Peter Miller offers an expanded view of “mortgage fraud for profit” that includes the practices of predatory lenders. 

Last fall, I wrote a piece for OpEdNews.com to eradicate any misnomer that there is somehow a difference between predatory lending and mortgage fraud.  There’s not!  I was responding to a  white paper wherein the Mortgage Bankers Association defined mortgage fraud in clear, certain terms while cloaking predatory lending with ambiguity.   Both are criminal acts with a nearly identical cast of characters and foreclosure as an inevitable by-product.

The conceptual root of “mortgage fraud for profit” is a single fraudster exploiting mortgage lenders by siphoning ill gotten gains from numerous transactions.  Think of it as the “lender as victim” syndrome. 

Miller’s broadened definition of “mortgage fraud for profit” reaches to the heart of a problem that elected officials can’t seem to grasp and industry groups want to conceal.  While many consumers participate in the fraud that’s at the core of the housing meltdown, they aren’t the masterminds of the crimes.  In some cases, industry insiders coach consumers while facilitating questionable deals to earn commissions or fees.  In other cases, as Miller suggests, industry insiders actively prey upon unsuspecting borrowers.  

Keep in mind, my definition of industry insiders includes real estate agents, title agents, loan originators, appraisers, etc.  Peter Miller refers specifically to unscrupulous lenders, but his perspective clears a path for a new definition of “mortgage fraud for profit” that includes anyone who violates the integrity of a real estate deal to turn a profit.

… featured again in The New York Times .

From the article:

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

And:

Credit counselors say many borrowers like Ms. Harris were cajoled or pushed into risky mortgages that they never had the ability to repay.

Blogger Carlos Gasca Yanez has proposed an innovative solution to this nation’s looming social blight: housing markets in crises.  The idea championed in a post titled Subprime Crises calling for Social Entrepreneurs is to partner nonprofit initiative with corporate enterprise.  Carlos envisions a real estate model that embraces a marriage of compassionate sensitivity to the profit motive.  Essentially, cooperative education would occur at every level beginning with professional development and the implementation of best practices.  Businesses and nonprofits would then endeavor to protect and inform borrowers likely to be victimized by predatory lenders.

A ridiculous proposition?  I think not.

Years ago, I participated in a social experiment with a nonprofit named People’s Homesteading Group.  To make a long story short: homes were awarded to participants based on an equation that favored need over financial qualifications.  My company facilitated thirty or more closings and the quasi-governmental funding that served as the financial mantle of the project.  While it might be said that corporate resources could have been used more profitably from the perspective of balance sheets, it could also be said that my horizons grew in ways that transcended dollars and cents.  The homesteading project was successful overall.

Don’t miss the comment thread on Carlos’ post.  Chris describes personal experiences with a radical and remarkable housing initiative unfolding in Scotland and Norway.  Cheryl gives an incredible dissertation on the importance of teaching credit fundamentals.

I left the post with a realization that housing is possibly the paramount global issue.

Earlier this week, I submitted an article, my first, to a site named OpEdNews.com.  I’m not sure if OpEdNews.com is a communal blog, in the same vein as Active Rain, or a syndicated news feed, but I enjoy the writing there a great deal.  The typical post tends to be more provocative and better written than ordinarily encountered in the blogosphere at large.  There’s also an unmistakable political bias.    Dave Wirshing brought the site to my attention after Title-opoly was quoted by M. Davis in a post named It’s going to be a lawsuit moment: class actions slated to restructure real estate market.  Mark Pilatowski graciously mentioned it in his blog.   I highly recommend that you read everything on OpEdNews.com that’s been penned by M. Davis.  She’s a talented, intuitive, and gutsy writer who understands the perils faced by real people during these challenging times in real estate markets.

 My article, The Cult of Plausible Deniability, is more likely than not to offend the sensibilities of many who make a living visa vie commissions earned in real estate transactions.  The term “real estate professional,” used in the broadest possible context, is intended to describe all licensed disciplines that contribute to a successful close for a mutual client.  A number of readers on Active Rain disagree with my judicious use of the term to describe anyone other than a real estate agent.  I’m sorry, but the words “real estate” are characteristically generic and aren’t the exclusive domain of those who list and sell property.

Recently, I was asked if I’ve published a list of upcoming speaking engagements.  I have not to date and probably won’t in the future.  Most of my speaking invitations come from corporations or professional trade associations.  The events are typically closed to the public.  My unusual credentials almost always draw a full house.

