Expert Calls Regulation Key to Combating Mortgage Fraud
LAS VEGAS-The key to combating mortgage fraud is "regulation, regulation, regulation," the director of research and policy for the Community Law Center told attendees at SourceMedia's Mortgage Fraud Conference in Las Vegas. Robert J. Strupp continued that the problem is people choose not to enforce the existing laws or modify them to meet the current conditions.
Among the issues he addressed in his presentation are "self-proclaimed" loss mitigation specialists and "certified" foreclosure consultants. No state certifies foreclosure consultants, Mr. Strupp declared, adding, "In my opinion, this whole industry needs to be regulated and it is not."
Among the red flags servicers should look for regarding possible foreclosure relief scams are these consultants telling the borrower not to contact the servicer, he said. Another sign is the borrower is paying a third party to negotiate for them. He also said to watch out for cash being disbursed at the closing that has not been approved by the servicer. Also be aware of a sudden default by the borrower, and then receiving a short-sale offer without having any workout discussions.
Rodney Nelsestuen, research director for TowerGroup, takes an opposite position from Mr. Strupp towards increased and detailed regulation.
At first, he said, it can be prescriptive in dealing with the problem, but in the end it will fail because the prescription will provide fraudsters with a road map to get around the problem.
Any solution to fraud needs to be principal-based, Mr. Nelsestuen said. People need to be called to a higher sense of accountability.
Raising the ethical bar is not an easy thing to do. Having commission-based compensation helps to drive bad behavior Companies need to report fraudsters and stop doing business with them. This can't be legislated, he said.
Amy Heinz, Fannie Mae's mortgage fraud program senior industry relations manager, said lenders need to start training their servicing personnel as soon as possible regarding fraud because this side of the business is not prepared to deal with it.
Repeating some of the same red flags as Mr. Strupp, she said servicers should be weary of the borrower "manufacturing" a default in order to get the lender to start negotiating. Until the default, the borrower has had a strong payment history. Conflicting reasons are given to the servicer for the default, Ms. Heinz said.
Even after the default, the borrower keeps making other payments.
One scam has the borrower using a trusted accomplice to make a fictitious low short-sale purchase offer. The fraudsters are creative, Ms. Heinz noted, and the industry does not know what the next iteration of the foreclosure rescue scam they will develop.
Joan Ferenczy, institutional investigation director at Freddie Mac, noted that many real estate brokers are committing mortgage fraud, but do not believe their activities constitute unethical behavior. She gave a personal example, where she was trying to buy one property that was contingent on selling her current property. Her real estate agent was looking to manipulate the data so that she could close on the new property before selling the other.
Ms. Ferenczy said the agent did not believe they were doing anything wrong, but rather just trying to get the deal done.
What should be frightening to the industry, she added, is that in 50% of the cases her office handles for Freddie Mac, the borrower is current. In one Florida case, she said, the fraudster had four years worth of reserves to keep the loan current.