This is a corrected version of an article originally published December 7, 2004.
Three banks were among the lenders allegedly hurt in an elaborate Texas mortgage-fraud scheme recently, and experts say other banks could be victimized by such fraud, too, if they don't start taking precautions.
According to an indictment filed Nov. 9 in the U.S. District Court for the Western District of Texas in Austin, 20 people - including appraisers, mortgage brokers, lawyers, and an owner of a mortgage firm - participated in a property-flipping scam that defrauded the $15 billion-asset IndyMac Bank of Pasadena, Calif., the $9.8 billion-asset Frost National Bank in San Antonio, and the $162 million-asset Preferred Bank in Houston.
Several nonbank mortgage lenders were also defrauded in the scam, according to the indictment.
Experts say that even though scams like the one alleged in the indictment are on the rise, many banks have not established procedures to thwart such fraud.
"Banks need to do more than give their loan processors and underwriters two-hour quickie sessions on fraud, but that's just what many of them are doing," said Constance A. Wilson, a vice president at AppIntelligence Inc., a St. Louis provider of mortgage fraud and compliance tools.
Television producers are apparently paying more attention to this issue than many bankers are. Both "The Sopranos" and "Law and Order" have dealt with mortgage fraud in recent episodes.
"When mortgage fraud becomes a topic for television series, banks had better start paying closer attention - they just can't sit there and pretend that it's not going to happen to them," Ms. Wilson said.
Banks should develop ways to spot when a large amount of loans have been made involving the same buyer and seller, as was the case in the alleged Texas scam, said Constance A. Wilson, a vice president at AppIntelligence Inc., a St. Louis provider of mortgage fraud and compliance tools. Ms. Wilson, who like other outsiders contacted for this story declined to comment directly on the institutions defrauded in this case, said that banks can easily enhance their internal software programs to handle such a task, or they can buy software that can be incorporated into their internal systems, she said.
Jacqueline A. Dreyer, the managing director of the LoanCert division of the San Rafael, Calif., fraud-prevention firm Prieston Group, listed a number of application red flags that could indicate property flipping:
- On the seller's column of the standard settlement statement required in applications, the funds would go to individuals or companies not listed as lien holders on the title commitment.
- The owner listed on the title commitment does not match the one on the appraisal report or the seller in the sales contract, or the phrase "owner of record" instead of a name is listed on any of these documents.
- The comparables listed on the appraisal report have had their own titles transferred within the last 12 months - an indication that they, too, could have been flipped.
"Banks should also independently verify employment, and whether the funds that the borrower brings to closing have been ... in the possession of the borrower for at least 60 days," Ms. Dreyer said.Both she and Ms. Wilson said banks can buy databases of suspicious appraisers and brokers and known fraudsters, as well as databases that track falsified personal information such as income and Social Security numbers. Banks may also want to purchase fraud insurance, they said.
Donald Lampe, a partner in the Charlotte office of the law firm Womble Carlyle Sandridge & Rice PLLC, said banks need to know that some types of mortgages are more susceptible than others to property-flipping and other scams.
"As a general rule, low- or no-down-payments can pose problems," because fraudsters don't have to put up any of their own money, Mr. Lampe said.
Second mortgages that don't require title insurance can also pose problems, he said. "Without title insurance, there's no way to know whether flipping has taken place prior to the borrower purchasing the property."
Several community banks contacted for this article say they have not suffered losses because of mortgage scams like property flipping, mainly because they know their customers and the appraisers they use.
John L. Holt Jr., the president of the $623 million-asset Southwest Securities Bank in Arlington, Tex., said it accepts reports only from appraisers it has previously approved.
Darryle Chapman, the president of the $240 million-asset First Federal Bank Texas in Tyler, said the face-to-face interviews it conducts with every mortgage applicant help to minimize fraud. It also independently verifies all of the information listed on the documents, he said. "It really comes down to truly knowing your customer," Mr. Chapman said.
Ms. Wilson said banks that resell their loans need to do as much due diligence before making the loans as they do for the ones they keep on their books. Buyers in the secondary market can force banks to buy back defaulted loans if the loans were found to have been fraudulent.
The three banks that were allegedly victimized are not talking about it publicly. When contacted for this article, Jay Farr, Preferred Bank's president said that he did not know about the scam or that his bank was named as a victim in the indictment until American Banker called him to comment.
"Of course, we'll cooperate with authorities, like we would on any type of situation," Mr. Farr said.
According to the indictment, members of the crime ring bought more than 70 homes, duplexes, and condominiums from March 2001 to January 2004. They allegedly resold the properties to other members of the ring and obtained mortgages at inflated values that were falsified by the appraisers working in the scam
In some cases, the mortgage firm involved in the ring would sell worthless loans to other institutions, according to the indictment. The crime ring would then allegedly default on the loans and split the proceeds among all of the members of the ring.
"Many of these properties were flipped more than 100 times a day, and each time the fraudsters pumped up the value to get bigger loans," said Martin Sheil, a special agent for the Internal Revenue Service's criminal investigation unit in San Antonio.
Many of the alleged fraudsters have been arrested, and law enforcement officials are attempting to extradite the alleged ringleader, Firooz Deljavan, who fled the country several months ago and was recently arrested at the Turkey-Iran border, Mr. Sheil said.
The Federal Bureau of Investigation said that it received more than 12,000 reports of suspected mortgage fraud between Oct. 1, 2003, and July 31, 2004. That's nearly three times the as many reports as it received in all of 2001.
"Mortgage fraud used to be strictly seen as an internal industry problem" perpetrated mainly by loan officers, AppIntelligence's Ms. Wilson said. "Now we are seeing more hard-core criminals becoming involved in mortgage fraud, because it is so profitable."
