2007 December 21 Friday
Mortgage Fraud Helped Create Real Estate Bubble

The Wall Street Journal fingers fraud as a core cause of the mortgage meltdown.

Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.

In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.

Organized criminal rings used fake documents to make homes sell for very high prices and people involved in the transactions pocketed large sums. Buyers pretended to have very high incomes. Payouts when mortgages closed that were supposedly to construction companies instead went to shell companies.

Lax standards by banks helped fuel the growth of mortgage fraud.

Embroiled in an all-out war for market share, issuers reduced barriers to credit, for example, by offering so-called "stated-income" loans, which require no proof of income. "The stated-income loan deserves the nickname used by many in the industry, the 'liar's loan,' " says the Mortgage Asset Research Institute, which works with lenders to prevent fraud. A recent review of a sampling of about 100 stated-income loans revealed that almost 60% of the stated amounts were exaggerated by more than 50%, MARI says.

So if you get laid off due to the huge credit crisis remember that the sins of men made the massive market failure possible.

Fraud by Hispanics in Illinois.

A Rockford Realtor was sentenced to 20 months in prison this afternoon for his role in falsifying documents to help Hispanic families qualify for loans backed by the Federal Housing Authority.

Cesar Arenas was the fourth person sentenced in the five-person mortgage-fraud ring that operated from 2001 through 2003 and the second to receive prison time. Rhonda Torossian, the loan officer in the scheme, was sentenced Monday to 20 months in federal prison.

Arenas helped Latin Americans (blood runs thicker than water) get mortgages under fraudulent pretenses.

Fraud in Miami.

Federal officials in Miami announced charges Monday against 31 people accused of participating in a scheme to illegally obtain mortgage loans worth roughly $14 million.

Prosecutors said the group's leaders secured inflated loans for the purchase of at least 28 properties and then pocketed the difference between the loan and the actual purchase price.

Several of the properties involved in the charges are in Broward County, according to the 20-page indictment.

Fraud in Paterson New Jersey.

An unlicensed Branchville appraiser pleaded guilty Tuesday in U.S. District Court in Newark to one count of conspiracy to commit wire fraud for his part in an elaborate real estate scheme in Paterson.

William Ottaviano, 41, who went by the name "Billy the Kid," was one of more than 10 co-conspirators in a wide-ranging housing scam overseen by Mahwah real estate agent Michael Eliasof. The team Eliasof assembled falsified mortgage applications for unqualified buyers, who were sold dozens of overpriced houses between 2002 and 2005.

Anthony Accetta, a former federal prosecutor, says the biggest fraud in the mortgage business was committed by the big investment banks. Without sufficient virtue in its people America can quickly become a Third World nation.

Share |      By Randall Parker at 2007 December 21 09:46 PM  Economics Housing

tommy said at December 22, 2007 1:58 AM:

Dennis Mangan has noticed something interesting:

Looking around on the web, I was unable to make an estimate as to how many illegal immigrants were involved in subprime mortgages, but Hispanics make up about 15% of the population, and around 80% of illegal immigrants. Since 40% of subprime mortgages went to Hispanics, they are nearly 3 times more likely than others to have one. (This article says "According to the NAACP, African Americans hold more than half of the sub-prime mortgage loans at risk of foreclosure. And blacks and Latinos are far more likely to be issued high-cost home purchase loans than white buyers." If the figures in the two articles tally, whites hold only 10% of subprime loans.)

It certainly sounds like this disaster was fueled, in part, by illegal immigration.

John S Bolton said at December 22, 2007 3:40 AM:

Illegals use fake ID's, often multiple concurrent ones, then it turned out that they could get mortgages.
This may be one of the larger components of the more extreme fraud cases with these mortgages, that is, not just liar's loans.

Luke Lea said at December 22, 2007 9:30 PM:

I wonder how much of the total fraud was committed in Texas? Last time, during the S&L fiasco, over half the total fraud was in that one state alone (a lot of the fraudsters later became George Bush supporters, too, I bet, with the tacit understanding that these old crimes wouldn't be investigated now, just as they weren't investigated during the first Bush administration, when most of them were being committed).

I am a little suspicious of the WSJ article. It makes it sound as though it were a bunch of amateurs ripping off Wall Street. Doesn't seem likely to me.

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