If there was one major takeaway from the National Crime Prevention Council’s 2013 Mortgage Fraud Virtual Conference, it was this: The mortgage market, while no longer a wicked stepchild of the housing crisis, must still be carefully monitored. Though its tantrum-throwing days may be over, the $1.1 trillion government loan industry has the potential to cause serious economic damage should fraudulent mortgage activity persist unchecked.
“What is old is new again,” says Michael Stolworthy, Director of Fraud Prevention for the U.S. Department of Housing and Urban Development. “We’re starting to see some disturbing trends. The same old type of mortgage cases are coming up.”
False statements on loan applications, inflated appraisals, and loan modification schemes are just some of the ways fraud is reappearing in the mortgage market. And with government loans on the rise—the number of mortgages insured by the Federal Housing Administration has nearly doubled since 2006—the potential for mortgage fraud increases, especially among applicants in shaky financial condition.
“Back during the mortgage boom, people who had taken out second and third mortgages were living the champagne lifestyle on a beer budget,” says Robert Simken, a former real estate practitioner turned police officer in Eustis, Fla. “Now, those same people are living in homes that are underwater and willing to do just about anything to get out of their bind.”
Problems arise when that “anything” includes turning to loan counselors, lenders, and alleged real estate professionals who make promises they never plan to keep. “If an opportunity comes along that seems too good to be true and the little hairs on your neck stick up and say ‘danger,’ don’t just ignore them,” Simken warns.
Through public outreach campaigns and educational seminars, organizations like the National Crime Prevention Council stress the importance of using an accredited real estate professional when contemplating any property transaction. “Half the people haven’t checked the qualifications of the individual helping them buy a home,” says Ann Harkins, CEO and President of NCPC.
Simkens agrees that home owners should seek advice from a noted professional. “You don’t go to the butcher for brain surgery and you don’t go to a brain surgeon for chopped meat,” he says. “It’s important to find an expert and not just someone who shows up and can recite the jargon.”
Beyond consumer awareness, agents and brokers must be mindful too, especially when issues involving false valuations can often lead to fraud. “Obviously, brokers should not provide a lender with a different opinion of value than the homeowner,” Stolworthy says.
In a new scheme called “flopping,” Stolworthy describes short sale “professionals” who use lowball valuations to convince banks that a property is worth less than fair market value. They set up a sale—often to trusts or insiders—at this low cost only to quickly re-sell the property at its true (and higher) price.
Other schemes target senior citizens who take out home equity conversion mortgages—or reverse mortgages—on their house. “The reverse mortgage program and its requirements can often be confusing,” says Simkens, who gives frequent lectures to senior citizens about mortgage fraud. “If some smooth-talking guy comes along who sounds like he knows what he’s saying, they might listen to him because it’s easier than trying to understand.”
The reverse mortgage market is a niche area of loan financing based on the value of a home. With a reverse mortgage, a senior citizen can legally borrow against the equity of his or her house. Oftentimes, fraudsters convince seniors to take out a reverse mortgage, then strip the property of its equity and steal whatever money is left.
Schemes like the one described don’t just hurt the individual home owner; the ripple effects of mortgage fraud can be felt throughout communities, particularly when fraudulent activity results in foreclosure. “If you have a boarded-up house next door to you with spray paint on the boards, that has an impact on the neighborhood and on the value of your home,” Stolworthy says.
With the loss of real estate taxes from these now-foreclosed homes, local governments are forced to spread their resources thin, affecting safety and educational funding and ultimately causing a reduction in the quality and quantity of the public services they provide.
However, these doom-and-gloom situations can be avoided, Stolworthy says, as long as there’s an open line of communication between the government agents monitoring mortgage activities and the real estate professionals who ultimately carry them out. “We’re here to listen,” he says. “But it’s a two-way street.”