Experts Say Fraud Has Spread to Retail Loans

Mortgage fraud has "crossed over" to the retail side of the business, according to a couple of experts in rooting out the crime.

Kathy Cooke, a senior fraud investigator for Freddie Mac, said her office is seeing an increase in the number of cases involving retail loan officers.

So, too, are the folks at the Mortgage Asset Research Institute. As the number of broker-driven loans has declined, said MARI's Merle Sharick, "fraud has shifted" to retail originations.

The two mortgage crime authorities made their comments here last month at the annual regulatory conference of the American Association of Residential Mortgage Regulators, which spent almost an entire day on the subject.

In another session, Seattle appraiser Richard Hagar called on the state overseers to come down hard on his colleagues who break the rules.

Noting that fudged valuations are "an absolutely essential part" of practically any scheme to defraud lenders, Mr. Hagar said he is "embarrassed about the way some appraisers have done their work."

"Eighty percent of all appraisal scams could be stopped if appraisers did their jobs right," he told the conference.

Mr. Hagar, who helped write the model for appraisal license laws in a dozen states, also chided loan brokers for pressuring appraisers to inflate their valuations and funding lenders for looking the other way.

He said that in reviewing 387 valuations, one Seattle lender rated only 17% of the appraisers who did them as outstanding or satisfactory. The rest either needed improvement, were substandard or failed to meet basic requirements.

But despite their poor work, the lender "still funded" everything but the bottom 5% of the loans, he said. And "it's not just them," he added. "Every single lender out there has similar numbers."

Meanwhile, Ms. Cooke, whose investigative territory at Freddie Mac covers the Eastern half of the country, told the meeting the shift from wholesale to retail follows what has become a familiar pattern among perpetrators of mortgage fraud. The crime typically involves industry insiders in one way or another.

"It's a sophisticated, highly orchestrated crime by individuals with industry insiders in their back pockets," she said. "Most times, borrowers themselves are either unaware or not directly involved and turn a blind eye."

A primary spokesperson for Freddie Mac on loan fraud, Ms. Cooke said she's also seeing more and more involvement by real estate agents and their brokers who won't get paid unless the deal closes.

Another trend spotted by the secondary mortgage market company is the growing incidence of "affinity fraud" in which the con artist exploits the friendship and trust of members of groups in which they infiltrate.

As members, Ms. Cooke said, they have an immediate level of trust, and can easily recruit other members as straw buyers.

Freddie Mac also has noticed that cases are no longer isolated by geography. Not only is the crime occurring in all 50 states, but it also is occurring across state lines. In one recent case, for example, the property was located in Massachusetts, the loan broker was in Pennsylvania and the borrowers were from Maryland, New Jersey and Virginia.

According to Ms. Cooke, fraudsters are openly "recruiting straw borrowers from all over the country" on such popular websites as Craigslist.com.

Mr. Sharick, who is responsible for business development at MARI, said criminals are now targeting shops that do not confirm information on loan applications, looking for holes in the approval and underwriting process.

"You can't accept loan applications at face value," Mr. Sharick told the conference attendees. "It's not enough to require borrowers to have a 750 FICO score and wear a halo. It's still, 'garbage in, garbage out.' You've got to authenticate, verify and reverify. The transaction is too fragmented with too many moving parts not to." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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