From his perch over the country’s biggest managed mortgage portfolio, a Fannie Mae executive recently testified about where mortgage fraud is worst, what schemes are being used and how to avoid getting caught up in them.
Loans secured by properties in the Upper Midwest represent one-third of fraudulent mortgages originated during 2005 and 2006 at Fannie Mae, Bill Brewster, director of anti-fraud initiatives for the company, said in written testimony last week. He was speaking at the Federal Reserve Board of Governors’ public hearings on the Home Owners Equity Protection Act.
The Midwest tied with the Southeast for the region with the largest share of Fannie loans with fraud, according to supplemental material. Georgia was the state with the worst record, with income and appraisal values being the most prevalent types of fraud. Next was Florida, followed by Indiana, Texas and Tennessee.
Social security numbers were most abused in Minneapolis; followed by Elgin, Ill.; Houston; Denver; and St. Paul, Minn.
Lying about income was the most common type of mortgage fraud at the government sponsored housing enterprise, Brewster said. Inflated appraisal values have been the second most common type of fraud.
He noted the normally honest borrowers and real estate professionals are deceptively convinced to commit fraud by “highly-imaginative” ringleaders. These perpetrators often participate in other criminal activities.
“In one case we are currently investigating, an attractive Web site uses religious overtones to lure consumers with comforting promises of credit repair, mentoring and homeownership,” according to the transcript. “In reality, the Web site is operated by [a limited liability company] that specializes in buying foreclosed properties and flipping them to homebuyers at inflated prices, using falsified asset and appraisal documentation.”
Brewster said the LLC is owned by a loan officer who collects both a loan commission and excess sales proceeds on each transaction. The bad loans, funded by a wholesale lender, are then sold to Washington, D.C.-based Fannie.
Another scheme had consumers renting their credit to an investment club — giving out their social security numbers and signing blank documents — in return for payments as much as $5,000. But they were unaware they were being used as straw buyers in a property flipping scheme to purchase multiple properties in another state.
The consumers wound up with late mortgage payments reflected on their credit reports.
Brewster suggested that everyone in the real estate finance chain must become better educated about avoiding becoming caught up in a mortgage fraud scheme.
Fannie, which reported a $2.6 trillion book of business as of March 31 — bigger than any other managed mortgage portfolio, combats fraud by enforcement, education and information sharing, according to the executive. Last year, the secondary lender reviewed underwriting on over 25,000 files. In addition, 98 cases on more than 7,500 loans were investigated while over 18,000 predatory lending reviews were completed.
“Perpetrators utilize whatever products are available and fabricate whatever documentation they need to make deals work. They exploit gaps in the mortgage process, and when one gap closes they find another,” Brewster concluded.
