Senior White House officials, along with top brass from the Federal Reserve, met earlier this evening with executives from Freddie Mac and Fannie Mae and reportedly told them that the U.S. government is preparing to place the two government sponsored enterprises (GSEs) under federal control. The plan, as outlined by The New York Times, would place both companies into a conservatorship, which means that their boards of directors and top executives would be replaced and shareholders would almost entirely be wiped out, but that the GSEs would continue operations with the federal government standing behind their debt.

Fannie Mae and Freddie Mac are privately owned but publicly chartered, and are considered critical to the stability of the U.S. housing and mortgage markets. Their current troubles have threatened to worsen the bursting of the housing bubble, which along with significant levels of fraud, has led to a surge in foreclosures.

The U.S. Treasury Department and the Federal Reserve recently took steps to increase confidence in both organizations, including granting them access to low-interest loans and removing the prohibition on the Treasury to purchase the GSEs’ stock. Despite these efforts, in the last year alone, publicly held shares of Fannie Mae and Freddie Mac have fallen more than 75%.

Just last week, Fannie Mae announced that the company’s chief financial officer, Stephen Swad, was being replaced by David C. Hisey, and that former Executive Vice President of Capital Markets, Peter Niculescu, would take on an expanded role as the new Chief Business Officer to replace Robert J. Levin, who is retiring as Executive Vice President and Chief Business Officer. The company also announced Michael Shaw would be appointed as the new chief risk officer and Daniel Mudd, the company’s embattled president and chief executive officer, would remain in place after a vote of confidence from the Board of Directors.

Tonight’s news of a government takeover comes just hours after the Mortgage Bankers Association released its latest National Delinquency Survey, which shows that the rate of U.S. home mortgages overdue or in foreclosure rose again in the second quarter. Among mortgages for one- to four-family homes, nearly 10% are currently at least one month overdue or in foreclosure.

From The New York Times:

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

The Mortgage Bankers Association (MBA) today released “Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts,” a new report designed to inform and shape the debate surrounding important issues affecting the real estate finance industry. This paper takes a comprehensive look at the policy discussion surrounding fraud against lenders, a critical issue in today’s mortgage market.

As Flipping Frenzy reported last month, President Bush recently went on record with a statement that his administration would pursue fraud and wrongdoing throughout the mortgage lending industry. Whether it’s fraud for housing or the more serious fraud for profit, scammers and fraudsters are deceiving lenders at an alarming rate, and more must be done to combat the problem.

The FBI has estimated that fraud cost mortgage lenders as much as $4.2 billion in 2006 alone. This growing trend is troubling for many reasons, but most significantly because fraud-related costs and losses incurred by lenders are ultimately passed on to their customers, increasing the cost of homeownership for all borrowers. The Financial Crimes Enforcement Network (FinCEN), a bureau under the U.S. Department of the Treasury has reported that the number of mortgage-related Suspicious Activity Reports (SARs) filed has increased an average of nearly 60 percent per year over the past four years.

“Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts” seeks to separate the issue of mortgage fraud from predatory lending and to provide policymakers with a roadmap to effectively combat the growing incidence of mortgage fraud. In the paper, the MBA discourages adding to or modifying the already comprehensive list of federal fraud statutes and instead recommends that Congress increase resources available to law enforcement and help facilitate the coordination of federal and state law enforcement of financial crimes.

The Mortgage Bankers Association argues that we do not need more federal laws to combat fraud. Instead, says the MBA, what is needed is a coordinated effort and more resources to investigate and prosecute. Good point, but we also need more resources for educating Real Estate industry insiders and consumers. In addition to being illegal and costly, we know that fraud has also contributed to the recent rise in delinquencies and foreclosures, and the industry and government must step up the anti-fraud effort, which includes education and awareness, to help curtail these related problems.

A PDF version of “Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts” can be downloaded by clicking here.

The Chairman of the Mortgage Bankers Association (MBA) told the New York State Assembly yesterday that while it’s true that unethical “actors” in the real estate finance industry make bad loans, policymakers should take care in their efforts to protect consumers and not inadvertently restrict the availability of credit for worthy borrowers.

“We all share the same commitment of developing better protections for consumers against abusive lending and foreclosures and assuring that these borrowers continue to have the financing they need,” said Robbins. “I urge you to not smash this subtle, intricate and ingenious system of real estate that we have created as we fix problems in the subprime market.”

In his testimony, Robbins pointed out that more than 1 million Americans used a subprime loan to purchase their homes last year. He then reminded Assembly members that homeownership across the country was near record highs and that subprime loans have played a crucial role in closing the gap between the overall homeownership rate and the minority rate.

Addressing the current troubles in the subprime arena, Robbins cited a confluence of factors, including a slowing of home price appreciation and the weakening of the job market in some parts of the country. He reminded lawmakers that neither was a particularly large problem in New York and that the state’s overall delinquency (4.82%) and foreclosure (1.11%) rates were below the national average (5.31% and 1.19% respectively).