As you might imagine, the current housing crises has been “center stage” during my recent presentations.

This past Wednesday, I spoke to a responsive group of real estate agents in Frederick, Md.  The elevated degree of receptiveness to my perspectives was a pleasant surprise.

My talking points:

• Only by examining its causes do we surmise that mortgage fraud is properly characterized as a national epidemic, not a series of isolated incidents.  
• Only by scrutinizing the motives of mortgage fraudsters do we recognize the cultural corruption of an entire industry. 
• Mortgage fraud statistics correlate directly to foreclosure statistics which in turn point to a breakdown of professional protocol, and standards, in residential real estate markets.
• The disparities between mortgage fraud and predatory lending are academic at best.  Unethical, often criminal, behavior demonstrated by loan originators, appraisers, real estate agents, and title professionals is the real world nexus that definitively binds mortgage fraud to predatory lending. 
• Legislation and judicial interpretation are not the answers.  Heightened professional standards among real estate practitioners are the crux of the solution.
• Class action litigation will change the form and function of the real estate industry in the next decade.

In light of the subsequently released Bush initiative, I would add that it’s apparent that the feds don’t see housing values rebounding anytime soon.  If they did, the proposal would include a recapture provision if gains were realized when the select group of properties were sold.
  
Bob Carney, who extended the invitation to speak, graciously wrote a post about the presentation for his blog, Focus On Frederick.com.

Click here to read Bob’s thoughts about the lecture.

While preparing for the Frederick invitation, I prepared my own analysis of current foreclosure statistics. 

The results are startling:

It’s a generally accepted fact that 1 in every 196 U.S. households is currently in foreclosure.  Notice I said households.

The U.S. Census Bureau estimates that there were 116,011,000 households in this country in 2006.

Using that number as the basis, simple math tells us that 591,893 U.S. households face the distinct possibility of losing their homes at this time.

A recently released study commissioned by the The United States Conference of Mayors estimates that an additional 1,400,000 at least, will occur in 2008 representing a market value of $316,000,000,000.  You read it correctly, I said 316 billion dollars.

What’s all this mean in practical terms?  In the absence of intervention in one form or another, roughly 5,178,922 men, women, and children could lose their homes between now and the end of next year, or sometime soon thereafter.

The numbers above represent a situation where every person living in the Washington Metropolitan Area were to almost simultaneously lose their homes.  The densely populated area includes the District of Columbia, 5 Maryland counties, 9 Virginia counties, and 1 county in West Virginia.

It’s as though every person living in the Tampa - St. Petersburg Clearwater Area and the Denver - Aurora Area combined were to lose their homes.

It’s the numerical equivalent to every person residing in the state of Minnesota finding themselves without a place to live.

In 2008, a citizen of this country will be 9.25 times more likely to lose their home to foreclosure than to die of cancer in any form.

I’ve been involved, engrossed really, in a lengthy discussion on Active Rain concerning the current housing crises and its plausible solutions.  To date, I’ve written three posts.  Each of them contains volumes of worthwhile comments.  As is often the case with blogging, the comments have taken on a life of their own and have  metastasized into something more valuable than the original post.

In a post titled ActiveRain Mortgage/Housing Crises Resource, Bryant Tutas, a real estate broker from Florida, has generously compiled an anthology of all related posts.  It continues to grow.  I highly recommend taking the time to read all of the posts and all of the comments.  It would take hours, but you would glean a national perspective of the problem through the thoughts of participants in the industry.

Don’t hesitate to add your personal views and experiences to the discussion by commenting.  It’s important that we share our knowledge during these difficult times.

Fran Gaspari, a regular on Title-opoly and Active Rain, shared the valued insights of a seasoned title veteran in a post titled What’s The Solution To The Stagnant Market … The Pent House Sweet.  I know that Fran would appreciate comments from his colleagues across the nation.

