Report: Mortgage fraud on rise in California
By: WILLIAM FINN BENNETT - Staff Writer | ∞
Mortgage fraud is on the rise in California, according to recent reports, and analysts say the cooling housing market is helping to reveal more suspicious mortgage transactions.
According to the U.S. Department of Treasury's Financial Crimes Enforcement Network, in 2006, California had more than one-third of the nation's suspicious loan activity at federally insured lenders. And the state's share of the suspected fraudulent activity is growing, according to the agency.
The types of fraud examined in the report ranged from false information provided on loan applications to misstating employment history or the applicant's annual income to incorrect data on closing documents. Analysts blame the fraud on both applicants and mortgage industry workers.
Federally insured financial institutions are required to file annual Suspicious Activity Reports that document suspected acts of mortgage fraud. Nationwide, in 2006, 37,614 such reports were filed by federally insured financial institutions. Of those, 13,768 reports, or 36.6 percent were filed by lenders operating in California.
By comparison, in 2005, California's share stood at 33.8 percent. In 2004, the state's share was 29.9 percent, according to agency officials.
Earlier this month, a report from the Mortgage Bankers Association said that those rising numbers are pushing the state from the No. 8 ranking in the nation in 2005 to the No. 2 position in 2006.
The report measures the number of suspected cases of loan fraud committed in each state as a percentage of the total number of loans issued in that state by reporting agencies. The companies' figures were based on reports filed from a wide range of subscribing lenders that include banks and secondary lending agencies and "lenders that account for the vast majority of wholesale lending in the country," according to the association's Web site.
However, one of the report's authors said recently that the study was based on confidential information provided by subscribing lenders from across the nation and that contractual obligations prevented him from releasing the hard numbers on which the report is based.
"The nature of the report is legally sensitive ---- we share as much as we can to show trends on an annual basis," said Nick Larson, with the Mortgage Asset Research Institute, which developed the report for the Mortgage Bankers Association.
Analysts say incidence of mortgage fraud in California most likely has been higher than reported for several years. It is only becoming apparent now as the housing market cools off and those who commit fraud can't hide behind housing profits, they add.
"California has nearly twice as many reports of fraud as the national average," Larson said.
The FBI reports that losses tied to mortgage fraud for 2005 were more than $1 billion just for federally regulated banks and lenders.
A hot California real estate market over the last several years may have been masking the amount of fraud that was occurring in the state, the report says.
"The recent slowdown in its housing market may explain California's return to high ranking this year," it states. "Some experts have suggested that (California's) problems were masked by high real estate appreciation."
Larson said that when prices are rising and a loan that was obtained fraudulently is paid off, the perpetrator makes his profit and moves on to the next deal, often going undiscovered. But when the market goes soft, the borrower can no longer convince a lender to pay more for the property than what he paid for it. And that's when fraud often comes to light.
Every spring, the association, which represents more than 3,000 banks and lenders, puts out the report on suspected fraudulent loan activity.
More than meets the eye
One local fraud specialist said recently that he believes fraud is much more widespread than the current report indicates.
Like Larson, Bob Simpson, president of Irvine-based Investor Mortgage Asset Recovery Company, said more and more fraud is being discovered in a cooling real estate market.
"When values don't go up, lenders foreclose and they conduct investigations," Simpson said. "I expect the number of frauds to increase at the same pace as the number of foreclosures."
Irvine-based RealtyTrac Inc., which tracks foreclosures in the state, reported 6,879 foreclosure-related filings in Riverside County from January through March, an increase of 94 percent from the first three months of 2006, giving the county one of the highest concentrations of foreclosures in the nation. The numbers include the initial default notices and recordings of actual auctions and seizures by lenders.
According to the Mortgage Bankers Association report, over the last several years, California has continued to climb in the rankings. It went from being 30th in the nation in 2002, to 23rd in 2003, to 19th in 2004, to 8th in 2005 and 2nd in 2006.
Most fraud involved illegal profits
The report broke down loan fraud into various categories: loan applications; tax or financial statements; verifications of deposit; appraisals; verifications of employment; escrow or closing documents; and credit reports.
On a nationwide basis, the greatest incidence of fraud ---- 55 percent ---- occurred on loan applications. When it came to subprime loans, those that usually go to people with bad credit, fully 66 percent of the fraud occurred on loan applications, according to the report.
About 28 percent of application fraud involved misstatements about employment history. Another 22 percent incorrectly stated their incomes, Larson said.
