• Nightmare on Highbury Court: A dispute over bricks led to bankruptcy, eviction, jail and fractured lives; first of two parts. Life was good for Roland and Marie Dreilich in the summer of 1999. In their mid-30s at the time, they’d already purchased two homes, taking advantage of the booming real estate market of the 1990s to acquire equity and move up the housing ladder.
• Real estate lawyers asleep at the fee switch: Most puzzlingly of all, is the fact that real estate fraud is actually less prevalent today, than it was when Bill 152 was a glint in the McGinty government’s eyes. Over the past two years, lawyers and title insurers have put into place far more stringent controls and fraud has declined accordingly.
• Mortgage meltdown linked to fraud: The desire to make a “quick buck,” along with extremely lax lending practices, are considered to be among the chief reasons for the recent decline in the nationwide mortgage and housing markets, according to a Utah title company executive.
• Grandview man gets one year for mortgage fraud: The second of three defendants in the mortgage fraud scheme involving former Kansas City Councilwoman Saundra McFadden-Weaver was sentenced Thursday to one year in federal prison. Ricky Hamilton, 53, of Grandview, also was ordered by U.S. Chief District Judge Fernando Gaitan of the Western District of Missouri to pay $144,234 in restitution.
• Stock Market & Stocks: Fraud a Major Concern as Economy Worsens: The people who pay the price for Wall Street abuse need to know what to do if they have been victims of Wall Street or mortgage fraud and abuse, what to do to protect themselves so they can live now, sustain and grow for a secure future, and other steps they can take to best prepare for what we believe is the inevitable recession.
• FBI Launches Mortgage Fraud Task Force in the Nation’s Capital: The FBI is launching a mortgage fraud task force in its Washington field office, joining a widening net of state and local investigators digging into the market crisis. Investigators are seeking to uncover evidence of overvalued home appraisals, shoddy lending practices and alleged irregularities in the packaging and sale of groups of loans that were marketed to ordinary investors, state investment funds and big Wall Street banks.
• Foreclosure Fraud: Freddie Mac Warns Borrowers with Video Dramatization on ‘YouTube’: Can a custom made video posted to YouTube keep troubled borrowers from losing their homes to fraud artists? Freddie Mac aims to find out. One of the nation’s largest investors in residential mortgages, Freddie Mac decided to produce an Internet video dramatizing a common foreclosure fraud scheme after a new survey found one in four delinquent borrowers go to the Internet before their bank or lender for information about avoiding foreclosure. Freddie Mac’s anti-fraud video can be found at http://www.youtube.com/AvoidFraud.
• Six face federal indictments in Provo, Utah mortgage fraud scheme: Six people have been indicted on federal charges for an alleged mortgage fraud scheme that inflated the value of high-end homes in an affluent Provo neighborhood. Prosecutors say the six formed a network of mortgage brokers, investors, real estate agents, appraisers, straw buyers and escrow agents to fraudulently obtain loans secured with property worth less than the loans.
• In Modesto (Calif.), Fraud Destroyed The American Dream For Many: The terms of the loans may have been unusual. But for many of the immigrants who signed up for them, they were simply a way to afford the $300,000 and $400,000 new homes along streets with names like Rancho Encantado and a litany of saints.
• Lousy credit? Buy somebody else’s: The Bush administration came up with one fix for some sub-prime borrowers who are in trouble. A San Diego company offers another: Buy a better credit score. With one or more of the “seasoned primary accounts” that TradeLine Solutions Inc. began selling this week, the company’s website says, you can “dramatically increase your credit score” for as little as $1,199.

Back at the end of January, I posted a blog entry that contained the following statement:

To fix the [sic:credit enhancement} problem, credit reporting agencies need to change the formulas they use to calculate credit scores so that the credit scores of additional cardholders do not benefit from the primary cardholder’s credit history. For many homeowners who participate in credit enhancement schemes, the benefits are temporary at best. All of us should be after the three main credit-reporting agencies–Equifax, Experian, and Trans Union–to see what, if anything, they are doing to remedy this problem.

But I digress…

Are you in the market for a mortgage loan with a low interest rate? Instead of qualifying for a discount rate by earning a good credit score, you can simply buy your way to a great credit score—the kind of score that convinces lenders to loan you money at lower interest rates. You simply piggyback on someone else’s excellent credit history. Here’s how it’s done:

1. A credit enhancement company pays people who have excellent credit histories to allow others to be listed, temporarily and in name only, on their credit cards.
2. The credit enhancement company then allows people with lousy credit scores to buy positions on the credit cards of people with good credit histories.
3. The low credit scores get a boost, often allowing high-risk borrowers to qualify for loans with much lower interest rates.