Robbins also said that 35 percent of New Yorkers own their homes free and clear and only 17 percent of have a subprime mortgage, and of that 17 percent, 83 percent are paying their subprime mortgages on time. New York’s subprime foreclosure rate is below the national average.

Robbins pointed out some of the steps the industry is taking to help borrowers who find themselves having trouble paying their loans–including partnering with NeighborWorks America, a national nonprofit organization to promote their free counseling hotline, 888-995-HOPE, manned by the Homeownership Preservation Foundation.

Robbins called on legislators to join with the Real Estate industry and consumer advocates to address the current problems in the subprime market while making sure that subprime loans remain available for those who need them.

“Subprime loans must remain a viable option for lenders to use to increase homeownership,” said Robbins. “Working together, we can stabilize and preserve the subprime mortgage credit system, provide assistance for homeowners facing foreclosure, and finally, prevent this from ever occurring again.”

The Mortgage Bankers Association (MBA) and the Mortgage Asset Research Institute (MARI) have combined efforts to compile and release the Ninth Periodic Mortgage Fraud Case Report. The report examines the current state of residential real estate and mortgage fraud and misrepresentation in the United States based on participating lenders’ reports to MARI.

Highlights from the report include:

• The number of reports in MARI’s Mortgage Data Industry Exchange database pertaining to 2006 originations is approximately 30 percent higher than the number of reports for 2005.
• Mortgage fraud is now more evenly distributed across nearly all states whereas, in prior years, reports tended to be concentrated in relatively few states.
• The current unsettled state of the subprime segment of the industry does not bode well for fraud in the coming year.
• There are changes in the rankings of the states in terms of their mortgage fraud experience, with Florida taking over the top spot and Georgia showing the greatest improvement from prior years’ rankings. Florida had more than twice as many incidences of fraud reported, and has gradually climbed to the top spot over several years, after ranking fourth in the nation in 2005, fifth in 2004, seventh in 2003 and 12th in 2002.
• The most common types of fraud found to date in 2006 originations are in the areas of employment history and claimed income.
• California’s reported fraud had been quite low in the past few years, and some industry experts have suggested that its problems were masked by high real estate appreciation. The recent slowdown in its housing market may explain California’s return to high ranking in this year’s report.
• The early payment default data for prime loans from First American LoanPerformance is highly influenced by tragic weather events on the Gulf Coast, and few valid conclusions can be drawn from the most recent results. However, this is not the case for subprime loans.

One bright note: After leading the nation for the past four years in overall mortgage fraud and subprime incidents, Georgia has dropped in the top 10 states for 2006 fraud reported to date. This dramatic development appears to be due, in large part, to the strong, coordinated stance against mortgage fraud that has been taken by a number of different groups in Georgia–industry members, mortgage and banking regulators, legislators and state law enforcement officials, coupled with the FBI and the United States Department of Justice.

Earlier today, the FBI and the Mortgage Bankers Association (MBA) entered into an agreement they say will aid in the fight to combat Mortgage Fraud. According to the agreement, the FBI and MBA will make available to the public a Mortgage Fraud Warning Notice as a “proactive means of educating consumers and mortgage-lending professionals of the penalties and consequences of this criminal activity.”

According to the FBI, Mortgage Fraud Suspicious Activity Reports (SARs) referred to law enforcement by financial institutions increased from 17,127 in 2004 to 35,617 in 2006. Also revealed in today’s announcement: The FBI’s Mortgage Fraud investigations have focused mostly on large-scale fraud perpetrated by organized crime and industry insiders, including attorneys, brokers, appraisers, and Realtors. Since September 2002, the number and types of investigations the FBI has participated in has increased from 436 to 1,036. Of its current caseload, 51 percent of its investigations involve expected losses in excess of $1 million, and 57 percent involve federally insured financial institutions.

The FBI says it works closely with national associations such as the MBA, as well as with individual lenders, in a continual effort to define and combat the growing mortgage fraud problem. The newly developed Mortgage Fraud Warning Notice is supposed to enhance the FBI’s endeavors to put potential perpetrators on notice in an effort to stop crime before it is committed.

The State of Michigan’s Office of Financial and Insurance Services (OFIS) recently announced its most recent list of brokers who are now prohibited from participating in Michigan’s residential mortgage loan and financial services industries. For anyone who has not been following Michigan’s fight against real estate and mortgage fraud and the scammers who commit such crimes, the state’s residential mortgage loan acts grant the OFIS the authority to ban anyone from participating in Michigan’s consumer finance industry if the Commission finds that that person has engaged in fraud.

