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Mortgage Lender Fraud Increase Seen By Law Enforcement

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Mortgage fraud is back in the news. However, this time it is the lenders rather than the borrowers who appear to be the main targets of the scams.

The Wall Street Journal quotes The Federal Bureau of Investigation as stating that mortgage fraud led to losses of $1 billion last year, more than twice that recorded in 2004. There is apprehension that some of the fraud that was perpetrated during the recent housing boom has yet to surface. Financial institutions filed 25,000 Suspicious Activity Reports - which can cover problems other than the mortgage related - up from 5,000 in 2002.


Chip Burrus, assistant director of the FBI's criminal division states that some criminal gangs involved in drug dealing and other street crimes have been attracted by the large sums involved in mortgage fraud. "It's more profitable and less risky," he said.

One of the largest property owners in Buffalo, New York was recently sentenced to a year in prison and paid $1.5 million in restitution, mostly to Freddie Mac after a pleading guilty to mortgage fraud. The man obtained over $4 million in home equity lines of credit which he maxed out, stopped making payments on the lines and let the houses go into foreclosure.

After a recent series of Boston Globe investigative articles on the mortgage industry the Massachusetts Division of Banking has issued 17 cease and desist orders against mortgage companies and brokers all over the state. Most of the orders concerned falsifying information to allow borrowers with insufficient income to qualify for loans although some were for operating unlicensed companies or unlicensed branches of duly licensed companies.

A Pennsylvania mortgage lender established a phony property management company in order to falsify rental histories for borderline borrowers. When a verification of rents was needed for loan documentation and the borrower had no history or a poor one, the management company - which wasn't renting or managing anything - provided the false information. Many of the borrowers, unable to afford payments, eventually went into foreclosure.

The biggest recent case has allegedly victimized one of the nation's largest mortgage company but also around 100 persons living in Virginia who took out loans to buy homes in Indiana at inflated prices.

Countrywide Mortgage has filed suit against 15 parties in the circuit Court in Macon County, Indiana alleging that the company may have been tricked into lending as much as $40 million dollars (figures elsewhere say $80 million.) The defendants include eight individuals an appraiser, a property management company, and several mortgage and lending companies. According to The Wall Street Journal, another large lender, Argent Mortgage Company may also have been caught up in the scam. Some of the bad loans also appear to have been acquired by Fannie Mae.

The principal targets of the lawsuit are the Penn family; Beulah, a lay minister in a church in the small town of Martinsville, Virginia; her daughter Sharon, a local hairdresser; and Beulah's son Robert. Robert Penn, operating through a number of companies he had formed, allegedly signed purchase agreements on a number of properties in Indiana at highly inflated prices. The two Penn women then apparently used friendships and business contacts within the community of Martinsville, Virginia to assist in the scheme. Martinsville, a small town in the Piedmont had fallen on hard times after many of the textile mills moved overseas and furniture factories closed. The Penns convinced friends and parishioners of their church to participate in a "no risk" investment to buy the properties, mostly located in the Indianapolis area. They were told there was no financial investment involved; they merely had to allow use of their names and good credit and sign some documents.

Robert Penn then allegedly completed purchase of the homes he had under agreement in the names of his Virginia investors. He paid the sellers of the homes only the actual market value while recording highly inflated values on the purchase and loan documents. The loans were handled through mortgage companies which were apparently either owned or controlled by Penn.

The Times reports that many of the Virginia investors received small payments from Penn early on, but most initially had no idea that they were suddenly property owners in Indiana - some owned multiple properties and owed hundreds of thousands of dollars. Some did not realize what had happened until they applied for new credit and were told they could not qualify for more debt or when they started getting collection notices from Countrywide. Several claimed that, while they had signed papers, they were given no opportunity to read them before signing. The houses, most located in rundown areas, are generally estimated to be worth $30,000 to $40,000 while the loans are usually three times that amount. The Virginia borrowers are liable for the debts and most say their credit histories are in ruins.

State and federal authorities are said to be investigating the situation, but no criminal charges have been filed.