What’s so bad about that? After all, people who sell their good credit profit from the good credit histories they have earned, borrowers with bruised credit have lower monthly payments (and they are the people who really need it), the credit enhancement company provides a valuable service and earns a good profit, and the lender gets another happy customer. Everybody wins, right?

Wrong!

Why? Because these piggybacking schemes are another type of mortgage fraud. Essentially, the borrower is lying to the lender—claiming to have a better credit history than they really have. This practice fools the lender into making a decision to approve a loan based on false information. I don’t know about you, but if someone who was asking to borrow money from me misled me about his or her ability to pay it back, I would get more than a little upset. Just because a bank or other institution rather than an individual is lending the money doesn’t make it any less wrong to lie.

As citizens, one of our responsibilities is to protect the American Dream, and one of those dreams is the American Dream of Homeownership. If we begin to turn the other way when people are committing obvious fraud, we place the entire system at risk. Homes will begin to cost more money, loans will be less accessible, and someday our children and grandchildren will no longer be able to afford their own homes.

Credit enhancement companies who engage in this sort of activity claim that they are not breaking any laws. But no matter what they say, using trickery and schemes to beat the system will eventually catch up with all of us, and we will get stuck with the bill—somebody always does. Borrowers need to earn credit scores that honestly reflect their ability to pay back a loan, not fraudulently manipulate authorized user credit card accounts.

Fortunately, Fair Isaac Corp. (the company that computes the most commonly used credit scores) has recently decided to fight back, announcing that its next version of the FICO score “will no longer consider certain types of credit card accounts,” closing a loophole that allowed strangers to coattail on a cardholder’s good credit. See “Fair Isaac combats credit manipulation,” for more details. In essence, the new rule will remove authorized user accounts from consideration by the scoring model in FICO 08, the newest version of the Classic FICO credit score which Fair Isaac expects to become available to lenders starting in September 2007.

Piggybacking on someone else’s good credit may not qualify as a crime, but anyone looking at it can see that it is just plain wrong.

It has been about three months since I have written about credit enhancement schemes. Today I bring the issues up again because of an excellent story on the topic that appears on Bankrate.com. In “‘Piggyback’ can lift your credit score,” Bankrate.com staff writer Brigitte Yuille digs deep into what I still believe to be a serious problem in this country.

As I have said before, I have no problem with an individual adding someone to his or her credit account as an authorized user. It’s perfectly legal, and in most cases is done for perfectly legitimate reasons. What I’m not okay with, both as a REALTOR® and private citizen, is someone with a poor credit score or non-qualifying income being able to qualify for a home loan based on an artificially inflated credit score. In case after case, the new homeowner defaults on the loan, which only adds to the mounting problems related to foreclosure and Real Estate and Mortgage Fraud.

From Bankrate.com:

It’s called piggybacking, and like the childhood playground game, it involves getting a lift. Only with this piggyback ride, it’s your credit score that gets a boost.

Critics claim it’s lenders who are being taken for a ride.

Piggybacking works like this: After paying a fee, you are listed as an authorized user on someone else’s credit card, someone with a healthy credit rating. You don’t actually get to use the card, but the credit history of that card appears on your credit report, making it more attractive.

Internet sites that make these connections claim that this ride on someone else’s credit history can raise your credit score almost instantly. Higher credit scores mean better deals and lower interest rates on loans.

You will, of course, pay for the privilege — often thousands of dollars.

And why would the credit card holder allow you to piggyback on his or her lofty credit rating? Simple, they get paid, usually around $200 per user per month.

Critics say these sites are gaming the system and call it fraud, claiming it violates federal laws and supports identify theft. They say the credit card holders who make their credit available are putting themselves at risk too.

The “piggyback” sites disagree. It’s legal, they say, claiming that not only are they protected by the law but they are also supported by organizations within the credit industry.

Here’s more, as it relates to the Real Estate industry:

Piggyback firms also say that top mortgage brokers have used the technique for years.

Real estate and mortgage fraud expert Ralph Roberts acknowledges that real estate and mortgage brokers have been telling clients with poor credit scores to piggyback their credit. But, he calls the “artificial inflation” of credit scores an invisible enemy.

“You can’t see what has happened until the home is foreclosed. There’s no tool to detect the scheme,” says Roberts.

Roberts says piggybacking is fraud and the companies that offer it are breaking the law.