The following individuals–most of whom have felony convictions involving fraud, dishonesty, and breach of trust–are now barred from ever working again in the mortgage or any other regulated consumer finance industries in Michigan:

• Ronnie Duke of Fenton, Michigan
• Joseph Saad of Dearborn Heights, Michigan
• Ronald Ribant of Southfield, Michigan
• Robert Troub of Portland, Michigan
• Chad Eugene Willis of Detroit, Michigan
• Marvin R. Fried of West Bloomfield, Michigan
• James Keyton of Traverse City, Michigan
• Richard Major of Grand Rapids, Michigan
• Brian Winborn of Ypsilanti, Michigan
• Kalil Khalil of Brownstone Township, Michigan
• Tariq Hamad of Taylor, Michigan

The bans were prompted by fraudulent activity that included equity stripping “foreclosure rescue” schemes; flipping of property involving inflated property values and undisclosed non-arms length transactions; providing borrower down-payment funds, without disclosing such assistance to the lender or investor; creation of fictitious loan application supporting documentation, such as W-2’s, verifications of deposits, and verifications of employment; occupancy fraud; and, converting loan proceeds or other funds for personal use.

OFIS has also revoked the mortgage licenses of William C. Phillips, doing business as Integrity Financial and Urban Mortgage Services of Redford; and Minute Man Financial Holding Co. and Metropolitan Financial & Funding Services of Detroit; and issued a Cease and Desist Order against Chad Eugene Willis’ unlicensed mortgage company, The Mortgage Highway LLC.

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The Mortgage Bankers Association just released the results of a new report that examines residential mortgage fraud and misrepresentation in the United States. The report, which will be made available in its entirety over the next few weeks on this web site, is based on filings by participating lenders to the Mortgage Asset Research Institute.

Highlights from the report include:

• Florida had the most reported mortgage fraud against lender cases for 2005, followed by Utah, Georgia, Colorado and Illinois.
• Georgia, which had lead the nation in total reported mortgage fraud against lender cases from 2002-2004, has dropped to third position for mortgage fraud. MBA believes this is likely due to aggressive efforts at the state level, including passage of the Georgia Residential Mortgage Fraud Act one year ago.
• Colorado and Illinois show steadily increasing problems over the past five years. Colorado was number 21 in 2001 and now ranks fourth in highest number of reported real estate fraud cases. Illinois dropped from 11th in 2001, to fifth in 2005.
• South Carolina shows the greatest improvement, moving from the state with the highest number of cases in 2001, to number 19 in 2005.

Over the last few years, the Mortgage Bankers Association has been a real leader in terms of raising the profile of real estate and mortgage fraud in the U.S. The Mortgage Fraud Against Lenders Resource Center is just one example of how the Association is making a difference in the effort to spot, stop, and report fraud.

The co-chair of the Mortgage Bankers Association of America’s (MBA) Legal Issues Sub-committee on Fraud says real estate fraud is likely to increase as the mortgage market continues to shrink. According to Arthur Prieston, housing values are dropping by approximately 9 percent in some parts of the country, while defaults on home loans are rising by as much as 22 percent. Prieston says that as lenders are increasingly dealing with harder loans to secure and less qualified borrowers, requests for exceptions to loan guidelines have increased, as have the number of suspected misrepresentations on home loan applications by consumers.

The bottom line… as the market contracts and margins thin, lenders are under more and more pressure to accept chancy loans. In response to the need to keep loan volumes up, mortgage lenders are increasingly tempted to not look too closely at loans, and the fraudsters understand this all too well… as they always have, the bad guys will continue to try to take advantage of the situation by pushing through loans containing material misrepresentations about employment, income, and the very reasons for securing their loans in the first place.

I agree with Prieston’s assessment, and he’s right… the mortgage industry must remain vigilant in the fight against fraud, even as loan volumes decrease!

The fight against real estate-related fraud just got a much-needed shot in the arm, but is it enough? Earlier this week, Washington, D.C.-based Mortgage Bankers Association (MBA) announced that it plans to help in the fight on fraud by seeking support for $7,000,000.00 in federal funding for the following initiatives:

1. The hiring of 30 new FBI field investigators to work on real estate fraud cases.

2. The hiring of two (2) new dedicated prosecutors at the Department of Justice to coordinate prosecution efforts with the U.S. Attorney’s offices.
3. An increase in dedicated resources for FBI Interagency Task Forces in the geographical areas with the highest concentrations of real estate fraud.

Once these priorities are funded, MBA says the FBI can more effectively pursue and prosecute real estate fraud.

“Fraud is an issue that impacts every lender and takes a huge toll on the resources of lenders,” says MBA Chairman Regina Lowrie. “Actions on Capitol Hill or by regulators have an impact on how companies operate their businesses.

While I applaud the Mortgage Bankers Association for supporting efforts to add enforcement personnel to the equation, policing alone is not going to solve the problem. In 2005, losses from real estate fraud soared to more than $1 billion, up from $429 million in 2004, according to the FBI. Honestly, does anyone really think 30 more agents on the ground and two more prosecutors at DOJ are going to solve the problem or make the bad guys think twice about committing fraud? Of course not.

The bottom line is this… In addition to dollars for enforcement, we need significant funding for education, along with more appropriate state and federal regulations. Education and regulation will make more of a measurable difference in the fight against real estate fraud than any number of FBI agents ever can or will.