My contributions, so far, to the very informative dialog taking place on Active Rain:

A Recipe for Unmitigated Disaster

Excerpt from post:

“While the initiative shown by state governments to confront the foreclosure epidemic is laudable, I doubt that localized efforts can pack the punch needed to make an appreciable difference.  Federal intervention is the sole option that makes sense at this very late date.  Some pundits are quick to blame Wall Street for the debacle while others point to lenders and an unmistakable affinity for product design that most assuredly spells disaster for borrowers.  Others want to place all the blame on borrowers for a lack of prudence and a fever-like desire to own palatial residences at any cost.  In reality, the protocol in real estate markets started to deteriorate during the mid-1990’s as evidenced by the first sustained spike in foreclosure rates in the history of this country.  Previous eruptions in default numbers were relatively short lived and linked to economic, micro or macro, downturns.  In our current scenario, foreclosure statistics escalated a decade ago and have continued to climb since.  Most disturbing is the apparent lack of corresponding economic factors to explain the phenomena.  Like it or not, foreclosure activity is a solid benchmark of mortgage fraud and predatory lending.  Mortgage fraud and predatory lending are often characterized as distinctly different forms of abuse.  In reality, the disparities between them are academic at best. Coincidently, it was during this same period that sub-prime lending gained traction.  While sub-prime lending is one of many causation factors, it is not the root of the problem.”

A Coin Has Only Two Sides

Excerpt from post:

“Regrettably, we shun the inevitable conclusion that the crises in real estate markets is far from over.  As a primary causation factor, we need to consider the paradigm of politics that is the federal reserve.  In his book The Age of Turbulence, Alan Greenspan audaciously exculpates himself from any responsibility for the pending debacle in domestic housing markets and related financial appendages.  He conveniently places blame on global factors while ignoring the devastating economic effects caused by restrained market forces.  Yes, Greenspan is guilty of holding interest rates much lower than they should have been for nearly a decade.  It was a political ploy by an appointee to a post that is ostensibly non-political.  Markets should determine interest rates, not a politico that caters to the aspirations of the oval office and a thirst for public approval.

The artificially created perception of prosperity had become a reality for a nation that believes that bigger is better and every debt can be settled tomorrow.  We felt so good for so long that we ignored the reality that all drunken stupors must end.  We are now paying the price and suffering the consequences of a reckless monetary policy born of the glitz of the mid 1990’s.  The laws of physics dictate that every force is accompanied by an equal opposing force.  Why would we assume a quick, painless correction for a problem that took a decade to create? The feds aren’t going to allow untold numbers of homes to go to foreclosure.  Consider the implications as a matter of public policy. Where would the countless families displaced by foreclosure live?  As a society, will we tolerate the appearance of boarded-up properties in polite middle class communities?  The stakes are high on this one.  The world is watching.  Foreign investors are already questioning the integrity of mortgage backed securities.”

The Metrics of a Market Correction

Excerpt from post:

“For 20 years I conducted closings referred by real estate agents and loan originators.   More than once I was compelled to seek a legal opinion after hours to determine my own liability because a deal turned ugly at the table.  More than once I had buyers accept unfavorable loan terms, angrily and reluctantly, because their possessions were stowed on a moving van and they had nowhere to go.  More than once I heard licensed professionals lie like hell to earn a commission or a fee.

It’s undeniably convenient to blame irresponsible borrowers for the woes of the industry such as they are.   It implies that someone else, anyone else, is at fault … but, what about all those times appraisers were asked, or threatened, by industry insiders to be a bit lenient by inching a value upwards by $1,500 or $2,500 to make a deal work.  It’s a far cry from $25,000, but we can’t ignore the cumulative reality.  Is it possible that a little cheat here and a little cheat there contributed in a big way to the problem we now face?  Could it be that the same mentality of cheating a little to make life easier found its way into every aspect of real estate protocol?

At times the truth is painful!

As a “card carrying” capitalist, I embrace the wisdom of free markets while denouncing government intervention in all its hideous forms.  Like most of you, my formative education leads me to believe that imbalanced markets need time to correct themselves. How much time, though?  My heart and intuition lead me in an entirely different direction.  I recognize the need for intrusive medical treatment when a patient’s health is in immediate and eminent danger.  Our neighbors, family members, and friends are suffering horribly.  Once the bleeding has stopped, we can look for solutions.”

I’ve been studying foreclosure statistics and trends to enhance my presentations.  Amazingly, less of a historical correlation exists between economic factors and foreclosure rates than one might think.  An exception would be the effect of rising interest rates on the vast number of outstanding adjustable rate mortgages.  Much of the data predates subprime lending application and it’s confusing array of products.

An indisputable link can be established between subprime lending, mortgage fraud, and foreclosure rates. 

The leadership of the title industry remains disturbing silent even though it’s positioned to make an important contribution in regards to mortgage fraud prevention.  One can only surmise the immense magnitude of financial losses suffered each year by underwriters due to foreclosures and classic forms of mortgage fraud.  What’s the problem?  Is it possible for an entire industry to be completely indifferent?  Is the working relationship between the title and mortgage industries foundering to a degree that viable solutions can’t be discussed?

