BOSTON — Another of the lessons from the mortgage boom and bust? Employees at financial institutions need to be even more vigilant about mortgage fraud.
According to Richard Hagar of The Hagar Institute, the prevalence of mortgage fraud in the U.S. rose so quickly in the housing boom that regulators were simply unprepared for the volume.
"We need to protect [ourselves], not just allowing government to do it because they can't keep up. The FBI is just overwhelmed. They need an army of us," Hager, a veteran appraiser, told credit unions during NASCUS' annual summit here. "From the janitor to the boss and everyone in between should take classes in mortgage fraud to be aware of it."
Breaking Down the Numbers
In 2001, there were about 4,225 cases of mortgage fraud nationally; that number has skyrocketed to a projected 75,000 cases this year. The truly scary number, Hagar noted, is that only about 15% to 20% of mortgage fraud incidents are reported. Mortgage fraud cases range from simple cases of false occupancy, false appraisals, false down payments and income overstatements by professional brokers, to shady scams that charge flat fees for fraudulent employment verification over the phone. Even though mortgage volume is well off its highs during the boom, the number of mortgage fraud cases across the country continues to climb.
"Fraud is up with fewer loans with more diverse scams. Why? Continued poor training for professionals, desperate borrowers, and a more knowledgeable scammer," Hagar explained.
The 30-year veteran appraiser explained several of the common yet sophisticated schemes in the market today. He called one the "builder bailout" where a builder's construction loans come due; he forms multiple corporations to each buy one home. The original company sells the homes for more than their value and the builder uses the excess cash to make payments, until the money runs out and 10 different financial institutions are stuck with a foreclosed property. Another revolves around AMC dishonesty where security features are removed from the original appraiser or raw data is gathered and then manipulated to whatever the AMC wishes to report to the lender.
"Once the security features are removed, they can write anything they want," said Hagar. "You must audit, test and ensure that the AMC you use is doing what is right. It is your responsibility."
Fraud Contributed to the Bubble
Hagar blamed fraud schemes for contributing to the housing bubble, saying illegal practices such as including vehicles in the price of a home, or two-for-one sales pushed values higher when the market wanted to bring them down and made the crash worse than it should have been. Just prior to the housing collapse in the sand states, Hagar had dire predictions, which were largely dismissed by lenders and brokers alike who saw a mild correction at worse on the horizon.
"I was telling people in the central valley of California that it was going to look like an economic wasteland. All we had to do was to look at the FBI fraud rates," he said. "And we were 100% accurate."
Hagar implored credit unions to get out in front of troubled members as soon as possible, let them know organizations like the United States Homeowners Protection Agency are not official and those with the title "Federal Loan Modification Company" have been indicted for multiple cases of fraud. Hosting townhalls to talk about foreclosure problems and potential scams also gives CUs the chance to do some cross-promotion, he noted.
"Not only will you stop the issue with your members you know about, you'll stop issues that you might not know about. You have the chance to put yourself forward as the good guy," said Hagar. "You can take so much business away from the banks."
