Reported incidents of real estate and mortgage fraud in the U.S. increased by 45% on fewer loan applications in the second quarter of 2008 from a year ago, according to a report released today by the Mortgage Asset Research Institute (MARI). The MARI Quarterly Fraud Report is based on data submitted by MARI subscribers on loans originated in the second quarter of this year that have since been classified as fraudulent.

Key findings from the report include:

• Fraud most often occurs at the beginning of the loan process. More than 65% of fraud incidents are attributed to “General Application Misrepresentation,” a trend that has continued over the past two quarters. General Application Misrepresentation occurs when information such as a name, occupancy or assets is incorrectly stated during the application process.
• Income misrepresentation on loan applications rose 5% during the second quarter of 2008 versus the first quarter of 2008.
• Asset and debt misrepresentation on the loan application rose 7% during the second quarter of 2008 versus the first quarter of 2008.
• Tax return and financial statement misrepresentation rose 4% during the second quarter of 2008 versus the first quarter of 2008.
• Verification of deposit and bank statement misrepresentation rose 3% during the second quarter of 2008 versus the first quarter of 2008.
• Appraisal misrepresentation climbed to 21% for an overall increase of 6% during the second quarter of 2008 versus the first quarter of 2008.
• Florida, California, and Illinois compose the top three states for reported incidents of fraud. Florida saw a 5% increase in General Application Misrepresentation in the second quarter, while California saw a 20% decrease. Illinois recorded the highest percentages of income and employment misrepresentation on loan applications.

As was the case for the first quarter of 2008, Florida tops the list with the most reported loans with misrepresentation in the second quarter. Twenty-one percent (21%) of reports for loans originated during this time period were for properties in Florida. California ranks second, with 15% of loans reported; and Illinois rounds out the top three with 12% of all loans reported.

Reported incidents of mortgage fraud in the U.S. increased by nearly 50% in the first quarter of 2008 from a year ago, according to a new report released this week. The report is based on data submitted by Mortgage Asset Research Institute (MARISM) subscribers about loans that were originated in the first quarter of this year and have since been classified as fraudulent, and shows a whopping 42% increase in filings. At the local level, Florida continues to lead all states in reported mortgage fraud. In fact, according to the report, Florida accounted for 24% of all properties with material misrepresentation for loans originated during the first quarter of 2008, and the Miami MSA alone boasts 49% of all of the reports submitted for properties in the state.

California ranked second in the first quarter of this year (with 52% of the properties with misrepresentation coming from the Los Angeles area), followed by a three-way tie for third place among Illinois, Maryland and Michigan.

Major urban areas also score the highest in Illinois, Maryland and Michigan. Ninety-four percent of investigations in the state of Illinois are for properties in the Chicago MSA, while in Maryland, 25% of reports are in the Baltimore MSA. In addition, the Detroit MSA counts for 56% of all of the misrepresentation reported for Michigan.

For all states, the most common type of fraud was in the “General Application Misrepresentation” category, followed closely by misrepresentations related to income and employment. In addition, multiple types of fraud types–such as identity theft and identity fraud–continue to appear in a significant percentage of loan transactions.

The report–which available for download here–presents a number of interesting and noteworthy trends:

• In general, misrepresentation on the mortgage application trends high in each of the states.
• Income and employment misrepresentation on the mortgage application rank high in Florida,
  California, Illinois and Maryland. Florida and Maryland report higher income than employment misrepresentation, and California and Illinois report slightly higher employment than income misrepresentation.
• Michigan shows a high percentage of asset and debt misrepresentation on the mortgage application.
• Appraisal misrepresentation (including value inflation and incorrect use of comparables) is most prevalent in Michigan.
• Maryland has an abnormally high percentage — 69% — of tax return and financial statement misrepresentation.

In its final analysis, this week’s report concludes the following:

1. The first quarter data reveals that loan application misrepresentation continues to plague the industry. According to the FBI’s 2007 Mortgage Fraud Report, “the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market.” Simply stated, mortgage fraud will not disappear — in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry.
2. As the nation’s lenders redraw their credit practices, we see a continued need to highlight and eliminate loans that are not in good order at the point of origination, well before prefunding processors spend any effort to seek added verification or validation of the mortgage application information. If loan applications are not in good order when submitted, the loan data may likely be adjusted to fit the business practice expectation to meet the requirements for funding, which ultimately may result in funded loans that quickly go bad.
3. To save itself from schemes both commonplace and new, the mortgage industry must continue to strengthen its attention to and practice of due diligence to ensure that transactions are in good order at the point of origination. This includes an analysis of the borrower’s identity, as well as the players involved in each of the real estate roles whether they are outsourced or work directly for the lender.
4. As lenders pursue higher-quality loans for the market, the priority should be on identifying poor quality at the earliest possible point in the process — and at the lowest possible cost. In MARI’s view, the origination and prefunding processes offer the largest and least expensive opportunities to assure funding of higher quality loans. How a lender accepts or rejects a loan application at the front door is often all a criminal needs to see how much further he or she may push through the loan process.
5. Pre-funding fraud detection solutions can help prevent the risk of application discrepancies, exposure to compromised identities and establishment of relationships with insiders who leverage someone’s good name to perpetrate fraud. If on the mortgage application general misrepresentation or income, appraiser or employer misrepresentation were checked adequately at origination and pre-funding, in this quarter’s examples, would there still be significant fraud to report…?
6. Mortgage fraud inflicts damage to profits, reputations and consumer confidence. Today, it is wise to ensure you know the customers, employees and vendors involved in every loan transaction — doing this early in the process can result in overall protection from tainted pipelines and hidden threats to loan quality.

