Mortgage fraud remains on the rise nationwide. According to government statistics, the number of Suspicious Activity Reports involving mortgage fraud has grown by more than 20,000 in the past five years.
Massachusetts can consider itself lucky compared to most other states when it comes to mortgage fraud, but state regulators say more work is needed to ensure that doesn’t change.
The Massachusetts Division of Banks and regulators from 28 other states are working to create a database that would include all current lending licenses and enforcement actions. The plan is to eventually create a national registry of mortgage companies and licensed mortgage brokers. It also will be a way for regulators to quickly know when action has been taken against an individual or company, making it harder for people who commit mortgage fraud to move into another state and continue working in the industry.
The Conference of State Bank Supervisors last Thursday announced it has entered into an agreement with the National Association of Securities Dealers to develop the database and licensing system for states.
“I certainly think it’s going to be another tool in [fighting] mortgage fraud,” said David Cotney, senior deputy commissioner of the Massachusetts Division of Banks.
Mortgage fraud is on the rise and industry watchers fear the problem may continue to grow as the lending market shrinks and pressure on profits mounts. Several area lenders said the DOB’s plan through CSBS is a proactive approach to combating the problem. The database is expected to go live in January 2008. It will be rolled out in phases, Cotney said. After more than a year of planning, the database now is just starting to be built. In the meantime, Cotney said he is hoping more states will join the initiative.
“This is not a state-by-state problem. This is a national problem. We need a national solution,” said Jim Jones, founder and president of First Wellesley Consulting Group, a management consulting firm specializing in the financial services and real estate finance industries. “We need to make sure the bad guys are not moving state to state. Basically, you shine the light on them. Maybe they get away with it once, but you don’t let them get away with it twice. I do believe the state regulators are taking the right action.”
The system also will streamline the process for license applications and renewals, allowing companies to apply online and in more than one state at the same time. Massachusetts is one of 44 states manually handling the process. Currently, several states have different forms and requirements, but those will be rolled into what essentially be a single standard electronic application, said Cotney.
Although the changes are still a way off, there are a few other national database services available to mortgage companies that can help steer them away from doing business with other industry players that have a fraudulent past or alert them to risky deals.
Jones, who follows national and local mortgage trends, said although Massachusetts is not among the states most troubled by mortgage fraud, people in the Bay State should not relax since the trend shows that perpetrators tend to move from state to state. As some states start to impose higher penalties for mortgage fraud, including lengthy jail sentences, fraud perpetrators could shift activities to the Bay State, he said.
“I think the commonwealth is vulnerable,” said Jones, who added he believes creating databases and tracking the problem will limit the extent of mortgage fraud.
The industry needs to be aware that mortgage fraud comes in several different forms, he warns. Jones said it’s important to keep an eye on all the players involved in a mortgage transaction who have an opportunity to commit fraud, including appraisers, attorneys and mortgage brokers. But even then, professional credentials and reputations can be misappropriated.
“What some of these folks are doing is hijacking the identity of people in the industry,” said Jones.
That’s what the Reston, Va.-based Mortgage Asset Research Institute has noticed: New forms of fraud continue to evolve and create unexpected problems for consumers and regulators alike. Chief among them is identity theft.
Merle Sharick, manager of mortgage and real estate business development for MARI’s parent company ChoicePoint, said he has noticed in his research that identity theft of industry professionals is increasing. MARI’s information can help verify identities. MARI currently has 650 mortgage industry subscribers using the company’s data to check up on companies or individuals before entering into business relationships with them. MARI has been unofficially dubbed the “Better Business Bureau of the mortgage business” by its users, he said.
“People need to know what’s going on in that market, especially as the market constricts,” he said.
However, when business is good, inadequate training and supervision and knowing people might be too busy to notice something is amiss also can produce a few bad apples, he added.
