the battle of
marika
2 April 2009
Article by Charles F. Kuyk
Mortgage fraud is a significant contributing factor to the subprime mortgage
meltdown and the ensuing global credit crisis. Perpetrators' schemes
resulted in terrible economic damage to both individual homeowners and
financial institutions. Author Charles Kuyk addresses the scope of the
problem and explains how controls can significantly reduce the risk of
mortgage fraud that results in serious and enduring damage.
The story of the subprime mortgage crisis and ensuing credit crunch has been
painfully well documented. While early estimates of the scale of the problem
put the losses at about $350 billion, recent estimates place the loss at
nearly a trillion dollars. The International Monetary Fund (IMF) estimated
in its April 2008 "Global Financial Stability Report" that the potential
losses in the financial sector for loans and market losses on related
securities might be as high as $945 billion,1 noting:
"What began as a fairly contained deterioration in portions of the U.S.
subprime market has metastasized into severe dislocations in broader credit
and funding markets that now pose risks to the macroeconomic outlook in the
United States and globally."2
In his latest book, "The Subprime Solution," economist Robert Shiller said
that we are at "a historic turning point in our economy and our culture. ...
The forces unleashed by the subprime crisis will probably run rampant for
years, threatening more and more collateral damage."
Many of the structured securities at the heart of the subprime meltdown -
such as collateralized debt obligations (CDOs) and structured investment
vehicles (SIVs) - have all but disappeared from the investing landscape.
Subprime mortgage-backed bonds have been rendered "extinct'' by the collapse
of the U.S. housing market, according to Jennifer Elliott, group managing
director in the Asia-Pacific for Moody's Investors Service.3
No one can predict the final cost of the crisis, but it continues to grow
and may well exceed the estimate the IMF made in April 2008. With millions
of subprime and Alt-A adjustable rate mortgages (ARMs) resetting in 2008 and
2009, it would not be surprising if the crisis expands.
The market turbulence in summer 2007 primarily stemmed from deteriorating
conditions in subprime mortgage-backed derivative securities (CDOs, SIVs),
but this turbulence has spread rapidly to other debt markets, such as
commercial mortgage-backed securities, home equity lines of credit, and
student loans. The growing uncertainty of the valuations of these
securities, fueled by the lack of liquidity in their trading, has
exacerbated the crisis well beyond expectations. The speed and extent of the
crisis caught many by surprise and triggered intervention by central banks
to meet financial firms' liquidity needs.
Prevalence Of Mortgage Fraud
The Federal Bureau of Investigation (FBI) has defined mortgage fraud as "the
intentional misstatement, misrepresentation, or omission by an applicant or
other interested parties, relied on by a lender or underwriter to provide
funding for, to purchase, or to insure a mortgage loan."4 Mortgage fraud is
frequently carried out by those working in the mortgage industry, including
mortgage brokers, lenders, appraisers, and accountants, as well as
borrowers. Acts of mortgage fraud are punishable by up to 30 years in
federal prison or fines of $1 million or both.
Victims of mortgage fraud include borrowers, lenders, investors, and those
living in and near neighborhoods where mortgage fraud has occurred.
Neighboring homeowners are often indirect victims when borrowers become
delinquent and default on their mortgages, which in turn leads to
foreclosures and the deterioration of surrounding property values.
Mortgage fraud continues to contribute to the subprime mortgage and general
credit crisis today. According to the FBI's "2007 Mortgage Fraud Report,"
mortgage fraud occurred throughout the United States. The FBI's data,
collected in 2007 from law enforcement and industry sources, revealed that
the top 10 states for mortgage fraud were Florida, California, Georgia,
Michigan, Illinois, Ohio, Texas, New York, Colorado, and Minnesota.
The declining housing market in 2007 and 2008 has provided a fertile
environment for the schemes of perpetrators of mortgage fraud. The Mortgage
Bankers Association forecasts a continued downward trend in the housing
market, which will provide unscrupulous real estate insiders with additional
incentives to find fraudulent ways to make a profit and more opportunities
for scam artists to prey on vulnerable owners and would-be owners of homes.
In addition to the financial institutions with money at risk in their
portfolios of mortgages, many federal and state agencies are involved in
preventing, detecting, and investigating mortgage fraud. These include the
FBI, the U.S. Department of Housing and Urban Development - Office of
Inspector General, the Internal Revenue Service, and the two large
government-sponsored entities, Fannie Mae and Freddie Mac.
Types Of Mortgage Fraud
The FBI and other agencies battling mortgage fraud generally describe two
broad categories of mortgage fraud: fraud for housing (or property) and
fraud for profit.
Fraud for housing generally involves misrepresentations by a prospective
borrower to support his or her purchase of a residence. The goal is to
purchase a house for which the buyer would not otherwise have been
qualified.
These misrepresentations typically involve one borrower and one lender and
often include the borrower's exaggeration of employment and income levels,
the extent and value of assets owned, and/or the understatement or omission
of liabilities. In many cases, loan applicants submit forged or fraudulent
documents to gain a mortgage. Fraudulent appraisals also are frequently
involved in both fraud-for-housing and fraud-for-profit schemes.
Fraud for profit, however, is motivated purely by monetary gain and often
involves multiple properties and mortgages as well as collusion by multiple
participants in the mortgage lending process. Based on its analysis of
suspicious activity reports filed by depository institutions, the Financial
Crimes Enforcement Network (FINCEN) confirms that "fraud for profit is often
committed with the complicity of industry insiders such as mortgage brokers,
real estate agents, property appraisers, and settlement agents (attorneys
and title examiners)."5
It is this second category that is of most concern to law enforcement and
the mortgage industry because of the magnitude of such fraud in the
industry. Gross misrepresentations concerning appraisals, sources of funds,
false intent to occupy, and falsified or forged loan documents are common in
fraud-for-profit schemes.