The borrowers, of course, are not completely blameless. It is hard to believe that anyone in America today has not heard the old cliche about free lunches and you also have to know that greed played as large a role as naivete. But could the lenders pay better attention. Why, for example, didn't someone question why so many people from the same town in Virginia were suddenly buying property in Indiana - one of three or four states in the entire country with areas that have actually had negative appreciation in recent years. Several of these buyers apparently closed on multiple properties in a single day - not unheard of - but perhaps a flag if Countrywide were adequately reviewing loans. The gentleman in Buffalo who owned the lender $1.5 million on $4 million in loans was pretty clearly playing on the lenders lack of attention to their collateral. The documentation in a loan package uses consistent forms nationally and each file is assembled in a way so as to facilitate later review. Perhaps the big lenders need to hire more people to do this review before they release funds to the mortgage companies.

They may have an obligation to the community as a whole to exercise greater care. Mortgage Fraud Blog quotes United States Attorney Patrick L. Meehan as saying, "Mortgage fraud harms entire neighborhoods. Foreclosures affect everyone, not just the people who lose their homes but also their neighbors." Meehan noted that a recent study by The Reinvestment Fund found that, for every foreclosure in Philadelphia within a block of your house the value of your house will fall by 1% within a year.



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Comments (28)

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Can a mortgage company obtain a foreclosure court order if they have sold off the mortgage to a another mortgage company.

Above Posted By: anonymous | Mon, 14 May 2007 03:29:35 EST

This comment is directed to Julie Ann, the detective. Escrow Officers absolutely have ethical expectations in Oregon. We are regulated by the Real Estate Commission on the escrow side of the house and the Insurance Commissioner on the title side of the house. In addition, our company has a Code of Ethics and a fraud awareness program started last year. Id you have doubts about the ethics of an escrow officer, by all means, contact the legal counsel for that company!

Above Posted By: Nancy | Sat, 6 Jan 2007 07:31:15 EST

Ms. Cambell: I do not have blind faith in anyone. I wasn't beeing greedy or seeking to burn the people who checked out my home. I know how to read and I understand contract law. What I lack is someone to enforce regulations and consumer laws. I have spent over a year trying to motivate the "Stop Fraud" bunch for naught. Unless you can afford to take a major lender, title co. and Real Estate Affiliation to court, you wasted time and wish you hadn't bothered. Fraudulent 600$ appraisal? For FHA?

Above Posted By: Danielle Von Tungeln | Fri, 17 Nov 2006 00:08:24 EST

There should be more public education, and less frenzy to buy at whatever cost, even if unqualified. People have taken equity from their home to gamble it on condo conversions in another state or county. Due in large part to blind faith in realtors & mtg brokers and nobody wants to pay a few hundred for an Honest appraisal - which should be what lenders and borrowers want but is not. Cash back at closing scams come up after booms bust, during adjustment periods. Lots of people can't afford this

Above Posted By: Doreen Campbell | Sun, 12 Nov 2006 20:16:02 EST

I am a mortgage loan officer and I can't believe the statement by Mr. Bishop... Just as there are "good and bad" doctors their are good and bad mortgage professionals, but to say that there is a "conspiracy" is a stupid comment.......... I guess that we should all be - thrown in jail - First of all the market isn't crashing....... it's getting back to normal.... the market is the market..which is run by supply and demand.... I can't wait until your book comes out......wait...yes I can

Above Posted By: tom | Fri, 27 Oct 2006 09:28:55 EST

The lenders are part of the total conspiracy. They know they're taking bad loans. The "Innocent Victim" ruse may fool the general public, but law enforcement knows better. The real estate industry and fraud are synonymous, from agent to banker to appraiser and industry spokespersons. The market is crashing because it was a false market to begin with and all the fingerpointing won't absolve responsibility.

Above Posted By: Stephen G. Bishop | Thu, 26 Oct 2006 20:15:51 EST

The industry has paid little attention to this known problem for years due to the fact that their rate of foreclosure wasn't hurting their bottom line. Once it started to eat away at the earnings and the slowing down of the market has made them less profitable they want to step in and claim "VICTIM". I could go on.....

Above Posted By: Anonymous | Tue, 24 Oct 2006 13:24:28 EST

I have been a mortgage broker for 25 years and I think anyone with a credit score of less than 680 would agree we have a place in this industry. All parties to fraud need to be held accountable-REALTORS, buyers and sellers but it seems the only time they are is with a huge scam-otherwise it falls on the mortgage officer. I have been threatened by realtors also. They do not fear my governing body nor their own. And, at some point, the consumer needs to be accountable for their own decisions.