According to the Federal Bureau of Investigation (FBI), which earlier today issued yet another Mortgage Fraud Advisory, here are the latest Real Estate Fraud statistics:

• Estimated Annual Losses: $4 billion to $6 billion
• Total Mortgage Fraud Suspicious Activity Reports in Fiscal Year 2007: 46,717, with $813 million in losses
• Total FBI Mortgage Fraud Task Forces/Working Groups (June 2008): 42
• Pending FBI Mortgage Fraud Investigations (May 2008): 1,380
• Cases opened in Fiscal Year 2007: 462 (compared to 295 in Fiscal Year 2003)
• Successes in Fiscal Year 2007: 321 indictments/informations; 260 convictions
• States with Significant Mortgage Fraud problems in 2008:

1. Florida
2. Nevada
3. Michigan
4. California
5. Utah
6. Georgia
7. Virginia
8. Illinois
9. New York
10. Minnesota

If you are interested in the federal government’s handling of real estate and mortgage fraud prevention and prosecution, read “FBI Halts Some Cases to Investigate Mortgage Frauds,” by Bloomberg’s Robert Schmidt. If you don’t have time to read the entire article, here’s just what you need to know:

• The FBI, confronting a surge in mortgage fraud, has ordered more than two dozen of its field offices to stop probing certain financial crimes so agents can focus on real estate and mortgage fraud.
• Kenneth Kaiser, chief of the bureau’s criminal investigative division, issued this directive late last week on a video conference call with the heads of 26 FBI offices in areas where real estate fraud is out of control.
• An FBI spokesperson said the shift was made after an analysis of how agents are spending their time. Approximately 150 FBI agents were working on more than 1,300 real estate fraud cases before the directive was issued.
• The 26 FBI field offices were told to temporarily suspend opening new cases dealing with price fixing, mass marketing, wire fraud, mail fraud and environmental crimes. Current cases aren’t being dropped, the FBI spokesperson said.
• FBI field offices in Florida, Georgia, California, Nevada, Arizona, Texas, New York, Ohio, Michigan, Illinois, Indiana and Minnesota–all rated as real estate and mortgage fraud hot spots–are participating.
• “Diverting FBI resources to deal with cases of mortgage fraud is exactly what Chairwoman Mikulski wants to avoid,” Melissa Schwartz, a spokeswoman for U.S. Senator Barbara Mikulski, who heads the appropriations subcommittee for the FBI, told Bloomberg late yesterday.
• The Attorney General of the United States, Michael Mukasey said last week that the Justice Department, the FBI’s parent agency, “won’t create a national task force to combat mortgage fraud as the government did with corporate crime after Enron. “This isn’t that kind of phenomenon,” he said.

For more on this developing story, read FBI Halts Some Cases to Investigate Mortgage Frauds.

The FBI just released a comprehensive new report on real estate and mortgage fraud, and, as you might expect given everything we talk about here on Flipping Frenzy, it isn’t a pretty picture. The information contained in the report can get quite technical, with plenty of charts, graphs, and hard numbers. Regardless, it’s worth the read–see “The 2007 Mortgage Fraud Report.” Among the Report’s key findings:

1. Real Estate and Mortgage Fraud is clearly on the rise. Although there is no central way to track the total extent of the problem, the FBI received 46,717 Suspicious Activity Reports related to real estate and mortgage fraud last year—compared to 35,617 in 2006 and just 6,936 in 2003. Only 7% of these reports documented an exact dollar amount in terms of losses, but even so, the total loss from this 7% was $813 million. The FBI’s caseload has also escalated. By the end of fiscal year 2007, the Bureau was handling just over 1,200 real estate and mortgage fraud investigations—a 47% increase from 2006 and a whopping 176% increase from 2003.
2. The downward trend in the housing market will continue (see forecasts provided by the Mortgage Bankers Association in the report), providing further incentive for shady real estate industry insiders to look for dishonest ways to turn a profit and growing opportunities for scam artists to prey on vulnerable homeowners.
3. The subprime lending crisis is a contributing factor to real estate mortgage fraud, both directly and indirectly. Subprime loans, designed for people with poor or limited credit histories, now represent more than 13% of all outstanding loans–double the percentage of five years ago. These high-interest, high-risk loans contributed to the 2.2 million foreclosures filed during 2007, up 75% from 2006. The trouble actually began when home prices were rising a few years ago, leading to relaxed lending practices throughout the industry and the exaggeration of assets by industry insiders and borrowers under their charge anxious to qualify for loans, both of which contributed to fraud.
4. The top 10 hotspots nationwide for mortgage fraud in 2007, carefully mapped from multiple public and private sources, were:
   
   1. Florida
   2. Georgia
   3. Michigan
   4. California
   5. Illinois
   6. Ohio
   7. Texas
   8. New York
   9. Colorado
   10. Minnesota

   Other states significantly affected include: Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut. The north-central region of the United States had the largest share of fraud, followed by the west and southeast regions.



5. The latest mortgage scams run the gamut: from builder-bailout schemes where developers unload excess inventory through financial trickery, to foreclosure rescue schemes that trick homeowners into signing over the deed to their house; from seller-assistance scams that use false appraisals to sell homes, to identity theft that leads to home equity credit lines being opened and drained.

The FBI’s report also briefly recounts the agency’s own response to the problem, including the Bureau’s participation in the Department of Justice’s Mortgage Fraud Working Group, through which the agency says it is helping to identify large-scale real estate industry insiders and criminal enterprises conducting systemic real estate fraud

The purpose of the The 2007 Mortgage Fraud Report is to provide insight into the breadth and depth of real estate and mortgage fraud crimes in the United States. The report updates the 2006 Mortgage Fraud Report and addresses current fraud projections, issues, and hot spots (as noted above). The objective of the report, according to the FBI, is to provide FBI program managers with relative data to justify real estate and mortgage fraud investigative and preventive resources and for investigators to identify real estate and mortgage fraud activity.

Another defendant has been sentenced to federal prison in a real estate flipping scheme that involved properties in Springfield and Decatur, Illinois. Frank Kelly Ciota, 47, of Riverton, Illinois, pled guilty last week to one count of bank fraud, one count of wire fraud, five counts of mail fraud, and one count of conspiracy to commit money laundering, and has been sentenced to a term of eight years and one month in federal prison.

