Fraudgate

Mortgage Banking, Nov, 2000 by Dona Dezube

Mortgage scam operators have creative new ways of doing their deeds. But lenders are finding new ways to defend themselves. Better prevention tools are helping tie the hands of at least some of the crooks--some of the time.

FRAUD IS THE MONICA LEWINSKY OF THE MORTGAGE BANKING WORLD--something you keep hearing about over and over, in lurid detail, and pray never happens in your office.

It's not just occurring in offices. Take the case of the 8-year-old Southern California girl whose uncle stole her identity and took it online, where he applied for and received four mortgages using alternative credit sources. Stealing an identity from someone you know is the modus operandi of about a quarter of identity thieves, the Federal Trade Commission (FTC) estimates.

Other identity thieves don't go so high-tech. Greensboro, North Carolina-based United Guaranty Residential Insurance Co. (UGRIC) Special Investigation Unit Manager Linda LeJeune looked into an identity theft earlier this year. UGRIC loss-mitigation specialists looking into a default found that the borrower's employment and deposits checked out, but he wasn't making his payments. Why? Because he didn't know anything about the loan. He did recall filling out and mailing in a direct-mail marketing piece to a lender, but someone from that lending company had called and told him he didn't qualify for a loan--and then used his information to take out a mortgage. "They had everything they needed to go out and open up loans in his name," says LeJeune.

Before the Internet, a borrower generally had to walk into a company's offices and show a driver's license to get a loan, says Steven Halper, president of New City Asset Management, Inc., a St. Charles, Missouri, firm specializing in prefunding fraud detection. Today, Halper says, the lending process is anonymous. Anyone can get online and just start banging away: kids, grandmas and hackers," he says.

Some of the biggest lenders will send a $30 loan package in response to an online mortgage application from Mickey Mouse living on Looney Tunes Street, according to Halper. "There's no controls on those sites--you can key in anything," he says.

Other con artists prefer to stick with the tried-and-true methods of the 20th century, the kind of fraud that's been around at least as long as the Federal Housing Administration (FHA): property flipping. Late last year, the Florida Department of Banking (DBF) spearheaded an investigation that brought down a $21 million flipping operation. The alleged ringleader, James Christenson, used accounts at Union Bank in Fort Lauderdale to buy more than 200 local properties.

Christenson then allegedly subdivided the properties into four-unit buildings, even though many were boarded up. Next, an appraiser, John Podelszek, assigned inflated values to the properties based on comparables owned by the group and pictures of other properties, the DBF charges. Christenson allegedly worked with a loan officer at First Financial of Boston, Inc., who prepared fraudulent credit files for straw buyers, whom he paid to sign closing documents.

Really up-to-date criminals combine the old and the new. Richard Ward, president of Affinity Corporation, West Hills, California, has seen cases in which a scam artist used someone else's identity to purchase a property and flipped it back and forth with other people using false identities. Once the flip was caught, the investigators were left with a pile of stale leads pointing to identity theft victims rather than the scammers.

No matter where you're doing business, you're exposed to fraud. "Mortgage fraud is invented in California, shipped out to Florida for R&D and back to Texas for export," says Lynn Wilburn, president of Houston-based Wilburn Investigations, a firm that offers fraud investigations and prevention seminars.

Jim Croft, executive director of the Mortgage Asset Research Institute, Inc. (MARI), Reston, Virginia, agrees. He says Orange and Riverside counties in California continue to be the No. 1 hot spots for fraud. They are followed by Florida--especially Dade and Broward counties, where confirming income can be a challenge. "Anything that documents the existence of compensation and longevity associated with employment seems to be subject to manipulation," Croft diplomatically says.

The Washington, D.C.-Baltimore corridor and the Greater New York metropolitan areas are also hot spots, as is Chicago. What do these cities have in common? Lots of money and lots of unsophisticated, first-time homebuyers, lower-income people and immigrants, many of whom make vulnerable flipping victim targets if they haven't had much experience with mortgages and real estate.

Up-and-coming areas on the fraud hit parade include Denver, Las Vegas, Salt Lake City, Phoenix and Albuquerque, as well as Washington and Oregon states, says Croft, whose institution monitors fraud nationwide.

A breeding ground?

Is there a segment of the mortgage market itself that's more prone to fraud--say, third-party originators (TPOs) or subprime originators? "There's been lots of hypothesizing that that's the case, because TPOs don't get paid unless the loan closes," says Croft. "Some folks have come out with statistics saying 70 percent of loans are originated by TPOs, so it's only natural that a substantial amount of fraud would be associated with TPO loans--but I don't have statistics that show more than 70 percent of fraud is committed by TPOs."