“Current U.S. Code on bank fraud says whoever knowingly executes, or attempts to execute, a scheme to defraud a financial institution by means of false or fraudulent pretenses can be fined up to $1 million or imprisoned up to 30 years, or both,” says Roberts.

To read the entire article, visit Bankrate.com.

I field a lot of phone calls from newspaper reporters trying to understand the 3 S’s of real estate and mortgage fraud: Size, Scope, and Specifics. Any mention on my part that ‘credit enhancement’ is one specific we should all be concerned about, and I am usually greeted with uncomfortable silence followed by something along the lines of, “What’s credit enhancement?”

The last time I wrote about this topic was March 6 of last year, so for those of you who aren’t familiar with the term, )from a real estate and mortgage fraud perspective) credit enhancement is any action taken by an individual that intentionally results in falsely boosting one’s credit score for the sole purpose of obtaining a real estate-related loan. Practically speaking, the most popular way of enhancing one’s credit is to have their name and Social Security number added as an authorized user to a credit card account connected to an individual with stellar credit.

Unfortunately, this practice is not illegal, but it should be. The idea behind this is that by listing a family member or trusted friend as an ‘authorized user’ on your credit card account, you are establishing some sort of “collective” credit history. That practice certainly makes sense in families in which members trust one another and actually operate as a team to ensure financial stability and build wealth as a unit. Unfortunately, though, and more often than not, credit enhancement is a service people buy, and in the end, no one but the fly-by-night credit enhancement companies actually benefit from the practice.

These credit enhancement companies that seem to be popping up all over the place apparently want to create an “extended family” that consists not only of family members but also includes complete strangers. Many credit card companies enable you to legally add anyone to your account, so someone with poor credit can ride the coattails of a more responsible borrower. I would strongly caution account holders from adding the name of anyone they do not know and trust implicitly to their account. After all, if they default on a loan, your credit suffers. Moreover, the practice is unethical. It dupes lenders into approving loans for those who have less stellar credit ratings, and provides those people with lower-interest loans that they would otherwise be unable to qualify for.

To fix the problem, credit reporting agencies need to change the formulas they use to calculate credit scores so that the credit scores of additional cardholders do not benefit from the primary cardholder’s credit history. For many homeowners who participate in credit enhancement schemes, the benefits are temporary at best. All of us should be after the three main credit-reporting agencies–Equifax, Experian, and Trans Union–to see what, if anything, they are doing to remedy this problem.

Back in mid-January of this year, I sent a letter to every states’ Attorney General to warn them about a credit enhancement scheme that’s gaining in popularity among some mortgage and real industry professionals. As Geoff Dutton writes in this morning’s online edition of the Columbus Dispatch, “Companies such as Creditlauncher.com and Seasonedtrades.com have transformed a common white lie in the real-estate industry into a full-fledged business.” Wondering what the common white lie is that Dutton’s referring to? From that letter I sent out in mid-January:

According to their website (http://www.creditlaunchers.com), Credit Launchers can add the name of a consumer applicant on Credit Launchers’ own credit accounts and allow them to reap the benefits of a drastically improved credit rating that they did not earn themselves. Through aggressive Internet-based advertising, this company markets its services in every state in a manner that specifically intends to deceive lenders and consumers alike.

I tip my hat to Geoff Dutton and his editors at The Columbus Dispatch. Every newspaper in the country should be covering this story, as should each and every real estate industry trade publication and website. In fact, if you’re a regular reader of my blog, you’ve probably already noticed that I also wrote about this very same issue as recently as last Tuesday (click here for that post). In the meantime, from this morning’s Columbus Dispatch:

Having trouble qualifying for a mortgage? There are a slew of tricks for padding your credit score, and a horde of companies peddling them. Internet companies are advertising a new tactic, a controversial service that is the latest twist in the murky world of “credit repair.”

It’s an open secret among real-estate professionals that prospective home buyers with marginal credit can improve their credit scores by persuading someone with good credit to add their name as an authorized user on their credit card — even if they have no access to the card. By piggybacking on someone else’s credit history, loan applicants boost their own credit score. Real-estate agents and loan officers sometimes recommend it. Local seminars have promoted the trick. And now, thanks to the Internet companies, you don’t have to rely on a friend or relative.

For a fee of several hundred dollars, the companies offer to add your name to a “seasoned” credit card, one with a history of timely payments. For several thousand dollars, they will add your name to multiple cards for a bigger boost.

