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To date, the mortgage community together with law enforcement agencies at both the state and federal levels have concentrated their efforts to combat fraud on industry insiders and criminals who have bilked the business out of millions, if not billions, of dollars.
But now lenders and the authorities are starting to turn their attention to regular borrowers who are often prompted into falsifying their applications by loan officers who tell them it's OK because "everybody does it."
"Fraud for property" is the industry term used to describe usually honest folks who exaggerate their incomes or tell other white lies to obtain the financing they need to make their transactions work.
Property fraud isn't nearly as costly as those schemes designed to put cash in people's pockets, otherwise known as "fraud for profit." But it is just as insidious. Indeed, the portfolios of practically every lender in the land are said to be riddled with these so-called liar loans.
Ordinarily, people who fib don't cost their lenders a dime. They tend to make their payments on time, just like most everybody else. But when those who use deception to obtain financing get in over their heads and can't - or won't - make their payments, their lenders stand to lose big, too.
Combine the possibility of a costly and sometimes lengthy foreclosure proceeding with ever-shrinking profit margins and it's easy to see why lenders are becoming more and more interested in unmasking the prevaricators. "When profits are down," says Douglas Duncan, chief economist at the Mortgage Bankers Association, "every dollar counts."
One place where the new get-tough policy can be seen is in Georgia, where assistant attorney general David McLaughlin has no qualms about going after persons who lend their names or credit histories to friends or neighbors or show up at a closing posing as someone else. "If you have a knowledge of a misrepresentation being made, then yeah, we're going to prosecute," says Mr. McLaughlin.
It used to be that these people were given the benefit of the doubt because they claimed they "never read the documents" or "didn't know any better." But "jurors in this day and age are finding that harder and harder to believe," says Mr. McLaughlin. And so does he.
"If you're dumb as a post and just plain stupid, you may get off with probation and a fine," the law enforcement official says. "They may not be the main bad guys, and they may not be the one's making the most money. But people need to be on notice that you don't get to engage in culpable behavior and get a free pass."
Of course, it helps that Georgia, which has been a favorite target of scam artists, is the first state to specifically define mortgage fraud as a crime. Everywhere else, mortgage fraud is prosecuted under bank or wire fraud laws, or sometimes even under bankruptcy or conspiracy statutes.
The same holds true on the federal level. It has always been a federal crime to knowingly provide false information on a mortgage application. But there is no specific law that codifies the crime of mortgage fraud. That could change, however, if Novato, Calif., attorney Arthur Prieston has his way.
Mr. Prieston, chairman of a firm that performs due diligence services on behalf of lenders and insures them against loss due to fraud, is at the forefront of an effort to define the specific crime of mortgage fraud in a federal statute and set strict sentencing guidelines.
"If there is more focus on what mortgage fraud is, if there is a list of specific crimes on a poster on the wall of every mortgage company office, then consumers can protect themselves from brokers who lead consumers down a wrongful path," the attorney says.
Meanwhile, some lenders aren't waiting for Uncle Sam's help. And they aren't waiting to be had, either. Rather, they are taking proactive steps to protect themselves.
According to Tom LaMalfa, managing director of the mortgage research firm Wholesale Access in Columbia, Md., some companies are starting to perform occupancy checks 60 days after closing to make sure the borrower was not an investor who claimed to be an owner-occupant to avoid the 1 to 2 percentage point surcharge lenders want to make riskier investor loans.
According to the Prieston Group, half the insurance claims made by lenders so far this year involve occupancy fraud. Some of those are directly related to scams operated by pure criminals. But three out of four involve investors who don't want to pay investor rates, says Mr. Prieston.
Lenders always have had the right to call loans due and payable if they discover they've been lied to. For the most part, however, they never knew of the misrepresentation until the investor-borrower stopped making his payments. So it was often too late to take that step. And as long as the borrower paid as promised, there wasn't any need to call the loan, either.
Now, though, according to Mr. LaMalfa, some lenders are inserting clauses into their mortgage agreements that allow them to step up the interest rate if they discover that the borrower isn't occupying the house.
"It used to be, 'no harm, no foul," says Ann Fulmer of the Georgia Real Estate Fraud Prevention and Awareness Coalition. "Now, there's zero tolerance."
According to Prieston, 10% of all loan applications involve some sort of material fraud. As many as half of all early defaults have some form of misrepresentation, as do 25% of all foreclosures.
One out of four insurance claims made to the Prieston Group involve false employment and 15% involve hidden debt. Sometimes, claims involve multiple types of fraud. But lenders will soon have new tools to uncover all kinds of deceptions.
Digital Risk, a new company based in Dallas, is developing a patented system of logarithms that can tap into up to 20 different public and private databases to alert lenders to the possibility that a borrower may not be occupying the house he is buying.
For example, the fact that a borrower has multiple power company accounts is a "good red flag" that he is really an investor, says Jeffrey Taylor, the firm's chief executive officer.
Digital Risk also is developing proprietary "income profiling" software that will allow lenders to determine whether an applicant is exaggerating his earnings, as well as a program lenders can use to make sure borrowers are who they say they are.
According to Mr. Taylor, the income software will connect to thousands of databases to zero in, among other things, on what you told the credit-card company you earned when you applied or what you told the car dealer when you applied for a loan. And the ID program will run the borrower's Social Security number against deaths listed by funeral homes, hospitals and life insurance claims to make sure he isn't borrowing someone else's identity.
"These public/private databases have been out there for years," says Mr. Taylor. "And we have figured out how to access them instantaneously without building hundreds of different links."
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NEWS ARTICLE - LENDERS LOOKING AT 'WHITE LIE' FRAUD
