Reuters reports that one in ten homeowners hold mortgages that are upside down.

I feel the numbers are substantially worse than generally reported and that many homeowners have a gut feeling that they are in real trouble because their homes have depreciated.   They are frightened, concerned, and confused.

We really don’t know how far values have plummeted and there’s no way to predict when the crises will end.

Never before has there been such a legitimate need and opportunity for title companies to connect with consumers.  Build credibility in local markets by offering information and resources to people who are frightened and in need.  Partner with churches, non-profits, real estate offices to host gatherings to discuss the realities of foreclosure, selling short, mortgage fraud schemes, communicating with lenders, etc.  Start a blog to stay connected with the people you meet and to keep sharing valuable information.

Re-invent your title company as the local “go-to” place for the real estate needs of real people.  After all, you are the expert.  No one knows their way around a transaction the way you do!

What are you waiting for?  Do it now … your future customers are waiting to hear from you!

Your future customers need to hear from you! 

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.

Earlier this week, I wrote a post about Philadelphia’s disturbing problem with fraudulent deed transfers.  Apparently, title theft isn’t limited to any one city or jurisdiction.

McHenry County, Illinois has launched an online service that alerts homeowners if documents containing their names are submitted to county clerks for recordation.  The service clearly targets criminals attempting to record fraudulent deeds to resell or collateralize real property belonging to others.

McHenry County homeowners can opt for a one year subscription for $12.99 or a three year subscription for $29.99.

WFTV.com reported today that the FBI, in cooperation with state authorities, is conducting hyper-localized investigations in Central Florida to hopefully combat a dramatic spike in reported cases involving mortgage fraud. 

The article indicates that investigators, at times posing as consumers and lenders, are targeting foreclosure rescue scams.

I really thought that the worst of this stuff was behind us.  Apparently, it’s not the case. 

As I’ve stated repeatedly while giving presentations, convicted fraudsters will find themselves in very bad places for extended periods of time after being judged first in the court of public opinion.

The Atlanta Business Chronicle reports that a federal judge issued a 28 year prison sentence for the king-pin of a massive property flipping scheme.  Phillip Hill had orchestrated the sale of hundreds of homes and condo units in the Atlanta Area.  The article mentions nothing of title industry involvement in the case, but I suspect that one or more title companies were implicated because flipping schemes can’t exist without the manipulation of Schedule A of title commitments.

My first question to prospective clients: What are your employees trained to do when confronted with fraudulent situations? 

It’s something of a loaded question because it implies that employees are equipped with formal skills to recognize the warning signs of mortgage fraud.  It also implies that management is visibly committed to battling mortgage fraud.  It’s sometimes difficult for title company management to make proper decisions when asked to do something inappropriate by a significant source of business.  I’m basically opposed to reverse competition and the AfBA because both business models severely limit the number of business sources that a title company is likely to have. 

Best practices to employ when dealing with the possibility of mortgage fraud:

Separate the players from the facts.  Mortgage fraudsters are often very charming and persuasive.  They are often important sources of business for title companies.  Cache phrase are often used like: “everybody gets paid”, or “the buyer and seller get what they want”, or “tell me what’s wrong with this deal.”  In effect, the criminal nature of a scheme could easily be blurred by the noise level that’s intentionally created by the fraudster.  Don’t think for a minute that you’re immune to the charismatic qualities of many white collar criminals.  Trust me, you’re not!  These people are natural predators who know how to find human weaknesses and leverage circumstances.  The weak market and plight of many sellers are exactly the types of conditions that incubate fraudulent activity.

Distance yourself from the situation to fairly assess the facts.  When red flags are present you need an opportunity to think clearly.  Don’t rush to judgment at this point.

Compare the circumstances in question to the normal flow of a transaction.  Don’t be afraid to list your concerns about a transaction on a piece of paper.  Create two distinct columns, one that shows things the way they should be and another that shows things the way that they appear to be.  Richard Nixon did this often when making difficult decisions during his presidency.  Visual tools of this type are very useful in revealing the finer points of fraud.  Remember one simple premise: You can’t do indirectly that which you can’t do directly.

Discuss the situation with someone else.  Every title professional needs a trusted someone to rely on as a source of second opinions.  The person can be a spouse, colleague, or friend.  It’s not enough to write an email, the discussion has to take place in person or on the phone.   You might find that answers present themselves while exploring your fears in an environment where honesty is the only expectation.  It’s possible that the other person would simply listen without adding much to the dialog.  Hopefully, you feel comfortable approaching your underwriter when dealing with difficult business situations.

Take a stand.  This seemingly simple statement has far reaching implications.  A title provider’s license is essentially a social contract and a promise to protect the interests of others.  I usually recommend a verbal confrontation with fraudsters with a follow up letter to the FBI. 

My points:

• Mortgage fraud convictions are much harsher today than in the past.
• Mortgage fraud can’t exist without title company involvement.
• Title industry models lack competitive attributes to deter mortgage fraud.
• Corporate culture presents a practical dynamic for mortgage fraud prevention.
• Best practices that identify and prevent mortgage fraud can be implemented through training.

From an article in USA Today:

In the past year, the bureau created 34 mortgage fraud task forces and working groups with investigators from departments including Housing and Urban Development, Treasury and Veterans Affairs.

They investigate suspicious activity such as deceptive pricing and falsified documentation by mortgage brokers, lenders, appraisers, real estate firms and others …

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.”

