Former U.S. Attorney Kendall Coffey said the new state law criminalizing mortgage fraud for the first time “is a forcible statement on the step-up that can be expected from state prosecutorial and investigative resources.”

“The magnitude of the problem is beyond the necessarily limited federal resources,” he said.

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While federal agencies typically focus on organized fraud rings and conspiracies, Coffey said so-called single-borrower fraud marked by inflated values and “understated liability to stretch up for a purchase that the borrower can’t justify are so numerous that you need a concerted effort with state and local authorities.”

Diverse combatants enlist to fight mortgage fraud

By Terry Sheridan

July 9, 2006 | DAILY BUSINESS REVIEW

Rampant mortgage fraud in South Florida has shined a spotlight on the crime like never before.

Partnerships of banking regulators, law enforcement agencies and industry groups are pooling their expertise and manpower.

The U.S. attorney’s office, FBI and state and local agencies have organized the South Florida Mortgage Fraud Working Group.

Miami-Dade police and county officials, the state Department of Financial Services and an industry group began preliminary talks last month about a public-private task force.

“It will take everyone working together,” said Glenn Theobald, chief legal counsel for the Miami-Dade police. “We don’t have enough folks to review every closing, but real estate agents and mortgage brokers know that when something smells like it isn’t right, it usually isn’t.”

With double-digit appreciation out of the picture, it’s not as easy to hide or support fraud, he said.

“We’re seeing a leveling off, and people are in 140 percent [mortgage] financing for an already 500 percent inflated price,” Theobald said.

The two anti-fraud groups want to head off an expected increase of fraud in the housing downturn, he said.

“People will be desperate,” Theobald said. “They might be tempted to listen to anyone’s ‘great idea.’ ”

Mortgage fraud was easy to hide in a sizzling real estate market when home prices escalated, sellers received multiple offers and lenders gave exotic loans to people who otherwise wouldn’t get keys to a house.

But the carnival has moved out of town.

Prices and sales are down, while foreclosures and loan defaults are up. Some sellers are anxious to get out, and an industry bloated from its feast finds itself on a starvation diet.

Some say fraud will be the only way to close some deals. And fraud will become even more widespread in a state that has consistently ranked high on the real estate crime charts for years.

“I’ve heard Realtors say they want to make deals where the buyer can get cash back [without telling the lender], and they’ve been in the business a long time and know it’s wrong,” said Sharon Dawes, area manager in Broward County for the state Department of Financial Services.

“If you haven’t sold a house all year, and someone says, ‘This is the only way it’ll work,’ you can see how fraud will happen,” she said.

Gov. Charlie Crist signed a new law last month making mortgage fraud a crime for the first time and defining violations as the misrepresentation, misstatement or omission of facts lenders use to make loans.

The Mortgage Asset Research Institute in Reston, Va., believes the scope of fraud in recently approved prime and subprime loans won’t be fully evident for several years.

The full impact is yet to be seen, said Richard Barkett, chief executive of the Realtor Association of Greater Fort Lauderdale.

“It has deep roots and a very long tail that we haven’t even seen,” he said at a recent Realtors meeting in Fort Lauderdale that included a seminar on mortgage fraud.

Fed up with the black eye, South Florida agencies and regulators have united for an unprecedented crackdown.

Led by federal prosecutors, the South Florida Mortgage Fraud Working Group’s goal is to get agencies at all levels working together, said group member Tim Delaney, assistant special agent in charge of the FBI’s white collar, civil rights and cybercrime programs in South Florida.

Members include the Miami-Dade state attorney’s office, the Office of Statewide Prosecution, and the Internal Revenue Service.

U.S. Attorney Alex Acosta wouldn’t discuss the working group or its members, saying he preferred to wait until indictments are ready to be announced.

“Mortgage fraud was a problem before and is even greater now,” he said. “We’re in discussion with all these agencies.”

A multi-agency approach is the only way to fight fraud, Dawes said.

The department has only six investigators for 35,000 licensed mortgage brokers in Broward County alone, she said.

The team approach will “give us more bang for our dollars and bring all the parties dealing with fraud to one table,” Dawes said. “That’s the answer.”

The approach worked with the federal Operation Whose House investigation, which produced charges against 11 defendants last November, Dawes said. Nine have pleaded guilty, and two are fugitives.

The indictment tallied $10 million in fraud on more than 30 loans with tactics including identity theft, straw buyers, fraudulent quitclaim deeds and false documents including loan applications, bank statements and employment and W-2 forms.

Others involved include the Florida Department of Law Enforcement, the state Department of Financial Regulation, Secret Service, the State Department’s Diplomatic Security Service and the Postal Inspection Service.

Former U.S. Attorney Kendall Coffey said the new state law criminalizing mortgage fraud for the first time “is a forcible statement on the step-up that can be expected from state prosecutorial and investigative resources.”

“The magnitude of the problem is beyond the necessarily limited federal resources,” he said.

Georgia became the first state to criminalize mortgage fraud in 2005. The move capped four years of public and private partnerships among regulators, industry groups and law enforcement to dethrone the state as the national leader in mortgage fraud in prime and subprime loans.

Georgia dropped to fourth place in prime loans and fifth in subprime loans last year, according to the Reston, Va.-based Mortgage Asset Research Institute, which maintains a mortgage fraud database.

While federal agencies typically focus on organized fraud rings and conspiracies, Coffey said so-called single-borrower fraud marked by inflated values and “understated liability to stretch up for a purchase that the borrower can’t justify are so numerous that you need a concerted effort with state and local authorities.”

At the national level, the FBI and Mortgage Bankers Association announced a fraud-fighting partnership in March. The association estimated fraud losses totaled $946 million to $4.2 billion last year, the FBI reported.

The number of FBI fraud investigations has more than doubled from 436 in late 2002 to a current 1,036. No state breakdowns were released.

Losses in more than half of the cases are expected to exceed $1 million — primarily affecting federally insured financial institutions.

In May, the MBA asked Congress for a $31.25 million, five-year allocation to the FBI and Justice Department to fight mortgage fraud.

The funding could provide 30 FBI field agents, two prosecutors and $750,000 to assist interagency task forces in targeted areas with high fraud concentrations, an MBA report said.