Frank Ciota was involved in the real estate scheme with co-defendant Gary Knox, 61, of Decatur, who was sentenced the week before last week nearly 20 years in federal prison. A third defendant, Dennis Wiese, Jr., 39, of Belleville, Illinois, who performed real estate appraisals, is scheduled for sentencing on May 2, 2008.

The three defendants each pled guilty to their respective roles in the scheme which involved more than 150 fraudulent real estate sales and financing transactions of more than $8 million from 1999 to 2005 in Springfield and Decatur, Illinois. Gary Knox represented himself and his business, Central Illinois Management and Development Company, as being in the business of buying, selling and managing real estate; however, he was not a licensed real estate broker or salesperson. Knox and Ciota obtained more than $3 million for their personal use and to promote the ongoing scheme while Wiese received fees of $350 to $450 per appraisal.

The three men admitted engaging to illegally flipping homes, which involves making false representations–including fraudulently inflated real estate appraisals–which were used to entice owners to sell, buyers to purchase, and lenders to finance rental properties that were sold at substantially higher prices than their reasonable value.

Frank Ciota, who was not a licensed real estate broker or salesperson, admitted that his own relatives were among his victims whom he advised of investment opportunities in rental real estate. Ciota falsely represented to one couple that they qualified for financing to purchase 12 to 20 houses. As a result, the couple became unwitting buyers of 12 properties, including four that were purchased within a three-day period in November 2002 for a total of $229,500. Three of the properties–830 S. 12th Street; 1320 S. 13th Street, and 1305 South Grand Avenue East–were purchased by the couple, without their knowledge or approval, on November 5, 2002. The fourth property, at 821 S. 14th Street, was sold to the couple on November 8, 2002, also without their knowledge or approval.

The Mortgage Bankers Association (MBA) yesterday announced that the Mortgage Asset Research Institute (MARI) has completed its 10th Periodic Mortgage Fraud Case Report to MBA. The report examines the current state of residential mortgage fraud and misrepresentation in the U.S. based on participating subscribers’ reports to MARI.

The report, which sites Florida as topping the MARI Fraud Index list for the second consecutive year and Nevada climbing to the No. 2 ranking, was released during MBA’s annual National Fraud Issues Conference in Chicago.

Clearly, the current market conditions, compounded by mortgage fraud, are having a detrimental impact on our entire national economy. The MARI report provides critical insight for those in the real estate finance industry to better understand the factors contributing to these circumstances so that our communities are better protected.

According to the Mortgage Fraud Case Report, “The conditions in the mortgage industry for the last half of 2007 made the year one for the record books.” Overall, 2007 marked the lowest volume of mortgage loan originations since 2002, the highest number of delinquencies and foreclosures, rapid and near complete shutdown of the non-conforming secondary market and hundreds of announced closures of mortgage originators.

Highlights in the Mortgage Fraud Case Report include:

• In addition to Florida and Nevada, the remainder of this year’s top ten (in order): Michigan, California, Utah, Georgia, Virginia, Illinois, New York and Minnesota
• Colorado showed the greatest improvement from prior years’ rankings, dropping out of the top ten for the first time in five years
• The most common types of fraud found in 2007 originations continue to be in the areas of employment history and claimed income
• The continuing unsettled state of the mortgage market as a whole does not bode well for any improvement in avoiding fraud in the coming year

The complete Mortgage Fraud Case Report is available both on the MBA Website, and MARI’s Web site.

25 Indicted in Chicago mortgage fraud scheme: Federal authorities have charged 25 people in what is considered one of the largest mortgage fraud schemes in Chicago area history. Following a four-year investigation, the FBI and U.S. Attorney’s office alleged in three indictments that more than 150 homes were involved in fraudulent mortgage transactions worth $25 million.

Colorado real estate agents get lesson in fraud: Summit County, Colorado, real estate agents got a lesson in identity theft prevention this week at a workshop detailing a nationwide problem quickly seeping into the industry. Janet Elkins, a fraud specialist at Alpine Bank, gave a quick tutorial on how individuals can prevent against identity theft, as well as how business can make smarter choices to prevent thieves from getting their foot in the door.

Ogden, Utah, businessman charged with real-estate fraud: The Utah Attorney General’s Office has filed criminal charges against an Ogden businessman accused of bilking hundreds of investors out of more than $140 million. Val Edmund Southwick, 62, was charged in Salt Lake City’s 3rd District Court today with nine counts of securities fraud, a second-degree felony. Prosecutors accuse him of bilking 817 investors out of millions in a commercial real-estate investment scheme. The federal Securities and Exchange Commission filed a separate civil action against Southwick over his Ogden-based business, VesCor Capital, which it alleges was a “massive Ponzi scheme.”

State cracks down on mortgage brokers: Colorado regulators Friday announced their first actions against mortgage brokers under a new set of state laws aimed at curbing unscrupulous lending practices. In one case, the state’s Division of Real Estate issued a cease-and-desist order against Cade Emerson Lee, who it accused of acting as an unregistered mortgage broker in Colorado despite having been convicted of felony securities fraud.

Mortgage fraud spiraling out of control in London, England: “Endemic” mortgage fraud on new homes has triggered a wave of repossessions and forced a widespread crackdown by regulatory authorities. Initiatives to address lenders’ concerns that residential mortgage fraud is on the rise are either under way or will be launched by the Council of Mortgage Lenders, Financial Services Authority–the City watchdog–the Royal Institution of Chartered Surveyors and police forces around the country.

Michigan tax accountant sentenced in $21 million mortgage fraud case: A Dearborn Heights, Michigan, tax accountant, convicted of stealing $21 million in a mortgage fraud scheme, was sentenced in federal court Thursday to five years in prison. U.S. District Judge David Lawson sentenced tax accountant Kalil Khalil, 36, to 60 months in prison for wire fraud based on a two-and-a-half-year scheme to defraud mortgage lenders.

