud is not.
Who are the victims? We all are victims in one
way or another, but there will be individual cases where some of us
lose more than others. Much is lost by a few when a small bank
loses a million dollars to fraud due to a dishonest closing agent.
Individual borrowers lose in a big way when they suddenly find that
money they paid to cancel a mortgage was stolen and that the
mortgage still exists. Furthermore, society loses when the
incidence of fraud is so prevalent that banks charge higher
interest to everyone to cover fraud losses. This is no different
from the retail store charging everyone more to cover
In conclusion, mortgage fraud is out of control and must be
dealt with more seriously. Change must begin at the top in Congress
with a no-nonsense attitude toward directing regulatory agencies in
eliminating gaps in the system where fraud occurs. Loan closings
must be monitored more closely, borrower documentation must be
verified more carefully and appraisers must be selected by
risk-management professionals disassociated with loan originators.
The use of more independent closing vendors must be subscribed to
for loan settlement services, reducing the potential for influence
from any and all individuals with a financial interest in a
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott
& Company Appraisers, a national real estate appraisal company.
He can be reached at (800) 854-5889, e-mail firstname.lastname@example.org or
through the company's Web site at www.appraisalsanywhere.com.
Previous columns he has written for The Mortgage Press can be seen
on the Elliott & Company Appraisers Web site.