But it's not dishonest homebuyers who have been responsible for most of the losses to loan fraud, Larson said. More than 80 percent of the losses to fraud were perpetrated by people who were looking to make an illegal profit, not ones who bought homes to live in, he said.
The study noted that more acts of fraud are likely to occur in the future.
About 50 lenders in the sub-prime market closed their doors in 2006 and many people are being laid off in the industry. Because more professionals will be competing for business in an ever tougher marketplace, temptations will be great to get loans approved for those with poor credit and there will be many who "yield to that temptation and try to make borrowers look more qualified than they are," it states in the report.
Contact staff writer William Finn Bennett at (951) 676-4315, Ext. 5426, or wbennett@californian.com.
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Please don't bail them out wrote on May 28, 2007 12:58 AM:Fines and jail time for the underwriters and other co-conspirators. And let the foreclosed properties go to auction. Only this will temper the fever in the next real estate cycle.
Mark wrote on May 28, 2007 5:22 AM:I was a previous owner of property in Riverside CA. I have great credit and was able to use 'stated' income with no documentation as to what I 'stated'. When I initially told the lender my income I was told to think 'more positively' about the number I provided so I could get a better mortgage rate and lower my debt-to-income ratio. So I did and it worked out for me - I sold my home after 2 years and moved to NC. I imagine it doesn't always happen that way though.
Amazed wrote on May 28, 2007 6:35 AM:Isn't it amazing that the fraud is only uncovered after the loan goes bad! A load denied only hurts the mortgage brokers and underwriters. A loan gone bad hurts everybody.
"YGMMLMM" wrote on May 28, 2007 7:18 AM:Another interesting article to read on this housing mess. What does it all mean to me? Can someone tell me, are home prices going to go down 50% so I can afford to by a home? None of the housing authorities seem to care when the prices were going through the roof.
Danny D wrote on May 28, 2007 7:55 AM:Mortgage fraud on the rise... and the Marines are forced to take ethics courses? You make a funny, yes?
Liar Loans wrote on May 28, 2007 8:34 AM:All fraud must be met with criminal charges. Otherwise, the honest and hard working will not be able to get a fair mortgage. Also, no bailout!
Hank wrote on May 28, 2007 8:53 AM:Loving my single family home on an acre with a nice view. What we're really talking about here is credit. Let's talk about credit cards. I payed all of mine off. Usury used to be against the law. Not any more.
mgt_brkr wrote on May 28, 2007 9:07 AM:Fraud has been rampant in the mortgage business for years. I cannot tell you the number of big "name" lenders, whose reps told me to make-up assets and boost the income numbers, because "we don't verify it anyway." - I've been around long enough to know that eventually many of these loans would go bad and the lender's rep would be long gone, bonus in hand, and I'd be left trying to explain why I encouraged the borrowers to lie. - I lost a lot of loans by being honest, where others played by a different set of rules and made a lot more money than I .- It looks like there is no downside to those who lied and comitted fraud. Lenders don't go after anyone, because they are the ones that encouraged the fraud in order to push their profits and executive bonuses to unbelieveable heights. - I hope some crusading US Attny General, perhaps with the next administration, will prosecute those who perputrated the fraud!
j t wrote on May 28, 2007 9:08 AM:as you know banks set you up for failer look at the credit card issue.
Sam wrote on May 28, 2007 9:30 AM:Too bad they don't go after the school districts' for bad overspending shuffles;fraud, the same way.
to mark wrote on May 28, 2007 9:55 AM:that was fraud your broker was telling you to do, anytime you give false information, owner occupied when really it will be a rental, upping your income to get a better rate,helping a friend or family member to buy a home with your credit, that is fraud,most brokers and lenders are legit, but when they tell you to lie or know you are lying that means there is something in it for them.Mark, for some reason your broker may have been afraid you might not of qualified for the loan without a higher income, or you may have only been able to get a subprime lender to look at you if you didnt up your income,or maybe the broker needed to get a ALT-A loan in order to keep working with a certain lender,but whatever the reason it was not to help you, brokers are only in it for themselves legit or not.
"Mark" committed fraud wrote on May 28, 2007 9:58 AM:Mark admits he lied on his loan application, and thinks it's ok, because he made money and was able to move on. What you did was illegal, Mark, and it's people like you that have ruined it for the hard-working honest folks. Bet you think it's ok for your kids to cheat on tests in school, and a little fudging on the 1040 is no big deal- as long as you get away with it, right? Another example of the lack of moral values in America today...
