Fraud compounds woes of housing crisis
Ob...@real.com
Reuters
http://news.yahoo.com/s/nm/20080305/us_nm/usa_housing_fraud_dc_2
Fraud compounds woes of housing crisis
By Nick Carey Wed Mar 5, 8:19 AM ET
CHICAGO (Reuters) - As the U.S. housing meltdown forces
hundreds of thousands of Americans from their homes, the
extent to which fraud was a factor in the crisis is just
coming to light.
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Products such as stated-income loans -- known as "liar
loans" because no proof of income was needed -- led to
widespread misrepresentation by borrowers about their
earnings.
But far more sinister forms of fraud, including identity
theft and "straw buyers" -- those created using fake
documents -- are also coming into the open.
Mike Reardon of nonprofit lender Neighborhood Housing
Services of Chicago (NHS) points out two such properties,
both boarded up, on South Rockwell Avenue in Chicago's
blue-collar South Side.
The owner of one of the homes was traced to Texas, he said.
"Turns out it was a case of identity theft," Reardon said,
shaking his head. "He had no idea he owned a home in
Chicago."
Across the street, he points to another boarded, slowly
rotting home, which had last been sold to a woman named
Susan Haas.
"I may be wrong, but I've been looking for months and months
and I can't find any proof Susan Haas exists," he said.
Many fraud schemes kept running as long as cash kept flowing
from Wall Street. Once the credit crunch turned off the
supply of easy money, the perpetrators simply walked away.
Estimates vary as to how prevalent fraud was during the
boom.
Arthur Prieston, chairman of the Prieston Group, which
provides mortgage-fraud insurance and training to lenders,
said that "at least 30 percent of the loans out there
contain some form of misrepresentation."
"But because lenders often have to sell off properties
quickly to cut their losses, we will never know exactly how
much mortgage fraud has been committed," he added.
Prieston estimates that mortgage-fraud losses were around
$4.2 billion for 2006, adding that figures for 2007 "will be
much higher."
In a recent case in Chicago, he said the authorities
prepared to file charges against a woman who had
fraudulently bought five properties.
"When we turned up to serve papers on her, we found she was
9 years old," he said. "Her uncle had stolen her identity."
HOUSE OF STRAW
The mortgage scam known as identity theft is relatively
simple -- the perpetrator uses a stolen identity to buy
property with no money down, then rents it to tenants until
it goes into foreclosure, collecting rent but never making a
mortgage payment.
A far more lucrative scam, using what are known as straw
buyers, happened was much more common, according to
Boston-based real estate analyst John Anderson.
"The vast majority of the cases I'm aware of involved straw
buyers," he said. "Thanks to products like stated-income
loans, people walked away with a ton of free money."
All you needed was to buy a foreclosed property at a bargain
price, have it falsely appraised with a grossly inflated
value, then sell it to a straw buyer at a big profit. The
straw buyer never makes a payment and the home goes into
foreclosure. The process was often repeated over and over
again.
"We've seen some properties that were sold like this dozens
of times," NHS' Reardon said. "This artificially pushed up
prices in some neighborhoods and when those fake buyers
walked away, the abandoned homes pushed prices down."
"The real victims are the genuine borrowers who bought here
at inflated prices and are stuck now with mortgages worth
more than their homes," he added.
False appraisals were also used to fool genuine borrowers.
"We get a lot of cases involving fraud that we refer to the
state attorney general," said Lori Gay, CEO of Los Angeles
Neighborhood Housing Services, a nonprofit lender that also
offers financial counseling services. "Some 15 to 20 percent
of the cases we see have some element of fraud."
The U.S. Federal Bureau of Investigation saw Suspicious
Activity Reports (SARs) related to mortgage fraud rise to
47,000 in 2007 from 7,000 in 2003, spokesman Stephen Kodak
said.
"This year it looks like we're on track for 60,000 SARs,
which is a significant rise," he said. "This has required
more allocation of manpower to mortgage fraud cases."
Prieston, the mortgage insurer, said that had major lenders
been proactive in checking the identities of the people who
were buying properties using stated-income loans and similar
products, then a lot of fraud could have been avoided.
"A lot of lenders claim they were victimized by fraud but
helped to constitute it by looking the other way," he said.
"The sad fact is that the vast majority of mortgage fraud
out there could have been prevented."
Anderson, the Boston-based real estate analyst, is among
those who were warning for years that easy credit created an
easy climate for fraud. "The banks on Wall Street had to
know there would be fraud. If they didn't they're morons."
(Reporting by Nick Carey; Editing by Eddie Evans)
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