Kingpin of $30M mortgage fraud scam in Canada jailed: The kingpin of a $30-million mortgage fraud believed to be the largest in Alberta (Canada) history was sentenced Thursday to six years in prison. Gohar (Carmen) Ahmed Pervez, 45, pleaded guilty to 54 counts of fraud that netted him more than $1.8 million in profit in less than five years. He received two-for-one credit for the two years he has served in the remand centre and is now slated to spend two more years behind bars.

Texas couple indicted for $3 million real estate fraud: A Navarro County, Texas, grand jury handed down indictments against three individuals Thursday, in connection with what prosecutors are calling “an organized mortgage fraud scheme.” Lynn Marriott, 54, and Kandace Y. Marriott, 51, both of Gun Barrel City, along with Karen Hayes, 56, of Kemp, were indicted for the first degree felony. Cpl. Mark Nanny of the Corsicana Police Department uncovered the operation, subsequently bringing in the Housing and Urban Development department (HUD) to the investigation. The defendants were doing business as One Way Home & Land, dealing with manufactured housing. Prosecutors allege the company falsified residential loan applications in order to assure the buyers’ loans were approved by mortgage lenders.

Some mortgage fraud cases will not be criminally prosecuted!: Amid all the anguish arising from the swelling volume of home foreclosures in and around Stockton, California, there has been much talk about real estate fraud. But most of the complaints cannot be criminally prosecuted, representatives of the San Joaquin County Office of the District Attorney said yesterday.

Foreclosure vultures prey on Portland, Oregon, homeowners: As national foreclosure rates hit their highest levels ever, people calling themselves “foreclosure consultants,” are filling Craigslist, billboards and mailers with offers to “save your home.” Detective Liz Cruthers, who investigates white-collar crimes for the Portland, Oregon, Police Bureau, says she’s spending much of her time learning the intricacies of “mortgage rescue fraud” and chasing down the bad guys.

Utah seeks stiffer penalties for real estate fraud: A Utah legislative committee is recommending the passage of a bill aimed at increasing criminal and civil penalties against people involved in mortgage fraud. The Senate Business and Labor Standing Committee on Tuesday unanimously approved SB134 for further consideration by the state Legislature.

FBI targets mortgage fraud in Hawaii: The FBI has opened multiple mortgage fraud investigations in Hawai’i as a result of the fallout from the nation’s subprime mortgage crisis, the bureau’s director said yesterday. FBI Director Robert S. Mueller III, speaking to reporters on a stopover following a trip to Asia, confirmed the subprime mortgage mess has reached Hawai’i.

Countrywide accused of mortgage fraud: Already burned in the subprime mortgage meltdown, lending giant Countrywide Financial Corp. is now under investigation in Florida for possible unfair and deceptive trade practices, state officials said Thursday. Officials say they have received more than 150 formal complaints about Countrywide since setting up a mortgage fraud hotline last year.

Arrest made in Erie, Pennsylvania, real estate fraud case: A key figure in an ongoing federal investigation into suspected mortgage fraud in the city of Erie, Pennsylvania, will plead guilty to fraud and money-laundering charges. The U.S. Attorney’s Office in Erie on Thursday filed criminal charges against Frank Kartesz II. Kartesz, 39, is accused of one count each of mail fraud and criminal conspiracy to commit mail fraud, wire fraud and bank fraud. The government alleges he was part of a scheme in which he and others bought run-down houses and sold them at artificially inflated prices. Most of the buyers were low-income people who knew little about the home-buying process.

Illinois mortgage broker in jail for selling credit histories: Homeowners already worried about with a slumping real estate market and tighter restrictions on home loans should look to the case of an Illinois mortgage broker as another cautionary tale.

Georgia real estate appraiser sentenced to prison for mortgage fraud: After submitting fraudulent appraisals on incomplete houses as part of a mortgage fraud scheme, a Georgia real estate appraiser has been sentenced to prison.

A couple of days ago I mentioned that the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) reported that mortgage loan fraud in the United States rose 35 percent in the past year. For anyone interested, here are some additional items of note from the FinCEN’s November 2006 report:

• Between 1997 and 2005, Suspicious Activity Reports (SARs) pertaining to mortgage loan fraud increased by 1,411 percent between. This report-filing trend continues apace in 2006, with 7,093 reports filed on suspected mortgage loan fraud during the first quarter, an increase of 35 percent over the SAR filings in the first quarter of 2005. One explanation for the increase in SARs reporting mortgage loan fraud is increased awareness of the potential for fraud in a dynamic real estate market. Many areas in the United States saw double-digit growth in real estate values during 2003 and 2004. At the same time, mortgage loan interest rates were at a historic low. Although growth in the housing industry appears to be slowing in the first quarter of 2006, opportunities for fraud are still present.
• Reports of mortgage loan fraud rose significantly in 2003. The Federal Financial Institutions Examination Council reported an increase in the number of mortgage loans beginning in 2003: “The 2003 data include a total of 42 million reported loans and applications, which is an increase of about 33 percent from 2002, primarily due to a significant increase in refinancing activity (approximately 41 percent).” SARs on mortgage loan fraud increased over 92 percent between 2003 and 2004. The increase in filings may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 – 2005 timeframe and a broader awareness of this fraudulent activity.
• Mortgage loan fraud represents a growing percentage of total depository institution SARs. In 1997, reports of mortgage loan fraud comprised 2.12 percent of total depository institution SAR filings. In 2005, reports of mortgage loan fraud had increased to 4.94 percent of total depository institution filings.
• Identity theft was frequently reported in conjunction with the commission of suspected mortgage loan fraud. Reports of identity theft increased nearly 102 percent between 2004 and 2005.
• The National Association of Mortgage Brokers reports that as many as two-thirds of mortgage loans are now originated by mortgage brokers. Currently there are no national standards for licensing and oversight of mortgage brokers. Some states license mortgage brokerage offices, but not individuals; 24 states have no specific educational or experience requirements for mortgage brokers; and only a few states require criminal background checks on mortgage brokers making it possible for unethical individuals to move from one mortgage brokerage firm to another.
• The top 10 geographical areas for fraud are California, Florida, Illinois, Texas, Georgia, Michigan, New York, Ohio, Washington, and North Carolina.
• High home prices coupled with rising mortgage rates result in a reduction in housing affordability. In response to this trend, the housing industry is expecting a slow down in mortgage loan originations, a decrease in housing sales, and a slowing in housing price gains. The slow down in the growth of housing prices could result in the housing industry becoming less attractive to investors, which in turn could result in a reduction in the reports of fraud for profit. The current housing trend could also lead to an increase in fraud for housing as the increased costs of housing decreases the number of persons who qualify for mortgage loans. The current trend of rising interest rates and slowing housing equity growth could result in an increase in debt elimination fraud schemes, especially for homeowners with adjustable rate mortgages and interest only loans.

