Editor’s note: In this five-part series, Inman News examines the rising tide of mortgage fraud in the U.S., giving an overview of the problem, describing how it works, explaining obstacles to fighting it and describing technologies that combat it and legislation that aims to defeat it.

ICNY 2020

Editor’s note: In this five-part series, Inman News examines the rising tide of mortgage fraud in the U.S., giving an overview of the problem, describing how it works, explaining obstacles to fighting it and describing technologies that combat it and legislation that aims to defeat it. To read the entire five-part report, “Inside real estate’s fraud crisis,” with two bonus stories, subscribe to Inman News.

In 1996, mortgage fraud turned Alicia Sheppard and Ann Fulmer’s once-pleasant suburban Atlanta neighborhoods into a nightmare, devastated by deteriorated and damaged homes, squatters, drug dealing, foreclosures and worse.

Indeed, mortgage fraud in Georgia occupied the number one spot for mortgage fraud in the nation from 2002 to 2004, according to the Mortgage Asset Research Institute, an organization that tracks the white-collar crime.

The stay-at-home moms vowed to fight, founding a grassroots organization, the Georgia Real Estate Fraud Prevention Awareness Coalition, or GREFPAC, to push for legislation.

Nine years later, in 2005, Georgia enacted the Residential Mortgage Fraud Act, a pioneering law combating mortgage fraud, thanks in great part to Taylor and Fulmer’s efforts and the grassroots organization they co-founded.

The Act, aimed at curbing mortgage fraud, was signed into law May 5, 2005, by Georgia Gov. Sonny Perdue. It defines mortgage fraud, provides for penalties and authorizes district attorneys and the Attorney General to prosecute residential mortgage fraud.

Other states, including Ohio, followed suit, and this February, Sen. Barack Obama, D-Ill., proposed a sweeping set of federal reforms to combat mortgage fraud that would ratchet up enforcement and create a national database of brokers who have been disciplined.

Residential real estate loan fraud is a national epidemic, costing communities nationwide an estimated $1 billion in 2005, compared to $429 million in 2004, according to the Federal Bureau of Investigation. In this five-part series, Inman News examines the rising tide of mortgage fraud in the U.S. This part focuses on mortgage fraud-fighting legislation and the outlook for the future.

If numbers from the Mortgage Asset Research Institute are any indication, Georgia’s new law appears to be succeeding.

Mortgage fraud in Georgia “dropped significantly” in 2005, according to James Croft, MARI’s founder. Though the state is still in the top five highest states for fraud, it is no longer in the number one position, based on preliminary information that will be released in coming weeks, Croft said. MARI is endorsed by the Mortgage Bankers Association industry trade group.

“Now we actually have a law that addresses mortgage fraud, which has opened up a number of doors,” said Becky White, GREFPAC’s current president. “We are seeing closing table sting operations conducted by local police. Two were reported just last week.”

The advocacy group’s president was referring to three arrests made in one week at two separate real estate closings in Fulton County, Ga.

“Gwinett County and DeKalb County have been active in prosecutions,” White said. The first four people to be prosecuted under Georgia’s act were indicted in early December by a Gwinnett County, Ga., grand jury.

Mortgage banking attorney Rachel Dollar, who represents lenders in mortgage-fraud cases, said the Georgia law is succeeding. “There have been several arrests and charges” under Georgia’s new law, Dollar said. “It’s doing well.”

Georgia’s success inspired other states to move on the issue. One of them is Ohio, which has the grim distinction of having the highest foreclosure rate in the nation – nearly 3.2 percent at the end of the third quarter of 2005, according to the Mortgage Bankers Association. The national average was just under 1 percent, the MBA said.

Linking predatory lending scams with resultant foreclosures, lawmakers are seeking to protect consumers with Senate Bill 185, the Ohio Homebuyer’s Protection Act, currently underway in the Ohio legislature. Currently, the jury is out on the Ohio bill, which has been delayed as the state House and Senate work out differences.

Altogether different from the Ohio and Georgia bills is that of U.S. Sen. Barack Obama, D-Ill. Obama’s bill would increase funding for federal law enforcement programs, create new criminal penalties for mortgage professionals found guilty of fraud and require industry insiders to report suspicious activity.

Obama’s bill would also authorize $10 million more for anti-mortgage-fraud programs in the Departments of Justice and Housing and Urban Development. It would require the FBI to update bankers on fraudulent activity in a formal, systematic way, establishing a national database of mortgage professionals who have been sanctioned by state or federal regulatory agencies.

Mortgage industry professionals praise the new Georgia law. Notwithstanding, their forecasts for 2006 aren’t optimistic.

As times become tougher in the industry, the incentives to commit fraud increase, said William Matthews, a senior vice president at the Conference of State Bank Supervisors.

“You have a system that is commission-based and very focused on production. People who are veracity-challenged sometimes take advantage of the situation in order to receive a commission,” Matthews said.

Jeffrey Taylor, CEO of fraud prevention software company Digital Risk, went one step further. “I think 2006 is going to see more activity than we’ve ever seen before,” the CEO said.

Attorney Dollar said stiffer penalties, increased enforcement and enhanced awareness will contribute to a decrease in successful fraud schemes of the type currently encountered.

But, Dollar said, “the creativity of the con men, scam artists and fraudsters promises to have us all dancing the mortgage fraud tango for years to come.”

***

Send tips or a Letter to the Editor to janis@inman.com or call (510) 658-9252, ext. 140.

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