Housing scams worry banks - East Valley Tribune: Business

Housing scams worry banks

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Posted: Tuesday, October 11, 2005 6:42 am | Updated: 7:20 am, Fri Oct 7, 2011.

NEW YORK - On a cold, damp February morning, a car with two members of Freddie Mac’s special fraud investigation unit pulled up to 2175 Martin Luther King Blvd. in Atlanta.

What they found further stirred suspicions first raised by an internal report at the U.S. housing agency. The investigators would discover that the building, its yard littered with garbage and broken windows, was the linchpin of a $750,000 alleged real estate scam involving 38 condominium units.

‘‘It just didn’t have very good curb appeal,’’ quipped Kevin Ludden, one of the investigators. ‘‘In a minute you could tell it was a problem property.’’

The two men parked their car behind the building and, after a few words with the maintenance man at the stucco and brick two-story building, they found more clues to fraud that involved a real estate broker, a property appraiser and a closing agent.

‘‘I noticed all the fixtures were missing,’’ recalled Ludden, who didn’t trust the building’s rickety wooden stairs with his over 6-foot-tall, 290-pound frame. The maintenance man then explained that ‘‘he gets a phone call that tells him what units to put the fixtures in so an appraiser can come and take photographs.’’

The Atlanta building is still under investigation, but Ludden and his partner believed they had come across a case of real estate fraud, part of a growing problem across the country. Banks and other lenders as well as Freddie Mac, have voiced concern about the growing incidence of fraud, which can have a negative effect on neighborhoods and the market for mortgage-backed securities.

Some of the scams are intricate, while others are primitive. Typically, they involve the mortgage application process and the appraisals required for mortgage approvals.

In one case, a deceased appraiser’s appraisal seal was used by a family member to falsely certify documents, while in another case an appraiser was unaware that her son was using her seal. In another instance, a fabricated appraisal report was accompanied by photographs suggesting a property was in livable condition. The photographs were of the front and rear of a structure, but investigators found that the front of the property had been freshly painted and disguised as an inhabitable home.

The photos of the rear of the structure were from an entirely different building and the actual property was gutted, open to the elements.

‘‘It was like a kid’s doll house where you can reach in through the back,’’

Ludden said.

Investigators have also found socalled asset rental companies that promise to lend money to borrowers, who can then claim the money as savings for loan approval. Lenders are then fooled into thinking a borrower has more money than he or she actually does.

Fraud in housing often involves a member of the real estate industry, such as an attorney, broker or appraiser. New loan products that allow borrowers to get mortgages with less documentation about income and savings, so-called lo-doc or no-doc loans, also inadvertently aid fraud.

Some of the fraud does not become evident until loans become delinquent. In many cases, suspicions are only raised when a borrower fails to make any mortgage payments, as was the case with 2175 Martin Luther King Blvd.

As of Sept. 30, the end of the government’s fiscal year, there were 721 pending cases of real estate fraud being investigated, up from 534 in 2004, said Ronda Heilig, a supervisory agent with the FBI’s financial institution fraud unit.

There were 21,994 reports to the FBI of suspicious activity in the industry in the year ended Sept. 30, compared with 17,127 the previous year and 5,623 in fiscal 2002.

States with heightened incidences of mortgage fraud include California, Nevada, Utah, Colorado, Missouri, Illinois, Michigan, South Carolina, Georgia and Florida.

‘‘The FBI recognizes these as the top 10 mortgage fraud hotspots,’’ Heilig said.

The heightened incidences of fraud affect both commercial and residential real estate properties, but it is the residential scams that have Freddie Mac concerned. The agency guarantees home loans to lenders, who then resell the loans as securities on Wall Street.

Some $8 trillion of mortgagebacked securities are outstanding and they are held by a wide range of investors. Even the Federal Reserve uses mortgage-backed securities as collateral in its everyday dealings with banks.

‘‘This is a key market for investors. The integrity of that market is very, very important to those investors,’’ said Brian Cohane, co-head of residential and asset-backed bond trading at investment bank UBS, which trades billions of dollars of mortgage securities daily.

While late or unpaid loans are expected by everyone in housing finance — many are due to job losses or divorces — there is concern that a large number of mortgage scams that end up in defaults could be a rot in market for credit and mortgagebacked securities. U.S. mortgagebacked bonds have become prized by investors worldwide because of the guarantees provided by Freddie Mac and its sibling, Fannie Mae.

A wave of bad loans could increase borrowing costs for consumers, because investors will demand a higher yield from mortgage-backed securities in exchange for taking on the risk and banks would pass on the cost in the form of higher mortgage rates.

Fraud can also have a great social cost in neighborhoods like the one visited by Ludden. The artificially higher property values generated by the fraud can chase up property values for other homes in the neighborhood and this pushes up real estate taxes.

‘‘All those condos with the inflated values are loaded into the MLS (multiple listing system) and will be used by other legitimate appraisers as comparable sales for determining market values on other neighborhood properties,’’ Ludden said. ‘‘Then you have the snowball effect of increasing property values driven by the fraud.’’

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