Anyone applying for a mortgage or creating mortgage instruments or selling them — BEWARE.

The Chicago Daily New’s Ken Harney highlights a recent Obama administration piece of legislation and program that was put into law May 20th. It may not have made a big news, but for real estate it was the equivalent of a congressional declaration of war - a war against mortgage fraud. 

Every heard of the the Fraud Enforcement and Recovery Act (FERA)of 2009? The legislation will fund new SWAT teams of fraud-busters and broaden federal legal powers to go after individuals and mortgage operations that currently get attention - if at all - only at the state or local levels.  

So what is the scope of the mortgage fraud problem? The FBI’s mortgage fraud caseload has tripled in the past three years. Reports of potential fraud exceeded 65,000 in 2008 - up from about 25,000 in 2005 and just 5,400 in 2002. 

Which States are the worst? According to the 2009 report from the mortgage researchers, the top 10 states where frauds occur are (and they are not all from the most populus States): (#1) Rhode Island (where clearly less is more!), (#2) Florida, (#3) Illinois, (#4) Georgia, (#5) Maryland (had the highest percentage of frauds involving bogus tax returns), (#6) New York, (#7) Michigan, (#8) California - nearly 40 percent of fraudulent applications carried incorrect verifications of deposits or bank statements), (#9) Missouri, and last but certainly not least, (#10) Colorado. 

How much does this mortgage fraud cost us? The Treasury Department estimates it causes losses to homeowners and the mortgage industry of anywhere from $15 billion to $25 billion a year.  

What do these frauds look like? The Mortgage Asset Research Institute performs an annual study of the problem for the Mortgage Bankers Association, and its 2009 report found that: 

• Roughly two-thirds (2/3’s) of all frauds involve deceptions at the application stage.

• About 28 percent of frauds last year involved deliberate misinformation about tax returns or financial statements. Around 21 percent of fraudulent applications contained faked deposit verifications last year.

• Appraisal manipulation, typically inflated valuations, rank high as well, and were involved in about 22 percent of fraud cases in 2008.

Other widespread forms of home loan fraud include:

• Faked employment verifications,

• Misinformation on closing or escrow documents, and

• Credit reports or scores that have been manipulatedin some way to get unqualified borrowers approved, or lower interest rates, or both.

Hopefully by looking back at past mistakes we will learn, and change the way we do business. As such the Fraud Enforcement and Recovery Act of 2009 also created a newly formed Financial Crisis Inquiry Commission (FCIC). The commission has very broad powers to investigate who and what got us into the real estate mess, starting with:

• The sub-prime boom, who triggered the programs (federal, private and hybrid types), and who decided to lower the underwriting standards (greed or government intervention),

• Wall Street and their Mortgage Backed Securities (MBS) bundling and the CRE’s Commercial Mortgaged Backed Securities (CMBS) and

• AIG’s “non-insurance” derivative products which was not regulated by anyone,

• The failure of rating agencies and their practices,

• And more recent bank failures which are building an running at record default levels.

So scammers, both on Wall Street and on Main Street – BEWARE (not that we’re referring to any of our readers, of course!!): Whomever continues with these nefarious activities is likely to end up either before a grand jury getting hit with a big fine or doing prison time.Everyone’s now been warned. There’s a new sheriff in town and it’s certainly a new day.

Tags: Financial Crisis Inquiry Commission, Fraud Enforcement and Recovery Act of 2009, Mortgage Fraud

Posted in Fraud Enforcement and Recovery Act of 2009, Financial Crisis Inquiry Commission, Mortgage Fraud, CMBS, Refinance, Bankers, CMBX, Mortgages | No Comments