Above Posted By: Anonymous | Mon, 23 Oct 2006 13:31:36 EST

Jillayne - over the past 2 years I've seen that one of the main components to fraud are the large sub-prime lenders' need for volume. They need to generate volume, at any expense, so they are turning a blind eye to the loan fraud that is out there. Small wholesale companies can't compete if they do things right because the big guys allow just about anything. Brokers go where they can get the loans done - compliant or not. Change has to start with the big players willing to do things right.

Above Posted By: Jeff Arnold | Wed, 18 Oct 2006 12:18:51 EST

Wow! Stephen I guess you are proof that anyone can write a book. "If a person can't go to a bank for a mortgage, then they aren't qualified" That is probably the single most narrow-minded statement I've seen on this site. Are you aware that ~75% of the loans completed in this country are originated by brokers? If brokers weren't around, we'd still be in the dark ages of 20% down and perfect credit and our home ownership rate would be at 40%. I'm guessing you're a landlord?

Above Posted By: Jeff Arnold | Wed, 18 Oct 2006 12:11:33 EST

I am just putting the finishing touches on my book, "The Real Estate Industry - Day of Reckoning". Dramatic change is needed. Self-employed appraisers must be eliminated. The appraisal process was developed by the real estate industry to facilitate the fraud. Appraisal is the grease that keeps the fraud wheel rolling. Lenders must do their own appraisals. Brokers do not add value to the process. If a person can't go to a bank for a mortgage, then they are not qualified. There's more.

Above Posted By: Stephen | Tue, 17 Oct 2006 12:46:38 EST

I'd love to hear some dialogue on solutions. Self-regulation mechanisms that can support government regulation, etc.

Above Posted By: Jillayne Schlicke | Fri, 13 Oct 2006 22:08:33 EST

The fraud epidemic is not stopping unless everyone teams up to be aware of activities happening nationwide. For the companies that have correspondents, LOC's and retail there is an easy solution to track the many owner occupied properties, Inv. etc. being bought at the same time. ScanGuard has a program to help eliminate this problem and let the companies be aware of the activities taking place that before were hidden from the lenders. Help to educate and inform the industry.

Above Posted By: anonymous | Fri, 13 Oct 2006 09:23:56 EST

To anonymous - it varies from state to state as to what obligation the escrow officers/title officers have. They should independently insure the integrity of the transaction but are dependent on the RE and lending industry for the livelihood. It is easy to see that being too much of an advocate in the transaction can be a liability to the volume of their business.

Above Posted By: Watchdog | Thu, 12 Oct 2006 08:21:11 EST

I am a former appraiser, licensed twice only to find that every mortgage transaction contains an element of fraud. The brokers I challenged laughed about it. I filed a formal complaint with the FBI and my white papers (The Truth About Real Estate Appraisal, Conspiracy Theory, et. al.) have been published in numerous blogs and periodicals. I have declared war on the real estate industry.

Above Posted By: Stephen G. Bishop | Wed, 11 Oct 2006 12:47:03 EST

I am a detective in Oregon, just found this site and am relieved to see the concerns. I have a current mortgage fraud case involving an elderly person being scammed out of their house. The elder thought it was a mortgage, but the broker stole the house for pennies on the dollar. I have since found out that the escrow officers have no ethical obligations, to anyone, which shocked me. Is this common in other states?

Above Posted By: anonymous | Tue, 10 Oct 2006 12:52:33 EST

Mortgage fraud has negitive effects on everyone within the given community. As a loan officer I believe I have an obligation to to do my job honorably. If each of us within our industry tuurned in the "players" we could clean up our industry very quickly. I for one will not allow this to continue. We must each stand up for right and do the right thing.

Above Posted By: Julie Ann | Sun, 8 Oct 2006 09:04:18 EST

In the Indianapolis situation one of the mortgage brokers involved got scammed into this just like everyone else. They have nearly 2 decades of experience but when all of the paperwork is in order, the apprasials are in order with legit comps, VOD's are provided, variances by Countywide are given, everything appears to be on the up and up. They did the loans. Now they are being dragged into this and will probably lose everything they have. This Penn guy was a real "Christian" charmer.

