Why is mortgage fraud still a problem?

Over the weekend I received an email from an editor of the opinion page of the Washington, D.C. Examiner (a conservative publication) asking me about the impact of mortgage fraud on our economy. This was my response (from which he has asked to quote):

A few things come to mind about mortgage fraud:

1. Yes, I do think there was pervasive fraud at all levels of the mortgage process, from agents getting kick-backs from affiliated lenders to appraisers who couldn't get work unless they played along.

I also think there was fraud for construction loans, as I know some rather compliant consulting firms out there who would manufacture just about any story (which you can easily do with data if you know what you're doing) to assist builders and developers either get approval from corporate offices for projects or to include with loan applications to lenders. On further inspection, however, the conclusions were made out of thin air and based on 'rules of thumb' that simply didn't exist.

Believe me, when I dared to proclaim in the L.A. Times in July 2007 that sometimes builders didn't really do their homework and just hoped for the best, I'm sure I lost potential clients in the building industry. But I was also the type to tell clients, "Sorry, bud, this ain't gonna fly!"

2. I also think the fraud continues, and I have very grave concerns that we're not learning any lessons in this country. For example, I had read a story in Business Week that the same companies which sold sub-prime loans to the uninitiated have simply re-worked their business models to sell FHA loans. Well, guess what? FHA loans are also now going sour at a higher rate than anticipated, and could eventually need their own bail-out.

3. Not only that, but some appraisers who actually lost their licenses due to fraud are now back working for 'appraisal management companies' that are supposed to act as an objective liaison between lenders and agents. Only it doesn't quite work that way: agents can simply say, "assign me x appraiser" through this intermediary, and we're back to business as usual.

I don't think we're going to fix the mortgage fraud problem until we see a some perp walks and major scofflaws going to prison. Otherwise I guarantee you we'll just see more of the same, and in that environment, why doesn't everyone just quit their jobs and become appraisers and mortgage brokers?

Lest anything think that response was too harsh, here's a summary from an AP story on mortgage fraud via the L.A. Times:

The mortgage industry, applying far more scrutiny after a tidal wave of defaults, reported a record number of mortgage fraud incidents last year, with Rhode Island making its first appearance as the nation's top fraud hot spot.

The number of mortgage fraud reports among loans made last year grew 26 percent from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.

The increase came as lenders dramatically tightened their standards, making it more difficult for borrowers to qualify for home loans without large down payments, solid credit and proof of their incomes...

The recession has also increased pressure on shady mortgage lenders and brokers -- as well as borrowers -- to lie on loan applications, according to the fraud report. "There's a lot more desperation, with the economy being what it is," said Jennifer Butts, one of its co-authors.

More than 60 percent of mortgage fraud cases last year stemmed from falsified applications, while 28 percent came from tax returns or financial statements, and 22 percent came from appraisals, the study said.

One fast-growing scheme, the report said, is coming from "foreclosure prevention specialists" who offer to rescue distressed borrowers and sometimes trick the borrower to sign over the deed to their house. While some states have recently toughened penalties for such scams, but only a few state attorneys general are able to seek criminal charges and jail time...

As awareness of the mortgage fraud problem grows, law enforcement agencies are stepping up their efforts to combat it. The FBI created a Washington-based national mortgage fraud team in December and has more than 1,600 open mortgage fraud investigations, more than double the number of such cases just two years ago.

With so many ongoing cases, FBI investigators are not focusing on individual borrowers but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars.

Looking forward to seeing some perp walks!