Detection Tools
MARI oversees a database of fraudulent activity in the mortgage industry stretching back 15 years. Sharick said more than 70 percent of mortgages are now originated by a third party rather than the actual lender. And fewer lenders are keeping loans in their portfolios, choosing to package and sell them on the secondary market. All of that, Sharick said, adds to the confusion and makes tracking fraud more difficult.
“There are more opportunities for something to happen because there are more people involved,” he said.
MARI recently released its eighth periodic Mortgage Fraud Case Report for the Mortgage Bankers Association. The report shows an increase in fraud and breaks down its findings by types of fraud and highly affected areas, which include Florida, Utah, Georgia, Illinois and California. According to MARI, Massachusetts currently is far down the list in terms of the number of mortgage fraud incidents, ranking 40th among the 50 states.
According to the report, however, fraud increased dramatically nationwide in 2005, and the trend seems to be continuing in 2006. Suspicious Activity Reports showing potential mortgage fraud also continue to rise. In 2005, 25,931 mortgage-related SARs were filed with the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department. Just five years ago there were 3,515 reported.
Sharick said that not all cases are reported, and only federally insured institutions are required to submit SARs, so the numbers do not reflect the true extent of the problem.
The problem, industry watchers say, is unquestionably growing worse.
“I don’t think there’s any doubt about it,” said Sharick.
The Federal Bureau of Investigation in Washington reported 721 pending mortgage fraud cases at the end of 2005, up from 534 the year before. There were also 1,020 pending mortgage fraud cases reported by the Department of Housing and Urban Development and the Office of the Inspector General, 920 more than the previous year.
Don Effertz, vice president of industry relations for Interthinx, a company that validates loan-application and third-party data electronically, said some lenders in states that see less mortgage fraud may feel a false sense of security. He said it is an important issue that everyone in the industry should take seriously and realize it could strike them at any time. He compares it to addicts admitting they have a problem. “Hi, I’m Don, and we have a potential for fraud problems,” is something he said lending professionals should be admitting industrywide.
Calabasas, Calif.-based Interthinx offers an intergraded system to help companies become aware of possible fraud. The way it works is similar to a credit scoring system, except that Interthinx is scoring the probable legitimacy of the loan application and the property. Each receives a score from 1 to 1,000. The transaction is deemed safe if it receives a score of 601 or higher, but if red flags pop up in the scoring process, the company is alerted. The service has been offered for about a year and there are already 1,100 clients using the system, said Effertz.
Since 80 percent of mortgage fraud is believed to be perpetrated by industry insiders, having a system employees can’t manipulate adds a further layer of protection, said Effertz.
“Sometimes the fraudster will make up an address, phone number or Social Security number, hoping nobody will check that, but that is exactly the kind of thing we check,” he said.
Sushil Tuli, president of Arlington-based Leader Mortgage Co. and Leader Bank, said he believes more professionals in the industry are starting to notice that fraud-detection options are becoming more widely available. He also said he believes more mortgage companies and banks will rely on those types of services and it could reach a point of being a necessity.
Although Leader has not had a problem with mortgage fraud, Tuli said he is aware that his institution is not exempt from the epidemic. He said Leader tries to arm its staff with ways to detect fraud.
“Awareness of mortgage fraud is needed,” he said.
Eric Nelson, president of Milford-based United Funding Corp., said educating and training staff is an important element in preventing fraud. He said his company will do occasional self-audits to make sure everything is in line. Although he said he doesn’t believe Massachusetts will suddenly be hit with a flurry of fraud cases and move up the list, he warns that a slowing market could generate more fraudulent activities overall in the industry.
“Let’s face it, a slowing market means less loan volume. Desperate times sometimes lead to desperate measures,” he said. “I think if people are trying to make a quick buck, they will do almost anything to get a loan.”
Nelson said people committed to long-term careers in the industry are usually able to think ahead and steer away from the temptation to cut corners during a downturn in the industry. He said the whole concept of mortgage fraud is troubling and it is important for companies and regulators to take a proactive approach to the growing problem.
“I don’t care how slow the market is; you still have to do the right thing,” he said.
