Acton Commentary

The New Mortgage Fraud: Kick ’Em When They’re Down


As the number of foreclosures rises across the country, many borrowers are willing to do almost anything to keep their homes, opening themselves up to the growing abuse of mortgage and real estate fraud. In the real estate market as in any other, moral failure has negative economic consequences.

Every time you see or hear an ad saying, “We guarantee we can save your home,” beware of a scam. There is no company, agency, or federal affiliate that can save every house from foreclosure. What lenders refer to as loss mitigation -- the process of finding ways to keep borrowers in their homes -- works on a case by case basis and requires an evaluation of all parts of a borrower’s loan and expenses. Yes, some properties can be saved, but there are no guarantees.

As more is learned about how the industry operated during its boom, we find mortgage fraud is nothing new. But it appears that some of the same people guilty of fraudulent mortgage practices in years past, along with some newcomers, have concocted new schemes to defraud homeowners. Today’s mortgage fraudster preys on the vulnerable, those who have run out of options and are desperate for help. They seek out people known to have fallen on hard times, pressuring them into making snap decisions about things they know little about. Unlike those schemes we saw during the peak of the housing market, which capitalized on the dream of owning a home, the fraud of today takes advantage of the fear of foreclosure. These practices bolster the stereotype of the predatory lender, except now the predators are the ones ostensibly offering assistance, tempting ignorant homeowners into what appears to be an easy solution to their tough problems. All this further erodes trust in the housing market which, in the long term, undermines the stability of lenders and homeowners alike.

Although fraud was common during the housing boom, the FBI’s 2008 Mortgage Fraud Report suggested a rise in activity after the bust: “There is a direct correlation,” it concluded, “between fraud and distressed real estate markets.” According to the study, there was a 36 percent increase from 2007 to 2008 of reported suspicious activity in the mortgage industry. This led to $1.4 billion of losses in 2008, and losses reported so far in 2009 exceeded the same period in 2008 by $208 million.

Nearly 12 percent of homeowners were at least one month behind or in foreclosure at the end of 2008, and that number has been growing steadily during 2009. These are the people targeted by those the FBI calls “mortgage fraud perpetrators.” Senior citizens are viewed as easy marks. The FBI report explains, “(perpetrators) recruit seniors through local churches, investment seminars, television, radio, billboard, and mailer advertisements, to commit fraud.”

The FBI outlines many different kinds of mortgage fraud, from taking advantage of distressed builders to fraudulent offers of credit repair. But the greatest problem in today’s markets is the “Foreclosure Rescue” scheme.

Once the culprits at work in these schemes have a borrower on the hook, they convince him to stop talking to his mortgage company or bank. The perpetrators then ask for an up front fee, usually between $1,000 and $3,000, and once it is paid, promise to handle the rest of the process. A legitimate mortgage lender may charge a fee when stopping the foreclosure process with a loan modification or a repayment plan, but it will not ask for this fee up front and will work to stay in contact with a borrower throughout the process.

Once the mortgage fraud perpetrators have received their fee, they tell the borrower to stop making mortgage payments, or worse, to make mortgage payments to the bogus organization directly. They may use part of the up front fee to file paperwork putting the borrower into bankruptcy, as this places a temporary hold on any foreclosure proceedings. Since the defrauders told the borrower to stop talking to lenders and anyone affiliated with the court system, the borrower has no idea this hold only lasts until the case is heard in court. When the borrower does not show up for the court date, foreclosure proceedings resume. Or, in most other cases, perpetrators falsely tell a borrower that the troubled mortgage can be renegotiated and monthly payments can be reduced with delinquent payments applied to the principle or negotiated away. They tell the borrower that the loan is being worked on, but nothing is ever done. In most cases, once the borrower realizes she or he has been a victim of mortgage fraud, the loan is so delinquent that there is little any legitimate lender can do.

More needs to be done by the mortgage industry to make homeowners aware of these schemes. The Administration of National Banks and the U.S. Treasury Department produced a list of “Consumer Tips for Avoiding Mortgage Modification and Foreclosure Rescue Scams” in April, but it is important for all legitimate lenders to make sure borrowers know what risks are out there.

Mortgage fraud is taking money out of a market working to rebuild itself, and these schemes, along with the intervention it will take to end them, will only slow recovery. They also further deteriorate trust in the housing market, where this quality is critical. We need to trust our builders to build safe homes, trust our realtors to price homes fairly, and trust our lenders to have in mind the best interests of the people who comprise their market. When this trust is damaged, it is more difficult to stem falling home values and housing recessions. Unethical mortgage operations, like all selfish and shortsighted economic activities, do not only harm the immediate victims; they hurt all of us.