FBI Struggling to Keep Up with Corporate Mortgage & Foreclosure Fraud

The number of cases of mortgage fraud reported to the Federal Bureau of Investigation has more than doubled in the past three years, but what is especially troubling is the dramatic increase in reports of corporate fraud. Right now the FBI has more than 560 pending corporate fraud investigations that relate to the mortgage meltdown and the current financial crisis. Instances of individual mortgage and foreclosure fraud are so out  of control right now the FBI has a huge backlog of uninvestigated cases, with a 26% increase in reports over last year alone.

Technically, any kind of falsified information on a mortgage application constitutes fraud, but the kind of mortgage fraud that the FBI is most concerned with is of a much larger scale than the typical ‘liar’ or NINJA loan (short for No Income No Job no Assets). Much of this fraud took place on a huge scale during the housing bubble of 2001 through 2007,  and was perpetrated mostly by investors and ‘flippers’.

In one common scheme, an investor or group of investors cooperate with an appraiser who is in on the scheme. The investor buys up slum houses at inflated prices based on fraudulent appraisals. The investors purposely choose out-of-state subprime lenders with lax underwriting standards (often going through a broker) and take out 110% or 125% financing on the condition that the properties are to be rehabbed with the extra money and then rented out. Because the lenders are not familiar with local property values, and because they know they are going to sell the loan right away anyway, they take the inflated appraisal at face value and do minimal verfication on the borrower. Once the mortgage is approved, the investor defaults immediately, keeping the money without making a single payment, a single repair, and without talking to a single potential renter.

In Kalamazoo Michigan, between the years of 2005 and 2007, two men working on their own (in league with an appraiser) did this with no less than 23 separate slum properties, netting over a million dollars each in profit. No repairs were ever made on the homes, no tenants ever found, no payments ever were mailed on any of the mortgages. When a local newspaper reporter investigated the men independently, he was told that one of them became ill and because of that no work was done. The other man and the appraiser were unavailable for comment. All 23 houses were appraised at anywhere from two to ten times their actual value when compared to similar homes in their respective neighborhoods. The case is still pending FBI investigation due to a nine month backlog, and the men are currently charged with no crime.

In another common scheme, ab individual contacts home buyers about to go into foreclosure, presenting himself (or herself) as a foreclosure rescue specialists. Sometimes these ’specialists’ talk the troubled homeowners into paying a big fee and into forwarding reduced mortgage payments to them while they negotiate a loan modification with the lender, but instead of negotiating anything they simply keep the money and let the loan go into default.

In another variation on this con, the ‘foreclosure specialist’ will offer to take over title to the house, rent it to the homeowner at a reduced rate for several years, then sell it back on better terms down the road. As soon as the homeowner signs the paperwork to add the fake corporation to the note (always some vague, untraceable company name), the ‘foreclosure specialist’ cashes out the equity and leaves town, leaving the original borrower in even more trouble than before. The mortgage still goes into default, and the original borrower is as responsible for the balance due as before the con the started, only now the amount owed is even larger.

When the U.S. subprime meltdown is discussed by pundits and analysts, this kind of fraud is often left out of the equation. The problem is often made to sound as though it was created entirely by a throng of poor people buying mini-mansions on bad mortgage terms. In actual fact, a single mortgage fraud operation can (and many did) run up millions in bad loans without ever once occupying any of the properties purchased.

When underwriting standards get as lax as they did in the several years before October of 2007, it’s practically an open invitation to con artists of every stripe in every state. With the number of foreclosures in the U.S. increasing every month, local law enforcement agencies and the FBI are urging homeowners not to work with anyone who shows up or calls just after a loan goes into default and claims to be able to ‘fix’ a foreclosure problem.