JSten wrote on May 28, 2007 10:29 AM:Looks like the chickens are coming home to roost. Its OK though, most of the underlying venture capital comse from overseas investors, like the chinese, who are, after all, communists, or the arabs who are, after, all well, arabs, ... . So when THEIR bill comes due, we can as a country just turn our pockets inside out shrug our shoulders and say, "we dont have it". Seems almost...patriotic.
JBJ wrote on May 28, 2007 10:33 AM:Once all is said an done, California will the land of illegals, but immorals as well. The report indicates CA has over 1/3 the fraud (mortgage) - at least that is KNOWN. Add that to CA as the 49th (at the bottom) of all states in education and then wonder why folks can't read, write, tell the truth or make your hamburger right at fast food joints. The land of the homeless and welfare cheats is on the horizon. Or is it here already?
JP wrote on May 28, 2007 11:12 AM:JSten, your comments are patriotic, bigoted and wrong-headed. If the interest on mortgage pools purchased by foreign investment capital isn't paid, the result is default. That means that the properties revert to the lenders. It's called Real Estate Owned ("REO") in lender terms. That means many of us will be renters to our new overseas landlords. Since the "rule of law" underpins the legitimacy of a democratic society, the US can't just tell the new owners (lenders) of millions of US homes to take a hike. Hence, we have literally mortgaged our future as a nation. It'll be interesting to see how things play out in the next 5 years.
Here's the problem: wrote on May 28, 2007 11:17 AM:ONLY allow banks to provide fixed rate financing with proven income. People will then only buy what they can afford and there won't be any rises in the payment. This will fix it all.
Lib wrote on May 28, 2007 11:58 AM:Fraud...Hmmm...how about our entire credit rating system? How about being gouged by banks and mortgage brokers? Why are we charged such high rates when the fed rate is so low? Why don't our loan costs show a fair and reasonable profit with adjustments for inflation? The banks are fatter than ever, at our expense. Fraud...
What's the problem? wrote on May 28, 2007 3:23 PM:It's just business men making profit off of the poor and uneducated. So?
Reardon wrote on May 28, 2007 3:42 PM:"It's just business men making profit off of the poor and uneducated." That is true, but no different from the State Lottery, Churches, Casinos, the UN and government at every level.
TALLTALE wrote on May 29, 2007 12:01 AM:Why is everyone on the tail end of this article so indignant? This isn't the 1950's Norman Rockwell world you think it is.
BLAME REPUBLICANS wrote on May 29, 2007 4:12 AM:Let's see, Republicans have been in charge of the Presidency, Senate, House of Representatives, Supreme Court, California Governor, Federal Reserve, SEC, Financial Regulatory Committees and the Banking Committees all at the same time. They have left the borders wide open, imprisoned our soldiers, destroyed the middle class, plunged the working class into slavery through inflation and allowed the real criminals (CEOs of lending institutions and the oil companies) to become rich several billion times over. They hope I never sit on their jury! Save America, imprison a Republican.
Morgan wrote on May 29, 2007 10:08 AM:Mortgage Fraud spawned a dangerous housing bubble burst that ruined households and neighborhoods as overvalued property deceptively inflates nearby home values while also raising property taxes. All because of the illusion of rising demand. That demand went down "adjusted" as fast as it fraudulently went up. In addition, those fraudulent loans are sold into the secondary market as ticking bombs. Brian Cohane, co-head of residential and asset-backed bond trading at investment bank UBS, that trades billions of dollars of mortgage securities daily, said, “This (secondary) market is key for investors. The integrity of that market is very, very important to those investors.”
Abulafia wrote on May 29, 2007 9:49 PM:I live in CA, and know first hand corruption has become one of the new, more disturbing societal cornerstones as of late...."Gee, I wish I had a clue why?" he said sarcastically....
Crushed wrote on Jun 1, 2007 9:59 AM:Watch out for private lenders too - we had a private lender, who co-conspired with a broker to force us into forclosure, by embezzling our construction funds. The little guy sometimes just gets screwed. It's not just the 'big banks' doing this...... REPORT fraud!!
NO NO NO ... HERE'S WHAT IS REALLY HAPPENING: wrote on Nov 27, 2007 2:38 PM:The story incorrectly focuses on regular borrowers - but A LOT of fraud is happening by the loan brokers and real estate agents and wholesale lenders and escrow agents and notary publics. They rip off one person at a time and no news is generated. Each victim has little power to fight these big companies but that is where the real story is.
Paul wrote on Feb 8, 2008 12:54 AM:Real Estate Agents - Mortgage brokers - and finally Attorneys.
The world would be a better place without them!
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