I really have to point a finger of blame at the leadership of the title industry, or the lack thereof.  Sadly, only analytical solutions are publicly proposed at this time.  Tagging individual and properties as high risk factors has done little, if anything, to diminish the incidence of mortgage fraud and it’s impact on foreclosures.  In other words, if the approach didn’t work last year,and it didn’t, there would be no reason to assume that it will work this year.  An algorithm is no match for a fraudster intent on manipulation.

The U.S. Justice Department continues a misguided agenda of prosecuting mostly notorious fraudsters in metropolitan areas.  It’s a robotic and bureaucratic approach that makes for good political talking points, but has very little practical effect in a real world setting.

State and local authorities often recognize the existence of a problem, but lack the resources to confront this sophisticated form of theft.  

Title insurers must take a visible stand if the situation is to change.  Regardless of individual state guidelines, insurers need to raise their own standards regarding agent recruitment, professional development for agents, and auditing protocol.  We all know that mortgage fraud can’t exist without the tacit cooperation of title professionals.  

Why not do something about it? 

I’m admittedly concerned about the real estate and mortgage fraud outlook for 2007 after considering the developments of the past year. Real estate and mortgage fraud is a complicated issue presenting a spectrum of societal challenges in the form of costs and consequences. Industry leaders express grave concern without revealing a concise and cohesive strategy to combat the epidemic. The U.S. Justice Department continues a misguided agenda of prosecuting mostly “notorious” fraudsters in metropolitan areas. State and local authorities often recognize the existence of a problem, but lack the resources to confront this sophisticated form of theft. As a matter of public policy, the causation factors that result in a breakdown of protocol in real estate transactions are either misunderstood or conveniently ignored.

We’re told that real estate and mortgage fraud is properly managed by “tagging” individuals and properties as “high risk factors” based on information contained in data bases. Transparency is the “sound-byte” of the day and ostensibly a contributing factor to loan quality enhancement and loss mitigation. Sadly, technology is the only publicly disclosed solution proposed by lenders and title insurers at this time. The two industries that stand to lose the most have inexplicably shown little initiative in solving (studying) the problem. A dependence on technology has blinded them from a simple truth: the consequences of real estate fraud are a human reality, not a “virtual reality.” Why would the “cybernetic” approach to fraud prevention work in 2007 if it didn’t work in 2006?

The unrealistic expectations placed on automation by the real estate industry begin at the advent of every transaction. Homes are listed and sold locally, yet lenders and title companies now embrace a business model that espouses the virtues of mass production. The variables leading to homeownership aren’t “linear” and “quantifiable” as suggested by the “factory mentality” that is loan and title processing in today’s world. Escalating real estate and mortgage fraud statistics correlate directly to the application of “new” technology. The real estate industry has lost site of the fact that advances in technology are meant only for the advancement of the human condition. The incidence of real estate fraud was statistically insignificant in the past when lending and title services were “personalized” and “community based.”

Far too often, fraudsters target communities and individuals that can least afford the abuse. A boarded up home is visible evidence of real estate fraud; despair is the human cost that’s publicized so rarely. Consumers are sensationalized as villains by professional associations and the media when, in reality, all schemes require the orchestrated efforts and coaching of industry insiders. Legitimate studies conclude that predatory lending practices are biased towards minority and lower income groups. Deceitful loan brokers (realtors) enlist the cooperation of title agents and appraisers to exploit unsophisticated or otherwise vulnerable borrowers. A study released this month by the Consumer Federation of America indicates that woman with above average income and credit scores were more likely to obtain sub-prime financing than men with similar profiles. Households headed by woman, particularly women of color, are unable to realize financial security through the traditional path of homeownership. The “yield spread premium”, an advanced banking concept designed to bundle disparate loans in commodity markets, is often used abusively by mortgage brokers to “over-sell” unsustainable payments to trusting customers. The deceitful mortgage brokers are then paid undisclosed fees by wholesale lenders. I strongly oppose the use of the “yield spread premium” in retail markets without disclosure requirements much stricter than those currently employed.

