Last year, a mortgage broker in the Tacoma, Wash., area filed a false second lien against a property as it was headed to closing. The man planned to take advantage of an unsuspecting couple and quietly pocket $24,000 into his own account when the loan eventually funded.

Until recently, county prosecutors — already deluged with other major crimes — faced a difficult decision: Should they place other compelling cases on the back burner and go after a mortgage fraud case?

The Tacoma case was investigated and prosecuted, thanks to a special pool of funds earmarked for mortgage fraud. Other states, including California, also have adopted a Mortgage Lending Fraud Prosecution Account where a $1 or $2 surcharge is tacked on to every recorded Deed of Trust in the state. According to the Washington state attorney general’s office, this cash — about $1 million annually — allows authorities to more readily field complaints and scrutinize every step made by every player in the mortgage lending process.

Mortgage fraud investigations often involve recovery of files stored on computers and detailed analysis of voluminous loan documents and financial records. These processes can be quite costly and take several months to complete. Prosecutions are also rather lengthy because mortgage fraud schemes typically involve multiple layers of transactions and large volumes of data — all of which must be presented through numerous witnesses.

Chuck Cross, director of consumer services for the Washington State Department of Financial Institutions and a key player in the highly publicized cases against Ameriquest and Household International, said the fund made eight mortgage fraud convictions possible in 2005, with another 35 ready to go.

“The number of mortgage fraud cases that prosecutors simply could not get to was definitely on the rise,” Cross said. “And that was understandable — they’ve got murders, rapes and other serious injury cases that really limit their time and resources. As a result, county prosecutors have had to forego mortgage fraud cases in many instances.”

Washington state was not the only area where mortgage fraud — often deception, forgery, identity theft, illegal flipping — was on the rise. In 2004, the Federal Bureau of Investigation tracked 172 convictions or “pretrial diversions” involving mortgage fraud. The numbers were even greater in the first quarter of 2005, leading to its exhaustive “Financial Crimes Report to the Public.” The study identified the “Top 10 Hot Spots for Mortgage Fraud Incidents” as California, Nevada, Utah, Colorado, Missouri, Illinois, Michigan, South Carolina, Georgia and Florida.

Cross said the plan for the fund was bolstered through legislature by reputable members of the mortgage industry who were upset with the number of mortgage fraud schemes in the state. Not only were more consumers getting fleeced but the entire home-loan industry also was getting a collective black eye.

The Department of Financial Institutions can use the Mortgage Lending Fraud Prosecution Account to reimburse county prosecutors for a variety of costs related to the investigation and prosecution of mortgage fraud cases. Reimbursable items include training costs for investigators and prosecutors, and expenses related to investigation and litigation. County prosecutors may even seek recovery of salaries for members of their staff who were assigned to the prosecution of a particular case.

County prosecutors also have option of transferring jurisdiction of a mortgage fraud case to the Washington Attorney General’s Office for prosecution. The AG’s office now has a special team dedicated to the investigation and prosecution of mortgage fraud cases. (Washington law allows the AG’s office to have “concurrent jurisdiction” to investigate and prosecute cases when requested by the county prosecuting attorney.)

Loan officers who submit false information about a buyer’s qualifications (i.e. employment history, amount of income or source of down payment) in order to get a deal to go through may be guilty of theft by deception as well as other crimes, such as forgery, according to Rebecca Jacobsen of the AG’s office.

When consumers think of forgery, they often visualize the signing of someone else’s name on a check. However, it is forgery to create a false document, or materially alter a written document, with the intent to perpetrate a fraud. It is also forgery to offer or pass off as true a document known to be forged with the intent to carry out a fraud.

For example, documents that are regularly created or altered in mortgage fraud schemes include “gift” letters, which purport to explain the origin of down-payment funds, employment histories, income verifications and citizenship records. If a loan rep does not create or alter the documents but is aware that the documents are false, the loan rep still commits forgery if he/she forwards the false documents to a lender for use in making a financing decision.

That includes a $24,000 fake lien that would have gone directly into a loan officer’s pocket.

Tom Kelly’s new book “Real Estate for Boomers and Beyond: Exploring the Costs, Choices and Changes for Your Next Move” (Kaplan Publishing) is available in retail stores, on and in local libraries. Tom can be reached at

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