On the same day that the Financial Crimes Enforcement Network (FinCEN) reported that suspected mortgage loan fraud in the United States has risen 35 percent in the past year, the state of Illinois announced that six residential mortgage firms in the Chicago and East St. Louis regions used unlicensed loan originators to process more than 700 home loans. Both developments, which were announced last Friday, spotlight the need for continued education and enforcement in the fight against real estate and mortgage fraud.

FinCEN conducted its assessment, which is based on an analysis of Suspicious Activity Reports (SARs) regarding suspected mortgage loan fraud, to identify trends and patterns that may be useful to law enforcement, regulatory authorities, and financial institutions.

In Illinois, a state Mortgage Fraud Task Force (MFTF) found major problems after inspections at the following companies:

• Envision Mortgage Solutions: Twenty-eight (28) loan originators were found to have produced over 500 loans without possessing the proper registration as required in the State of Illinois.
• AM Mortgage: Eight loan originators produced around 100 loans without possessing the proper registration.
• Express Funding, Inc: Approximately 50 loans were originated by five loan originators not possessing the proper registration as required in the State of Illinois.
• Fidelity Mortgage Group: This firm originated 35 loans without employing a registered loan originator.
• Mainline Mortgage Group: A MFTF visit to this company revealed over 25 loans originated without a registered loan originator with the State of Illinois.
• Global Mortgage Company: The MFTF found that this firm had no actively registered loan originators but originated over 25 loans.

Consumers everywhere have the right to know that when they do business with companies licensed by a state, that they will receive the best possible service by ethical and appropriately trained professionals. Hats off to the state of Illinois for using all the tools available to discipline companies that violate the laws and regulations designed to protect homebuyers.

The FBI just released its latest figures on real estate fraud, and for some parts of the country, the news isn’t very good! According to the FBI, Southern California has the most reports of mortgage fraud in the country, topping the closest region in the number of reported cases by over 35 percent. Since January 1 of this year, the FBI has received 2,293 reports of suspected fraud in the Los Angeles area alone, and 4,228 in the Southern California region.

Real estate industry insiders in a number of ways initiate reports of Real Estate and Mortgage Fraud to the FBI. If a lender identifies a suspect, it is required to report the suspected activity to the FBI. However, according to the Los Angeles Times, only lenders that operate as banks are required to file suspicious activity reports with the FBI. That’s a growing number of lenders, say the LA Times, but banks account for less than one-half of all mortgage loans (mortgage brokers, which arrange loans but do not fund them, are not required, for some reason, to file reports with the FBI).

The FBI’s list of Real Estate and Mortgage Fraud hot spots thus far for 2006, with the number of cases reported through September 25, is as follows:

1. Los Angeles, California: 2,293
2. Atlanta, Georgia: 1,459
3. Chicago, Illinois: 1,245
4. Miami, Florida: 1,191
5. San Francisco, California: 942
6. Detroit, Michigan: 914
7. New York, New York: 907
8. Dallas, Texas: 635
9. Phoenix, Arizona: 631
10. Houston, Texas: 618

As I reported earlier this month, Illinois Governor Rod Blagojevich recently signed a series of bills into law that are aimed at protecting Illinois’ homeowners from fraudulent actions by unscrupulous mortgage ‘rescue’ firms. One of the bills Blagojevich acted upon–House Bill 4760–requires that the signatures on any deed or other documents that attempts to transfer property must be notarized. This new law, known as Public Act 94-0821, becomes effective January 1, 2007.

This morning’s online edition of the Elk Grove Times has an interesting little diddy about that new law. In an article titled Notarized Deeds Aimed at Stopping Mortgage Fraud, Staff Writer John Roszkowski writes:

Rosanne Pulia, deputy supervisor of the consumer fraud unit for the Cook County State’s Attorney’s Office, said she was not aware of the new law but questions how effective it would be in reducing most mortgage fraud.

“Most documents I’ve seen in the cases I’ve investigated have been notarized,” she said. Pulia said often times notaries will be present when a deed is signed but the thieves are providing fraudulent information and identification. Pulia said the law may be designed to better track down all of the parties who have attested to the signing of the documents in hopes of catching the thieves.

Pulia said mortgage fraud is a growing problem throughout the Chicagoland area and the state. “We get calls all the time,” she said. “People are getting foreclosure notices on homes they didn’t buy or didn’t even know about.”

Click here for the entire article.

While I find it interesting that a deputy supervisor for consumer fraud did not know about this new law, I find her commentary about the new law itself to be spot on accurate! Requiring that a notarized stamp accompany signatures won’t amount to a hill of beans so long as the bad guys continue to evolve their methods of identity theft, and government sits by while it happens right under its nose.

Here’s a better approach to stopping unscrupulous mortgage ‘rescue’ firms and others who prey off the ignorance of unsuspecting homeowners: Just like they do in the credit scoring industry, start a national campaign aimed at getting homeowners to be more in tune with what their local government says is the ownership status of their property. How many times have you seen those advertisements on television for companies selling credit score monitoring services? As a result, more American’s know their credit score now than at any other time in history.

