According to recent FBI testimony, about four in five mortgage fraud cases involve more than one industry insider. But the extent to which fraud has been committed nationally is largely unknown.
Those were concerns Chris Swecker, assistant director of the FBIs Criminal Investigative Division, recently testified about before the House Financial Services Subcommittee on Housing and Community Opportunity.
“Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing,” Swecker said in the prepared remarks statement of his testimony to Congress.
The FBI compiles data on mortgage fraud through Suspicious Activity Reports, or SAR, filed by financial institutions, reports by the U.S. Department of Housing and Urban Development Office of Inspector General, and from the complaints it receives from the industry at large.
However, he added, “the true level of mortgage fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. The industry provides incomplete or inconsistent fraud data.”
Contributing to that is that “a significant portion of the mortgage industry is void of any mandatory fraud reporting…[and] fraud in the secondary market is often under reported,” according to the director.
Marta McCall, who testified on behalf of the Mortgage Bankers Association before Congress, seemed to be in agreement.
The American Mortgage Network executive pointed out that the FBIs mortgage fraud investigations had more than quadrupled in a period of about three years.
“These numbers clearly demonstrate an increase in mortgage fraud,” McCall said. “Given the limits of data though, MBA believes that these numbers understate the problem.”
Swecker said the FBI has found that “80% of all reported fraud losses involve collaboration or collusion by industry insiders.”
Industry insiders are defined by the FBI as appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and processors, settlement/title company employees, mortgage brokers, loan originators and other mortgage professionals engaged in the mortgage industry.
Among the FBIs many investigations, one lead to the indictment of 94 industry insiders, of which some were American Home Loan employees, involved in money laundering and the fabrication of loan applications and documents. Another ongoing investigation has resulted in the identification of more than 35 industry insiders and more than 380 fraudulent loans exceeding $70 million, according to the director.
A two-year joint investigation by the FBI, the IRS, and HUD revealed a fraud for profit scheme committed by several insiders of First Beneficial Mortgage Corp. The fraud was perpetrated against Fannie Mae and Ginnie Mae and resulted in losses exceeding $30 million and a 21-year prison sentence for First Beneficial’s president. The executive was charged with conspiracy, bank fraud, wire fraud, and money laundering, and he was ordered to pay $23 million in restitution and to forfeit about $8 million in property.
The FBI also recently announced that in the period between August 2004 and Sept. 17, 2004, it had 158 investigations involving criminal groups and individuals engaged in financial institution fraud, including mortgage fraud, and 14 arrests, convictions and sentences representing potential losses due to fraud in excess of $3 billion.
Despite the numerous successes, “studies illustrate the need for increased coordination among industry and law enforcement,” the director said.
“If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market,” Swecker said. “Investors may lose faith and require higher returns from mortgage backed securities. This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans.”
Collaborative efforts between the FBI and prominent industry organizations, such as the Mortgage Bankers Association and Fannie Mae, are helping to create a fraud reporting mechanism for those not mandated to report such activity.
The concept of Suspicious Mortgage Activity Report, or SMARt Form, is under consideration by the MBA. Swecker said he supports providing a “safe harbor” for lending institutions, appraisers, brokers and other mortgage professionals similar to the provisions afforded to financial institutions providing SAR information, which would provide necessary protections to the mortgage industry under a mandatory reporting mechanism.
“Through a mandatory reporting mechanism, industry insiders would be the front line in preventing mortgage fraud,” Swecker said. “Zero tolerance within the industry combined with a mandatory system of reporting fraudulent activities to the FBI and HUD will be a major step in addressing mortgage fraud.”
