New Take On Mortgage Fraud: Undue EnrichmentSeptember 26, 2001 by LEW SICHELMAN Realty Times

The FBI is planning to seek an indictment in what could amount to a $30 million case of fraud involving a mortgage lender in Charlotte. And in Cleveland, 225 federal agents recently raided two dozen homes and businesses as part of investigation into allegations of mortgage fraud, money laundering and racketeering.

In the mortgage business, unfortunately, that’s just another day at the office these days. But in an unusual twist in Palm Beach County, FL, a loan officer has been sentenced to 20 months of house arrest and ordered to pay $17,000 in restitution for falsifying income statements on four loan applications.

The twist? All four loans are performing; that is, the borrowers are paying on time, each and every month.

Until now, lenders have had to show they incurred a loss as a result of fraudulent statements before the authorities would act. But in this case, they decided to move on the loan officer because he “unduly enriched” himself.

Robert Cope, who heads the fraud detection unit at Freddie Mac, a major supplier of funds for mortgages, hopes this is a sign of things to come. But according to the supervisory special agent in the Financial Institution Fraud Unit at FBI headquarters in Washington, it probably isn’t.

“We’re not interested in cracking down on people trying to live the American dream,” G- man Eugene McMillan says.

Borrowers who fib on their loan applications are fairly safe from federal prosecution, McMillan says. “If there’s fraud but (lenders) would have made the loan anyway, it’s just not worth pursuing.”

Besides, the FBI has its hands full with “property fraud” in which unscrupulous loan brokers, appraisers, real estate agents and yes, even some builders, lie, cheat, falsify documents and do whatever else it takes to rip off unsuspecting lenders and buyers.

The agency has assigned 2,500 agents to McMillan’s unit. Together they are working more than 23,000 cases, almost two out of five involving fraud against financial institutions.

About 5 percent of those cases concerned mortgage fraud. And the case load would be larger if financial institutions were not afraid to report possible crimes because they dread the fallout from the bad publicity or the greater attention of federal regulators.

Mortgage-related crimes also tend to be under-reported because state-chartered institutions, mortgage companies and Freddie Mac and its chief rival, Fannie Mae, are not required to file suspicious activity reports, and because still-performing loans that were secured under fraudulent circumstances may go undetected for years, if not forever.

Nevertheless, the trend toward more cases is growing. Reports of possible fraudulent activity increased 57 percent in the first quarter, according to supervisory special agent Mark Johnson in Charlotte. And the amount of possible losses is was up a whopping 436 percent from the first quarter of 2000.

“There’s a lot of money in the mortgage business,” he said, adding that he could use three times as many agents as the 14 currently assigned to his squad.

Freddie Mac and Fannie Mae are seeing a big increase in mortgage fraud as well.

Sometimes it involves unsuspecting ethnic borrowers who don’t understand English very well — or the housing market, for that matter. And when they trust the wrong person to act as their liaison, they end up on the hook for a $100,000 mortgage on a house that may be worth only $5,000-$6,000.

In other instances, however, the fraud involves properties that aren’t run down at all. In the Atlanta area, for example, the authorities recently uncovered a scheme to illegally drive up the values of “good” condominium “buildings in good neighborhoods.”

“Fraud is easier to commit today than ever before, and it’s not all concentrated in one place, either,”said William Brewster, who runs Fannie Mae’s National Underwriting Center in Dallas.

Brewster also says fraud is widespread. “There’s little pockets of fraud everywhere. We see it popping up all over. A scam works anywhere. If someone is found out in Florida, they just move on to Houston.”

To root out perpetrators, Freddie Mac’s Cope says lenders must know who they are doing business with.

Don’t do business with someone just because you played golf with someone and he seemed like a nice guy, he warned at a conference recently. Do a background check first, and not just on him but also his company and its principles.Other recent stories about mortgage fraud include:

• Miami familly allegedly ran a mortgage fraud ring that swindled lenders out of $3.8 million
• Maryland is the state with the most instances of possible fraud, according to Affinity Corporation’s ‘Suspected Fraud Activity Index’ for the months of June, July and August.
• Thomas Eck and Zahra Gilak made as much as $15 million, and defrauded investors of $100 million in sham that included online mortgage brokerage
• Senior executives of MCA Financial Corp. were charged with felony securities fraud.
• Richard Wood, a Las Vegas mortgage broker accused of bilking millions of dollars from dozens of investors in a nationwide Ponzi scheme, was gunned down outside his home.
• FBI Investigating Massive Mortgage Fraud Case In Spokane
• Freddie Mac investigating serious allegations of loan origination improprieties and fraud
• Richard Michael McDowell, who through southern California-based Active Home Loans and M&M Loan Service admittedly swindled an estimated $7 million from about two dozen investors, was sentenced to 27 months in federal prison
• PinnFund CEO Michael Fanghella — who is accused by Securities and Exchange Commission attorneys of the largest securities fraud in recent Southern California history — surrendered to the U.S. Marshals Service in San Diego.
• Raymond T. Jackman, JR., a mortgage broker in West Roxbury, Massachusetts who is alleged to have worked with a tax preparer that prepared fraudulent tax forms for over 50 prospective borrowers, pleaded guilty to conspiracy to commit bank fraud.