Government officials and consumer credit counselors say legitimate methods for improving your credit score are free but take weeks or months. These experts recommend against paying for alleged shortcuts designed to fool the automated credit-scoring process. The blunt assessment of Steve Baker, the Midwest director of the Federal Trade Commission: “We’ve never seen a legitimate credit-repair company.”

In Ohio, a growing number of people are turning to them and feeling ripped off. Complaints to the attorney general about credit-repair companies have been on the rise, records show, including one filed recently against Creditlauncher.com by an industry watchdog.

“It’s very, very wrong,” said Ralph Roberts, a real-estate guru and best-selling author based in Michigan, who filed the complaint in Ohio. “They’re manipulating the system.”

Click here to read the entire Columbus Dispatch article. While the article itself is not as in-depth as I feel it could be, it’s a good start, and it shows once again–as I pointed out in a blog posting a few weeks back–just why the state of Ohio is out in front when it comes to providing across-board coverage of real estate and mortgage fraud-related issues.

I hope more and more newspapers and real estate trade publications start to cover this story as well. In fact, if anyone from the media happens to land on this post, and would like more information about this developing story, please contact me at editorial1 at ralphroberts dot com. I’d be happy to share a press release we’ve developed on the topic of credit enhancement/credit card piggybacking, which is also available on PR Newswire by clicking here.

My oldest daughter recently turned 18, and as many parents with children in college are compelled to do, my wife and I added her to one of our credit card accounts. She attends a college that’s 2 1/2 hours away from our home, and while an 18-year-old daughter with Daddy’s credit card in tow might worry most parents, we’re confident that ours will make smart and informed choices where my credit is concerned. That’s right, I said where my credit is concerned.

By now, most people know that it’s as easy to authorize additional people to use their credit card accounts as it is to swipe the credit card itself at the checkout counter in their local grocery store. In my case, all it took was one simple phone call to my credit card company, and within three minutes our daughter’s name was added to my account, and within the next couple of days her first credit card will arrive in the mail.

While I’m happy she’ll have a credit card to handle emergencies and special situations which her Mother and I approve beforehand, I’m not particularly thrilled by the prospect of little-miss-college-girl unintentionally benefiting from my hard-earned and very respectable credit score.

If you didn’t know, in most cases, when you add someone as an authorized user to your credit card account, the new authorized user inherits your credit history. In other words, if you have an excellent credit rating and you add your daughter’s name to your account, she automatically receives a boost in her credit rating–a boost she has not earned. What’s so alarming about this is the fact that real estate industry professionals have been telling their clients with poor credit scores do the same thing–piggyback on someone else’s credit card account–so they can qualify to buy a home they really can’t afford!

In fact, an entire industry now operates underground to do just that… boost consumers’ credit scores so they’ll qualify for home loans. Take for example Credit Funding Solutions, Inc, (formerly “Credit Launchers,” and also known as “CFS”), which promises to boost consumers’ poor credit scores to unreasonably high levels in as few as 90 days for a flat fee. According to their original web site, which has now been taken down, the company can add the name of a consumer applicant to CFS’s president’s personal credit card accounts, which, as I explained before, allows someone to reap the benefits of a drastically improved credit rating that they themselves did not earn. Through aggressive Internet-based advertising on sites like CraigsList.org, CFS markets its services in nearly every state, and the demand for their service is so strong that a competitor has now emerged—a company called Seasoned Trade Lines—and both companies now appear to be paying consumers with good credit scores thousands of dollars to allow strangers to piggyback off of their credit card accounts… and what’s even more alarming is the fact that Mortgage Brokers and REALTORS are encouraging the practice by referring their customers to both companies!

Look, I have no problem with anyone adding anyone else to his or her credit card account as an authorized user. It’s perfectly legal and in most cases is done for perfectly legitimate reasons. What I’m not okay with—both as a REALTOR and private citizen—is someone with a poor credit score or non-qualifying income being able to qualify for a home loan based on an artificially inflated credit score. In case after case, the new homeowner defaults on the loan, which only adds to the problem.

The three major credit reporting bureaus—Equifax, Experian, and Trans Union—need to address this issue. There has got to be a way for someone to be able to be added as an authorized user and NOT benefit from the authorizer’s credit score. I mean, come on… if we can put a land rover on Mars, why can’t we do this? The stakes are too high—for both consumers and real estate industry professionals alike—for us not to be talking about this issue. Anything that can manipulate the system and be used to commit real estate fraud needs to be road blocked, and anyone who piggyback’s off of someone else’s credit score with the intent of securing a home loan should be stopped, as should the real estate industry professional who suggested it!