Local governments should act now to establish notification systems to alert homeowners of any changes to the ownership rights of their property. How simple would it be for an automated system to be kicked into place once real estate-related documents are filed with the proper authorities? Pretty darned easy! If I can do it for the people who inquire about my real estate services (send them automated e-mail messages, that is), surely local government can procure a system that e-mails and snail-mails notification immediately upon any attempted change in status to real estate.

With the stakes being as high as they are, can we really afford not to have automated notification of the change of property ownership status in place?

The Chicago Crime Commission–one of the oldest and most well respected citizen crime commissions in the United States–has just published The Chicago Crime Commission Gang Book, which says in part that real estate and mortgage fraud schemes are now being used more than ever to supplement gang-related activities in and around the Chicagoland area. The 272-page book also reveals some other interesting facts, such as:

• The profile of the typical Chicago gang leader as a graying, suburban, technology-friendly convict overseeing hundreds — or even tens of thousands — of members in everything from mortgage fraud to drug dealing, according to the Chicago Sun Times
• The Sun Times also reports that many gang leaders supervise lucrative real estate and mortgage fraud schemes to supplement their traditional bread-and-butter enterprise: drug trafficking, which generates hundreds of millions of dollars in profits a year in the Chicago area.
• The report also says that Chicago’s inner-city police have become skilled at disrupting gang-related activities so much so that gang members are now moving to the suburbs where authorities do not have the manpower or experience to deal with them.
• Among the report’s findings, according to the Associated Press, is that there are up to 100 street gangs with as many as 125,000 combined members in and around Chicago. Ten to 20 of the gangs, reports the AP, including the powerful Gangster Disciples, the Latin Kings and the Vice Lords, are highly sophisticated and well-organized entities.

Let’s see… the typical Chicagoland gang leader is graying, suburban, and technology-savvy. That seems to fit right in with the real estate fraud crowd!

For more details from the The Chicago Crime Commission Gang Book, or to purchase a copy of the book for yourself, please click here.

I’m in California today and tomorrow attending the 2006 edition of the Predictive Methods Conference (PMC). In addition to delivering tomorrow’s Keynote address on Recognizing, Avoiding, and Recovering from Mortgage Fraud, I’m visiting with conference attendees via my booth in the exhibit hall, as well as sitting in on number really great workshops. In the meantime, for anyone who may have missed it, earlier this month, Illinois Governor Rod Blagojevich signed legislation into law to protect his state’s homeowners from fraudulent actions by unscrupulous mortgage ‘rescue’ firms.

Senate Bill 2349 now gives Illinois’ homeowners new rights when dealing with companies that offer financial assistance to help them save their homes from foreclosure. It also guarantees that homeowners will receive a substantial portion of their equity in the home from the companies.

As we all know, mortgage rescue fraud is popular among the predatory lending crowd. As Illinois’ Attorney General Lisa Madigan says, “without the protections afforded by the Mortgage Rescue Fraud Prevention Act, homeowners are vulnerable to the greediest of predators who take their money and strip the equity in their homes.”

With the recent rise in foreclosures, Illinois has seen a huge growth in the mortgage rescue services offered to homeowners who are delinquent on their mortgages and at risk of foreclosure. Currently in Illinois, there are two known types of mortgage rescue services: the first are consultants who promise the homeowner they can save the home by negotiating with lenders. These consultants can cost $1,000 to $2,500, and often do little or no work for the homeowner.

The second type of mortgage rescue service are property purchasers who offer to help by letting the homeowner rent the property until they can get back on their feet financially. Homeowners do not always understand that they are signing over ownership of the house to these purchasers. In some cases the rent payments end up being more costly than the mortgage payments, making it financially impossible for them to repurchase the house. Once the property purchaser has taken all of the homeowner’s equity out of the house they will resell the house and evict the homeowner. This type of fraud was documented in a recent Chicago Tribune series.

In the first quarter of 2006 there were over 13,000 foreclosures filed in Illinois, a 32 percent increase from the last quarter of 2005 according to another recent story in the Chicago Tribune.

The legislation:

• Limits the amount a mortgage rescuer can make if the homeowner is successful in buying back the home to 125% of the total debt on the home paid by the rescuer.
• Requires that all mortgage rescue companies provide disclosures and give homeowners the right to cancel contracts, and increases penalties for violations.
• Requires that the mortgage rescuer provide the homeowner with at least 82% of the value of their home if the homeowner is eventually unable to buy back the home from the mortgage rescuer.

Senate Bill 2349 becomes effective January 1, 2007.

Governor Blagojevich also signed two additional bills into law that will provide homeowners with additional protections against property fraud.

Senate Bill 2569 requires that the Cook County Recorder of Deeds send a postcard to notify homeowners when a quitclaim deed has been filed. Quitclaim deeds are often used to transfer property without the legal property owner’s knowledge. The Recorder’s Office, who introduced this bill because of recent problems with mortgage fraud and fraudulent transfers of property, has reported an increase in quitclaim deed filings recently. This legislation becomes effective January 1, 2007.

House Bill 4760, now known as Public Act 94-0821, requires that the signatures on any deed or other document that transfers property must be notarized. This legislation becomes effective January 1, 2007.

According to the Chicago Tribune, a former real estate lawyer who fabricated evidence to obstruct a federal investigation, was sentenced last Friday to three years of probation and ordered to pay $21,000 in fines and restitution. The Tribune reports that 53-year-old Nicholas Black lost his law license in 2002 after he admitted creating two backdated notes to help two of his clients conceal a fraudulent 1996 sale of a popular restaurant and bar. Black admitted creating the notes in 2000 at his clients’ request.

Click here for the Chicago Tribune’s coverage.

As a result of aggressive, unannounced inspections by state regulators into mortgage lending practices, last week the state of Illinois announced over $190,000 in fines for 22 residential mortgage offices–as well as the suspension of one office–for failing to comply with state regulations related to the licensure of mortgage brokers. The Illinois Department of Financial and Professional Regulation (IDFPR) carried out the inspections, which were in response to reports of growing instances of real estate and mortgage fraud.

