Mortgage fraud is “pervasive and growing” in the United States, the FBI has said, and it has a devastating impact on homeowners. But real estate loan trickery can be devastating to businesses as well, as one affected loan broker can attest.
“My company went out of business because of an employee’s mortgage fraud,” said Michael Richardson, former owner of Denver, Colo.-based Primero Home Loans. He said an employee of his was making loans based on fraudulent documents without Richardson’s knowledge. As a result, the firm lost its approval to do FHA loans and went out of business.
“I had no idea what was happening at the time,” he said of the employee’s activities.
Mortgage fraud is on the upswing, with the number of suspicious activity reports to the Federal Bureau of Investigation in 2004 almost triple those in 2003, according to a report the FBI released in May.
According to the Federal Financial Institutions Council, up to 10 percent of all mortgage loan applications in the $3 trillion annual U.S. residential real estate market involve some form of material misrepresentation.
Richardson says the problem not only ruins homeowners’ credit and wrecks their lives; it also destroys businesses that are fundamentally honest but are used by dishonest employees to commit fraud.
Richardson said he discovered irregularities in an employee’s work for his mortgage brokerage in September 2004. At first, he worked with the employee, but more and more problems surfaced. Finally, he fired the employee and contacted the Department of Housing and Urban Development.
Instead of the help he expected in straightening out the matter, the department in its investigation didn’t find any mitigating factors and terminated Richardson’s approval to do FHA loans, he said – a devastating blow to the business, which specialized in first-time home buyers using FHA loan products.
The termination, plus the bad publicity surrounding the fraud, ultimately put him out of business, Richardson said.
Though he currently works as a consultant to Edgewater, Colo.-based Metro America Mortgage, Richardson’s main focus these days is fighting mortgage fraud. He has established a Web site with information for brokers and lenders, PreventMortgageFraud.com, does public speaking on the matter and has written a book, “An American Epidemic: Mortgage Fraud a Serious Business.”
Richardson said he did everything he could to remedy the problem after he discovered that an employee was engaging in mortgage fraud. “Individuals commit loan fraud, not companies. There might be a few companies that are formed for the purpose of committing fraud, but by and large the companies are honest,” Richardson said.
Richardson discovered his employee’s misdoings in a quality control audit, he said. According to Richardson, he did everything possible to clear up the problem.
In 2004, Richardson hired Gary Lacefield, a former HUD investigator who worked for HUD as the Supervisor of Investigations (Southwest Region) for eight years and who now runs a private-sector audit firm. Lacefield’s firm went over a number of the more than 100 files created by Richardson’s allegedly unscrupulous employee.
“He had been using some other quality control service. Had he been using a good service, they would have uncovered his problem much more quickly than they did,” said Lacefield, who is president of Risk Mitigation Group, a quality control firm.
Lacefield said Richardson’s quality control service should have independently verified statements of income and employment, as well as credit reports, but did not do so. This meant it took longer to identify the problem, he said.
According to Richardson, the problem was caused by an employee at Richardson’s firm who was in cahoots with a kingpin outside the firm. The kingpin was a marketer who advertised that he could get anyone a loan. When applicants came to him, the kingpin helped them create false pay stubs and other fraudulent documents to obtain loans, Richardson said.
Then, Richardson’s employee knowingly accepted the fraudulent documents and obtained loans for people who couldn’t really afford the payments, Richardson said.
When Richardson discovered the problem, he worked with the employee at first, and then fired her, he said. He also notified the investor he was selling loans to. He then notified HUD, which did an investigation, he said.
HUD did not return calls asking for comment.
“Once they’ve suspended, then you have to reapply and the reapplication process could take as long as HUD wants it to take. I’ve seen it take as long as two years,” Lacefield said.
Losing HUD approval was a huge blow for the business, Richardson said. He estimates that he spent $200,000 trying to straighten out the problem. This includes $50,000 in attorneys’ fees and $350 per file for Lacefield’s firm to audit a number of the approximately 100 affected files.
But what really did in the three-year-old Primero Home Loans was the bad publicity, said Richardson, a licensed real estate agent who has been in the business 20 years and served on Fannie Mae’s Colorado Advisory Board years ago, according to Tony Hernandez, director of the mortgage giant’s Colorado Business Center.
“When rumors start in the industry, this is the part that hurt me the worst. It’s not the company that committed the fraud, it was the individual. But they (other industry professionals) don’t want to do business with you because they think you are committing fraud,” said Richardson.
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