How Mortgage Fraud Functions

Monday, Sept. 24, 2007 | To a frustrated home seller in the current real estate market, it sounds like an offer from an alternate, utopian universe: A buyer offers to pay as much as you’re asking — plus 10 to 30 percent — and you just kick the difference back to the buyer in cash after the deal closes. You’ll get out of the house without knocking tens of thousands of dollars off of your asking price to compete with the other 23,000-some homes on the market in the county.

But the offer fits the profile of the most prevalent kind of mortgage fraud against lending institutions in San Diego County, experts say. Typically called “cash back at closing,” an example of the scheme looks like this: A house has been listed on the market for several months at $500,000. Then, without fanfare, the listing agent raises the price to $625,000, and hires an appraiser to say the house is worth the new, higher amount. Based on that appraisal, a lender approves a loan for $620,000.

Soon, the buyer purchases the house for $620,000, using a mortgage for 100 percent of that amount. The sellers get their full price, the buyer gets close to $100,000 cash, and the agents for the buyer and seller garner a higher commission than they would have on the original list price.

“That’s where it gets tempting and awkward for the seller,” said San Diego mortgage fraud expert Todd Lackner. “They’re getting their full price; it’s the seller’s dilemma.”

But it’s a scam that can defraud the lender, artificially inflate values in entire neighborhoods and leave an economy reeling from the effects of foreclosure.

The FBI says suspicious activity reports for mortgage fraud increased more than six-fold between 2002 and 2006 nationwide, as skyrocketing housing values in many cities like San Diego attracted investors seeking quick profits.

But so far, federal law enforcement appears to have been silent locally on the phenomenon. Cases have come forward in Riverside and Orange counties, but in San Diego, no charges have been brought on cash-back cases like these.

Rachel Dollar is an attorney based in Santa Rosa, Calif., who represents lending institutions in mortgage fraud cases. Her blog tracing indictments and sentences in mortgage has landed her national fame as a mortgage fraud expert. San Diego schemes have yet to show up much in criminal charges, she said, and before prices started declining, lenders could recoup most of their losses by auctioning off the homes in question, often for a profit.

“California is always in the top 10 for mortgage fraud, but I’m not hearing anything in particular in San Diego yet,” she said. “Property prices were escalating and hiding a lot of it for so long, but that’s turning around now.”

But it’s the fallout from the cash-back deals that’s worrisome locally. In most of these situations, the buyer leaves after making maybe three mortgage payments, sending the home into foreclosure and keeping the cash. They then allow the home to lapse into foreclosure, the cash gained from the kick-back scheme pales in comparison to the ruined credit. In the meantime, the neighborhood value has been artificially inflated, raising property taxes. Neighbors who were once happy to see a comparable house selling for so much find themselves now next to an abandoned eyesore that will likely be auctioned at a loss. And lenders are faced with huge losses.

All of the scheme’s steps, save the deposit of the cash into the buyer’s bank account, are usually traceable in the Multiple Listing Service, the buying and selling database used by real estate professionals. That allows people like Lackner, a longtime local real estate appraiser and self-taught mortgage fraud expert, a window into what he says are hundreds of similar cases that have exploded in this county in the last couple of years.

Lackner’s Mission Valley office holds boxes and boxes of printouts on deals he says match the cash-back scheme, most since January 2006. He said it kills him how little it takes to buy off one of his fellow appraisers on these deals.

“The key is on all of these, no matter what, there’s a fraudulently inflated appraisal,” he said. “And they’re not usually getting more than $350 an appraisal, the normal fee. They’re just getting work — and that’s how slow it is right now.”

A few years ago, lenders would often OK a small amount of cash back, typically no more than 3 percent of the sale price, to help pay closing costs or to complete repairs, Lackner said. On a $500,000 house, that’d be about $15,000. But cash-back schemes have grown and twisted. Often, buyers seeking cash back were buying several properties at once, financing them all with 100 percent loans from different lenders, claiming each property is “owner-occupied” in order to get the loan with no down payment.

Many of the lenders that allowed the price to be adjusted have gone out of business. In fact, Lackner has observed that the implosion in recent months of dozens of mortgage lenders that specialized in the zero-down, no income verification loans used widely in these cases has begun to dry up the occurrences of deals that look like fraud.

But so far, a crackdown on such schemes in San Diego has remained elusive, he said.

“There’s just no enforcement in California,” Lackner said. “That’s unfortunate, but what can you do?”

Darrell Foxworth, a spokesman for the local FBI financial crimes unit said he couldn’t comment on any ongoing local investigations, but forwarded a copy of some national data.

The FBI considers mortgage fraud one of the fastest growing financial crimes in the country, labeling it “pervasive” in a May report. But the structure of the mortgage industry, where initial loans were cut into pieces for sale on the secondary market, means the problem could be much bigger than the complaints the agency is receiving, according to the report. That structure allowed mortgage lenders to isolate themselves from the devastating effects of loans made to borrowers who couldn’t pay them back.

Eighty percent of the mortgage fraud nationwide is attributable to collusion between real estate industry insiders, and borrowers who misrepresent their own incomes or identities constitute the other 20 percent, according to the report.

Dollar said there’s some justification for the law-enforcement response for mortgage fraud — officers have a lot of other issues to deal with.

“The problem with law enforcement is that they dabble in things like murder and drug crimes,” she said. “Say you live in a neighborhood, where someone got shot. Which one would you rather the police were out there dealing with?

“They’re concentrating their efforts and there’s often little left over for white collar crimes,” she said. “[The cases] are document intensive, with subpoenas and boxes and boxes of bank documents. But more and more, they’re definitely expending considerable resources on mortgage fraud.”

Tom Pool with the state Department of Real Estate said the number of complaints against licensed agents or brokers for particular transactions — the category under which mortgage fraud complaints would fall — is growing. And, he said, wherever the DRE investigates and suspends or revokes licenses, law enforcement officers are often close behind.

“The feds have been on the heels of a number of accusations that we’ve filed,” Pool said, referring to some cases in Northern California and Bakersfield.

For Lackner, the calls come from everyone ranging from real estate professionals to neighbors suspicious of the deal down the street. He writes software to search the MLS and the tax rolls for suspicious activities. He shows files to governments and public agencies. And he hopes that one day, the schemes will be busted open and the market will heal.

“It’s my goal to get every one of these people busted,” he said. “I just don’t know how they sleep at night.”

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