IDFPR’s investigation found that 19 Illinois-based mortgage firms employed 35 unregistered loan originators, which is in direct violation of state law. In the most egregious violation, First Star Financial Corporation had 10 unregistered loan originators working in its offices, and was issued $50,000 in fines. The State of Illinois also issued an emergency suspension order against Liberty Mortgage Corporation for refusing to allow IDFPR investigators access to its premises on several successive attempts.

Residential mortgage companies in Illinois employing unregistered loan originators are subject to a $2,500 fine for the first violation and $500 for each additional unregistered loan originator. Individual unregistered loan originators are subject to fines of $950 and a permanent notation on their file should they decide to seek certificates of registration in the future.

As we all know, predatory fraudulent mortgage lenders are devastating communities across the country. As the Chicago Tribune’s David Jackson reported in November of last year, a single block on South May Street in Chicago saw four homes shuttered within four years due to mortgage fraud, and the area has since become a haven for criminals. A study done by the paper showed that 16 of the 34 census tracts in the area were high-intensity fraud areas, with at least 10 frauds per 1,000 owner-occupied housing units.

The Detroit News is reporting that a Grosse Ile, MI, man has filed a class-action lawsuit against 17 companies and individuals, alleging he was the victim of real estate fraud based on grossly inflated residential property appraisals. Blaise Repasky, who The Detroit News says filed suit last Friday in U.S. District Court in Detroit, alleges that he purchased eight Detroit area homes in 2004 at a total cost of $940,000 but later learned that the true value of the homes totaled just $393,150. Click here for The Detroit News article.

A Dallas, TX, television station is reporting that a local man stands accused of running a mortgage fraud scheme that involved a home once owned by a popular ex-Dallas Cowboy football player. According to Dallas’ CBS 11 News, Oltha Austin, Jr. is wanted on suspicion of committing mortgage fraud. Apparently, Austin forged his mother’s name on a loan application and falsely claimed that she had a trust fund worth an estimated $6,000,000. Click here for the entire story.

From HattiesburgAmerican.com: “Richard Lucas, the alleged ringleader in a mortgage fraud case, was jailed Friday afternoon on a federal court order. Lucas, 31, was booked into Forrest County Jail about 1:10 p.m. Friday and remained there today. He and nine other people face federal charges of bank fraud, wire fraud and conspiracy to commit bank and wire fraud in connection with a so-called mortgage flipping scheme. During a March 1 hearing, U.S. Magistrate Robert H. Walker ordered Lucas to report to Clearview Recovery Center for drug treatment as soon as a bed was available and to maintain communication with federal probation officers. He had ordered Lucas to undergo a drug assessment as part of a pre-trial release agreement. It was not clear today why Lucas was ordered jailed.”

From The Chicago Tribune: “Federal authorities said Friday that a banker who fled the country after being indicted for mortgage fraud arranged for the wire transfer of $800,000 to accounts he controlled in Switzerland and Dubai shortly before he was charged. Fugitive banker Michael Kakvand was arrested in December in Canada, returned to Chicago but now wants to be released on bail. His lawyer, Edward Genson, is arguing that he is not a flight risk. U.S. District Judge William Hibbler has scheduled further hearings on the issue. FBI agent Jay Hagstrom testified Friday that Kakvand was secretly and illegally tape-recorded by a one-time co-worker while he was on the run. In one recorded conversation, Kakvand tells the worker: “I am sure from the bottom of my heart I have not done something terribly wrong.” Prosecutors contend that Kakvand was part of a ring that engaged in a $29 million mortgage fraud scheme.”

As I reported on February 3rd, as well as on the February 23rd, Real Estate Fraud is booming in Canada. Click here for an excellent article from the Saskatoon StarPhoenix on just how serious the problem has become.

Finally, the Atlanta Business Chronicle is reporting that a husband and wife team have been sent to prison and ordered to pay more than $2.5 million in fines for mortgage and bankruptcy fraud. According to the Atlanta Business Chronicle, Hurb Grant was sentenced last week by a U.S. District Judge to three years in prison and ordered to pay $1.3 million restitution for bankruptcy fraud related to a scheme to retain fraudulently acquired properties, while his wife, Jennifer, was sentenced in January to five years in prison and ordered to pay $1.3 million restitution. Click here for the Atlanta Business Chronicle’s article on Hurb and Jennifer Grant.

A number of people and organizations are weighing in on Illinois Senate Bill 2349, the state’s proposed ‘Mortgage Rescue’ Fraud Prevention Act. Here’s an overview of the proposed legislation, followed by links to commentary:

BACKGROUND: Due to the explosive growth of predatory mortgage
lending, home foreclosures are on the rise in Illinois, as they are in many other parts of the United States. According to the National Training and Information Center, mortgage foreclosure filings in Cook County, Illinois, jumped from 8,006 to 17,248 between 1996 and 2002. After dropping slightly in 2003 and 2004, filings were projected to hit a record high of 17,600 in 2005.

The self-styled “mortgage rescue” industry has grown in direct proportion to the number of homes that are at risk of foreclosure. Although ‘mortgage rescuers’ promise to save the homes of financially distressed homeowners, backers of the Illinois’ measure say they all too often add insult to injury, either by charging exorbitant fees for services never rendered or by stripping the equity from properties and leaving homeowners with nothing in return.

HOW DO ‘MORTGAGE RESCUE’ SCHEMES WORK?

Here are two of the most common ‘mortgage rescue’ schemes:

1. Distressed property consultants offer phantom help to homeowners in distress, typically promising to “buy them time” or “save the home” by negotiating with the homeowners’ creditors. In exchange for a fee that ranges from $1,000 to $2,500, the distressed property consultant does little or nothing, and essentially abandons the homeowner to a fate that might have been prevented with professional intervention.