On Sunday, Sept. 02, 2007, NBC Dateline featured a segment about the criminal escapades of Matthew Cox.  Click here to read more from the NBC web-site.  Yes, Cox is a legitimate bad guy.  We’re all better off because of the dedicated efforts of federal authorities that put him behind bars.  Most importantly, Cox is off the streets and unable to victimize the innocent and the vulnerable in the future. 

I especially applaud the good work of correspondent, Keith Morrison, and the staff that worked on the frightening and eye-opening piece.  The public needs to know about Cox and others like him.  We need to fear the criminality inherent in his type.  But, let’s be completely honest, I doubt that a single viewer is better able to recognize the behavior commonly associated with mortgage fraud after watching the report.  Don’t blame NBC, or Mr. Morrison, as the reporting was stellar.  Mortgage fraud is a complicated matter that’s generally misunderstood.  It thrives in the culture of ignorance and greed incubated by the real estate industry.  And, it’s not going away any time soon.

I typically flash a photo of Matthew Cox during presentations and talk briefly about his criminal career.  I do, however, caution audiences not to confuse Cox with the average mortgage fraudster.  His is not the true face of mortgage fraud.  His is the face of a dangerous street thug who couldn’t earn an honest buck if his life depended on it.  If you want to see the face of mortgage fraud, look at your neighbor, at your colleague working in the adjacent cubicle, at the person sitting in front of you in church.  It’s a startling statement, yet sadly true.

In a letter to Mr. Morrison, following the airing of the segment, I wrote: 

Some real estate pundits blame a negligible number of prolific fraudsters for the startling increase in reported fraud statistics. Others blame consumers.  Undeniably, the innocent residents of many localities are preyed upon by notorious operators, like Cox, who take advantage of others in the course of their selfish pursuits.  Often, consumers are actively involved in perpetrating mortgage fraud at some level, but there’s much more to the story.

And … 

The responsibility for mortgage fraud rests with the real estate  industry and more specifically its self imposed culture of non-transparency.  The crux of the problem isn’t the criminally motivated behaviour of the notorious and egregious few; look to the collective mis-steps of the many when searching for answers. In the aggregate, we find the truth about an epidemic that ruins lives and destroys communities.

And … 

Any story about Matthew Cox is necessarily a story about mortgage fraud and the predatory behavior of a born felon. But, it doesn’t paint a complete picture.  Mortgage fraud is a societal blight inflicting suffering upon real people.  I urge you to revisit your original segment and do a follow up based on the information I’ve provided. In particular, I urge you to stress to the public that real estate crimes are always accompanied by warning signs. Through awareness, the public can identity and pro-actively deter the assaults made by fraudsters.

Click here to view the entire letter on Mortgage Fraud Forum. 

I learned from the Dateline segment that Cox has a thorough understanding of titles and the recordation process.  He was able to feign the ownership of homes by constructing, executing, and apparently notarizing fraudulent title deeds.  He also recorded fraudulent releases to give the appearance that certain properties were free and clear.

Off topic note:  I have a practice of referencing any releases recorded in the past several years, or so, on my title abstracts when there’s no refinance mortgage recorded.  It’s something that I specifically look for that requires a judgment call based on experience.   Copies of any questionable reconveyance documents are included for examiners to review.   I wonder if offshore abstractors know enough to identify possible signs of fraud in a chain of title?  It’s an important question to ask!

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? 

Ben S. Bernanke, Chairman of the Federal Reserve, recently voiced his opinions and concerns regarding subprime mortgage markets.  Bernanke was quick to acknowledge the contributions made by subprime products in initiating home ownership and strengthening communities.  He also spoke candidly about the pervasive abuses that we hear so much about.

The Chairman’s published speech was, for me, a glimpse into the mindset of someone who understands mortgage lending and a chance to preview recent subprime statistics. 

Statistics included in speech:

• Outstanding first-lien subprime mortgages account for about 14% of all first-lien mortgages.
• Subprime mortgages accounted for more than 50% of foreclosures initiated in the 4th quarter of 2006.
• Near-prime loans account for 8% - 10% of outstanding first-lien mortgages.
• Roughly two-thirds of outstanding subprime first-lien mortgages have adjustable rate features.

• Require disclosures by lenders to assist consumers in making informed decisions.
• Establish lending guidelines that clearly prohibit abusive practices.
• Offer principle based guidance to lenders along with supervisory oversight.
• Establish and encourage best practices.
• Provide practical education to potential borrowers.

The critical role of effective disclosures was espoused as the primary tool against lending impropriety.  The rational: Informed consumers are in the best position to make decisions in their own best interest.

I have long advocated the preparation of written disclosures by title professionals, especially when closing a loan with a yield spread premium.  Written disclosure is not the practice of law unless a particular point of view is advocated.

I see nothing improper about warning consumers that mortgage fraud is punishable by jail time and other serious consequences. 

As an aside: Employment, income, and occupancy comprise the 3 most misrepresented categories in mortgage loan application.   Inflated appraisals are stunningly absent from the list.  It turns out that a lender is unlikely to spend money on a review appraisal to verify appraisal fraud when another form of misrepresentation is verified.  It makes sense not to incur additional losses, but it makes even more sense to identify fraudster appraisers.

An example of a best practice:  Paper your files with disclosures, prepared by you and signed by borrowers, to clearly explain anything unusual about a real estate transaction or loan product. 

Question: What should you disclose in writing? 

Answer: Anything and everything the bothers you or makes you think twice.   Don’t rely solely on standard lender disclosures.   When litigation rears it’s ugly head, you’ll be grateful that these forms exist.

To read the entirety of Bernanke’s speech: Click here.  I highly recommend it.

Related Post: Mortgage Fraud: Fact versus Fiction on Active Rain