In some ways, 2006 marked the beginning of a period of accountability for industry insiders who commit or facilitate real estate and mortgage fraud. A dramatic spike in default rates occasioned by rising interest rates has “unearthed” a generation of loans originated by internally falsified documentation and over inflated appraisals. It’s now impossible for lenders to use “hyper-appreciated” REO values to understate actual losses caused by foreclosures. The crimes of the past decade are finally coming to light. The media suspects that the real estate industry has had its collective hand in the ill-gotten profits of fraud. Future articles appearing in respected publications will provide the basis for criminal investigations, regulatory inquiries and class action litigation.

Reform will take a very long time and will offer no relief for those already victimized by fraudsters. In his book, “An Inconvenient Truth”, Al Gore wrote “We have everything we need to begin solving the crises, with the possible exception of the will to act”. An informed and concerned community of consumers is the fraudster’s worst enemy! A community based approach to fraud prevention presents opportunities for consumers to avoid exploitation; especially when initiated by industry insiders. This site is a perfect example of a learning opportunity for consumers and industry insiders alike. I predict that fraud statistics in 2007 will escalate to startling heights. For reasons I can’t comprehend, legislators and industry leaders will continue to approach the problem with “stone hearts” and “closed minds.” Real estate fraud is a human issue that can only be solved through a shift in public policy and public perspective. Once society recognizes that human suffering is the primary cost associated with fraudulent activity in the housing market; the financial consequences will self-correct in time. When will we learn?

To my way of thinking, public awareness will eventually prove the most effective deterrent to real estate fraud. Still, I’m convinced that the professional development of industry insiders is, for now, the proper focus of fraud prevention efforts. The continuing education offered to real estate agents, mortgage brokers and title agents needs to expand in scope beyond the “bullet-points” we see routinely in well intended brochures. I’m not implying that the content of the standard brochure is inaccurate or inappropriate; I’m saying that the behavior of fraudsters is complex and requires explanation. There’s one unusual aspect of the title industry that deserves careful consideration: the customer is not always right. In fact, a customer intent on committing fraud is the worst enemy of the title professional. Truth be known: otherwise good people can fall prey to the “seduction by greed” in a real estate deal. Its easy money and lots of it! With that being said, I would like to share my insights into the “warning signs” of fraud.

The fraudster must gain the trust of the title agent (your trust) before revealing the mechanics of a fraudulent scheme. This person will pretend to be your friend and will look for personal vulnerabilities in you. Fraudsters will tell you things about themselves that are possibly untrue and intended only to win your confidence. The white collar criminal is often charismatic, charming and persuasive. (always manipulative) They will flatter you professionally and personally. It’s not uncommon for a fraudster to target you by becoming “friendly” with members of your staff.

You must always question the motive of a new source of business that appears suddenly and without a reasonable explanation. Why would an investor, real estate agent, or loan broker who is a complete stranger approach you about doing business? You want to believe that your product is unusual or innovative. But, is it? Always keep in mind that the fraudster is forever tempting and testing title agents. You must also refuse to do business with people who have notoriously bad reputations. I know who the “bad guys” are in Baltimore; you know who they are in your city or town. Doing business with them can only bring you grief.

Your concern is appropriate if one, or more, of the following scenarios becomes real:

• Transactions are habitually rushed by the same source of business. Rushed transactions are indicative of a hidden agenda and are often accompanied by aggressive behavior and abusive comments
• You are asked to close a door or leave a room to discuss a transaction
• The details of a residential transaction become unusually complex. You should be able to explain any residential deal without using the word “creative”; there are no “shades of gray” when the interests of a consumer are at stake
• A purchase transaction is masked as a refinance enabling a purchaser to receive cash at the closing
• A second version of the settlement sheet is needed to deceive the lender
• Words and phrases are used that bother you. “Who will know?”  “Everyone gets to make a few bucks” “I just want the deal to work”  “We need to keep the lender happy”
• You start to feel uncomfortable. If you begin to sense that something is wrong for any reason; you’re probably right

In time, the fraudster will reveal the mechanics of the scheme. The action requested of you might seem so minor or passive that you tell yourself it couldn’t be criminal. I urge you to always consider the worst possible outcome of your professional decisions. Realtors, mortgage brokers and title agents are indicted nearly everyday in this country and later spend time in prison. If this were a novel, we would be at the moment of truth for the title agent; a moment of perfect clarity! This is, in fact, not the case! Real estate fraud is accomplished in secrecy through a series of minor actions that sometimes seem justifiable, yet always veiled by deceit. The pathetic behavior of the fraudster can be attributed to cowardice as much as to greed.