2. Distressed property purchasers lead homeowners to sign over the deed to their property by telling them they can stay in their home and pay rent until they get back on their feet financially. Many homeowners do not realize they are selling their home to the “rescuer,” and most receive no financial benefit from the transaction, even when their equity in the property is greater than what they owe. Commonly, the homeowners’ rental payments are much higher than their mortgage payments. Using a variety of devices, the “rescuer” ultimately strips the home of its equity, often by selling it to a third party, and the homeowner ends up facing eviction.

WHAT WILL SENATE BILL 2349 DO?

Illinois’ ‘Mortgage Rescue’ Fraud Prevention Act will provide protections to homeowners under when dealing both with consultants and purchasers. Here’s how:

Distressed Property Consultant Protections

1. Distressed property consultants must provide homeowners with a written contract listing all services.

2. The consultant contract must contain a right to cancel at any time.
3. The consultant cannot receive any compensation until all services have been performed.

Distressed Property Purchaser Protections

1. Distressed property purchasers must provide homeowners with a written contract that lists the terms of the sale and makes it clear that the home is actually being sold.

2. The homeowner has the right to cancel the sales contract for five business days after it is signed.
3. Prior to sale, the purchaser must make a determination that the homeowner has the ability to make rental payments and to buy the home back.
4. The purchaser must pay the homeowner at least 82% of the fair market value of the home.
5. A homeowner who remains in the home under a rental agreement has the right to cancel the rental agreement at any time.
6. The purchaser must record the purchase contract with the county recorder of deeds, so that any subsequent purchaser is put on notice.
7. A violation of this Act is a violation of the Consumer Fraud Act. Distressed property purchasers in violation of the Act are subject to criminal penalties as well.

WHO’S COMMENTING ON THE PROPOSED LEGISLATION?

Illinois State Senator Jacqueline Y. Collins (D-Chicago): “These individuals claiming to be rescuers generally are not that at all. Often times they are preying on the most vulnerable targets they can find, and unfortunately those people frequently happen to be from low-income households. This is a practice that has to be stopped to save our communities.”

Since similar legislation is expected to hit lawmakers dockets in Texas, HoustonRealNews.com is weighing in.

And finally, the National Association of Responsible Home Rebuilders and Investors (NARHRI)–an association of individual home re-builders, investors, businesses, and related professionals dedicated what they call the improvement of the legislative and regulatory atmosphere governing the home re-building and investing industry is weighing in as well. Click here for NARHRI’s opinion.

The Illinois State Assembly is considering legislation that its sponsors say will target real estate-related fraud. SB2349, otherwise known as the Mortgage Rescue Fraud Prevention Act, was introduced by Illinois State Senator Jacqueline Collins (D-Chicago) and State Representative Marlow Colvin (D-Chicago), back on the 18th of January, and is aimed at helping consumers from falling prey to mortgage rescue scams and mortgage bailout consultants. If passed, the Mortgage Rescue Fraud Prevention Act would force bailout consultants to detail all of their services in a clearly written contract, and allow homeowners to cancel any time before all services have been performed.

According to Illinois Attorney General Lisa Madigan, the Mortgage Rescue Fraud Prevention Act is narrowly tailored to target the two most common types of mortgage fraud rescue schemes. First, it targets “distressed property consultants” who offer phantom help to homeowners, usually promising to “buy them time” or “save the home” by negotiating with the homeowners’ creditors. In exchange for upfront fees, the consultants do nothing and abandon the homeowner to a fate that might have been prevented with legitimate professional intervention.

Madigan targeted these “distressed property consultants” through a lawsuit filed yesterday in Sangamon County Circuit Court against HomeSavers USA, Inc., and its CEO, David Moakler. HomeSavers USA, Inc., is a North Carolina-based company that advertises mortgage foreclosure assistance to Illinois consumers via the Internet. In her lawsuit, Madigan alleges that HomeSaversUSA promised to negotiate with consumers’ mortgage companies and guaranteed they would not lose their homes. According to Madigan, HomeSaversUSA demanded that consumers pay a non-refundable service fee before the company would begin any work. Illinois consumers paid fees ranging from $350 to $900, according to the lawsuit, to HomeSaversUSA. Madigan’s lawsuit alleges that HomeSaversUSA failed to engage in the promised negotiations and did nothing more than consumers could easily have done themselves.

Secondly, the bill targets “distressed property purchasers,” con artists who lead homeowners to sign over the deed to their property by telling them they can stay in their home and pay rent until they are back on their feet financially and can repurchase their home. Many homeowners who enter into these deals believe that they are getting help to catch up on their payments and do not realize they are selling their home to a third party. Most receive little financial benefit from the transaction. Commonly, the homeowners’ rental payments end up higher than the mortgage payments. Using a variety of devices, the “rescuer” ultimately strips the home of its equity and leaves the homeowner facing increasing financial distress, and eventually, eviction.

If passed, Illinois’ Mortgage Rescue Fraud Prevention Act would require that:

1. Distressed property purchasers must provide homeowners a written contract that lays out all the terms of the sale and makes it clear that the home is actually being sold.

2. The homeowner has the right to cancel the contract for five business days after all parties execute it.
3. Prior to sale of the property, the purchaser must make a determination that the homeowner has the ability to make rental payments and buy the house back.
4. The purchaser must pay the homeowner at least Eighty-two percent (82%) of the fair market value of the home at the time of the sale and may not include fees as part of the payment.
5. A homeowner who remains in the home under a rental agreement has the right to cancel the rental agreement at any time.
6. The purchaser must record the purchase contract with the county recorder of deeds so that any subsequent purchaser is put on notice.

While I applaud the State of Illinois’ attempts to regulate mortgage bailouts, the fact remains that until someone comes to table with a public awareness campaign aimed at educating consumers about real estate fraud, no additional amount of regulations will make any sort of measurable difference. Why? Because the scammers and bad guys will always find ways to navigate around the system to prey on unsuspecting homeowners. That’s it. It’s that simple. Regulations will only get us so far in the fight against fraud. We need education, and we need it now!