Above Posted By: Anonymous | Sun, 8 Oct 2006 01:19:53 EST

Until all the real estate brokers understand that and stop the real estate agents orchestrating the Mortgage Fraud, the Mortgage Fraud just continues to escalate. Our community continues to suffer as the prices continue going down, leaving the innocent ones, us locals, owing more than the property is worth. This Realtor who doesn't even live here, bragged everyone's doing it and no one cares, and he's been proven correct.

Above Posted By: Jack Olson | Thu, 5 Oct 2006 18:38:28 EST

I believe Mortgage Fraud is the main culprit for the drive up in prices a couple years ago and the drop in prices we are still experiencing, with all its resulting collateral damage to our community. A Realtor involved in Mortgage Fraud has an unfair advantage over those that don't. Same for loan officers and escrow officers involved in Mortgage Fraud.

Above Posted By: Jack Olson | Thu, 5 Oct 2006 18:38:16 EST

His Broker and he even called my managers several times trying to get me fired for refusing to do the fraudulent loans! He's gone on to do the 8 loans totalling more than $2m with other lenders as he spreads them around so the lenders won't catch on. It's all in the public records. My concerns is the lack of knowledge in Mortgage Fraud. Appraisers are the only ones locally who seem to have any understanding of it.

Above Posted By: Jack Olson | Thu, 5 Oct 2006 18:37:29 EST

My experience is Occupancy Fraud, which part of Mortgage Fraud, is the biggest form of Mortgage Fraud out there and the Realtors the biggest fraudsters of it. I've been threatened I would be blackballed and they would get me also fired by a Realtor and his Broker when I refused the bribes this Realtor offered me and refused to do his fraudulent loans for himself and his clients.

Above Posted By: Jack Olson | Thu, 5 Oct 2006 18:35:18 EST

This is good info. I am a realtor and I sometimes see shady buyers, investors as well as lenders. I stay a way from that kind of activity but some are persuaded because they make it seem like everyone is doing it, and I know everyone isn't. This kind of business practices hurts everyone.

Above Posted By: starie | Thu, 5 Oct 2006 14:16:18 EST

Lenders like Countrywide and Washington Mutual are getting what they deserve. There is no accountability in the industry. There are no standards. Their management teams should be locked in jail and the keys thrown away, not for what they've done but for what they haven't done to castrate this rising problem.

Above Posted By: Cecil Streets | Thu, 5 Oct 2006 12:56:58 EST

I am a Notary Signing Agent and have seen first hand several instances of mortgage fraud being committed against the lenders - borrowers who tell the lender they are living in a property when it is obvious (to me) they are not. I even reported one case in which a man who I knew to have been unemployed for 2 years close on a $450,000 home using stated income and lying about his child support obligation. Had the borrower been truthful, he would not have qualified for his home mortgage.

Above Posted By: Private | Thu, 5 Oct 2006 12:34:02 EST

I have just completed a 15 yr audit on my homes which were purchased and settled through Title Insurance Agencies and Title Companies.You will be the first to know (after the Authorities) the cover up I have found regarding overlapping interest charged, and tax evasion issues which to the general public are hidden. Yesterday I left a message at the desk of the person with whom I have been dealing all these years and trusted. He is now a CEO of a very large Group merger. He is expected Monday/11

Above Posted By: Evelyn M. Noto | Thu, 5 Oct 2006 10:55:13 EST

This kind of "straw buyer" scheme goes on all the time. I have personally counseled many investors who openly admitted that they did not read the docs or bother to check out the properties ahead of time. They found out about the scam when it was too late to do anything about it. Greed is a central issue, as people simply get caught up in the idea of making big money fast. Many of them even tell me that they "don't want to know" because they "need the money very badly".

Above Posted By: Donna Robinson | Thu, 5 Oct 2006 09:45:02 EST

“We at www.preventmortgagefraud.com educate based on a philosophy that mortgage fraud can be stopped one transaction at a time with proper prevention tools and education”. Dear Michael Richardson, "Thank you for doing your part in educating the mortgage illiterate souls like myself so that it might spare the easiest prey from falling into the predator's evil game of Monopoly. Too late to save me now but thank you none the less.” Respectfully, DW Chehalis, WA

Above Posted By: Michael Richardson | Thu, 5 Oct 2006 09:07:33 EST


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