The millions of Americans facing foreclosure on their homes aren't the only victims of the housing market bubble. There are also many consumers who have been duped into participating in schemes to buy properties and sell them at inflated values.
Mortgage finance company
has seen a big increase in mortgage fraud over the last two years, particularly in the Midwest.
"An alarming number of Fannie Mae's recent investigations have found that otherwise honest consumers and real estate professionals are fooled into conspiring to commit mortgage fraud." William Brewster, the housing agency's director of anti-fraud initiatives, said in prepared remarks delivered at a
hearing on subprime lending last week.
Fannie Mae doesn't lend money; it buys mortgages from lenders and packages them into securities before reselling them to investors. The company guarantees these mortgages, so if homeowners default, it's on the hook for any missed principal and interest payments.
Brewster said these schemes often involve phony documentation of a consumer's income and credit history or stolen identities. Many also involve misrepresenting the value of a property being used to secure a mortgage.
"Perpetrators are highly imaginative, and they are often involved in other organized criminal activity," he said.
Here's how one scam that Fannie is currently investigating works: An LLC set up a bogus Web site using religious language that promised to repair borrowers' credit and advise buyers about homeownership. In reality, the LLC specialized in buying foreclosed properties and flipping them to homeowners at inflated prices using falsified appraisal documents. The loans are then sold on the secondary market to bigger lenders, who then resell them to Fannie Mae.
Brewster said that in this case, the consumers appeared to have intentionally exaggerated their assets and down payments in order to qualify for the mortgage loans. But it's not clear they were aware how serious their exaggerations were.
In another recent case, consumers were clearly in the dark about their role in a scam. They were induced to rent their credit to what they were told was an investment club. They attended a meeting at a local hotel, provided their Social Security numbers and signed blank documents. In return, they received checks for as much as $5,000.
A few months later, two of the consumers were rejected for car loans because their credit reports showed significant mortgage delinquencies. As it turned out, unbeknownst to them, they were used as straw buyers to purchase multiple properties in another state -- over 1,000 miles away. The investment club was actually a property-flip scheme used to unload over 100 properties at excessive prices.
Brewster said the Southwest and Mideast each accounted for 32% of all cases of mortgage fraud uncovered by Fannie Mae in 2005 and 2006.
In 2006 alone, the company undertook 25,000 underwriting reviews, which led to 98 case investigations of over 7,500 loans.
Brewster didn't provide comparable statistics for earlier periods.
Fannie Mae espouses a strategy of combining consumer and lender education, enforcement and information-sharing to combat both mortgage fraud and predatory lending.
"Real estate agents, mortgage brokers, lenders, appraisers and title agents must become better educated about common mortgage fraud schemes, and not inadvertently conspire with the perpetrators of those schemes," Brewster said.
The Fed is seeking guidance on whether it should restrict or prohibit specific subprime lending practices, such as prepayment penalties, the lack of escrow for insurance and taxes, low-documentation lending and failure to give adequate consideration to a borrower's ability to pay off a loan. But Brewster said in his prepared remarks that in these kinds of schemes it's not matter what the product or the pricing is.
"Perpetrators often go for the most efficient pricing and easily fabricate whatever documents are needed," he said. "Yet the consumers caught up in such schemes are often the most aggrieved victims of the real estate finance system."