An Epidemic of Fraud

Single-family housing isn't the only niche where mortgage fraud is running amok.

Michael Costanzi, supervisory senior special agent for the Federal Bureau of Investigation, briefed a session at the recent Regional Conference of Mortgage Bankers Associations in Atlantic City that southern New Jersey is rife with condominium fraud.

New Jersey ranks in the top 10 states in terms of foreclosures associated with fraud, Costanzi told the session. There were 6,300 foreclosures in the three New Jersey counties he covers in just one year.

His Atlantic City office has four agents working fulltime on mortgage fraud, he said. They are working on 10 cases now, involving 240 properties. He expects that amount to rise to 500 properties.

And in case you think of mortgage fraud as bloodless white-collar crime, he said one of his office's interviewees, a straw buyer, was shot four times in an apparent attempt to keep information from the bureau (the man survived the shooting).

Suspicious Activity Reports in New Jersey jumped from 1,858 in 2008 to 1,934 in 2009, the agent reported.

Costanzi had some shocking numbers to share with the meeting. He said 60%-70% of all loans in foreclosure are the result of fraud, and that 80% of fraud losses involve collaboration or collusion from industry insiders.

They include builders/developers, real estate agents, appraisers, mortgage brokers, title clerks, lawyers, bank loan officers, investors and public officials.

Scams he's seen include builder buyouts, property flipping, straw buyers, identity theft, short sale fraud, appraisal fraud, equity skimming and foreclosure bailouts.

Foreclosure bailouts are especially nasty. A fraudster will offer a borrower in danger of foreclosure $5,000 for a quitclaim, proposing to carry the borrower for a few months until he can resume payments, at which time he will sell the house back to him. But he doesn't-and the borrower has sold his home for just $5,000.

One of the FBI's allies, oddly enough, is the humble HUD-1 form that must be filled out for all originations. The small print states it is a crime to make false statements on this form. "If we can prove it's not correct, you're going to jail," he said. Costanzi estimated it will take the FBI 3-5 years to work through this epidemic of condo fraud in southern New Jersey. That's the good news. The bad news is the agency has not yet started on single-family or CRE fraud in the area.

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