Mortgage and Foreclosure Fraud Mushroom in the Wake of Housing Bubble

A recent article splashed across the front page of the mid-size mid-western city where I live tells a surprisingly unfamiliar story about how ordinary people have pocketed hundreds of thousands of dollars by investing in subprime real estate. Though the current financial crisis has brought about intense discussion about the moral hazard of borrowing beyond one’s means, as well as the irresponsible underwriting that went hand in hand with the subprime borrowing fever, much less attention has been paid to the phenomenon of mortgage fraud.

We know mortgage fraud mushroomed during the boom times of subprime loans. Yet it continues to hover just off the main radar screen, remaining conveniently just outside of public awareness. What exactly is mortgage fraud anyway?

In the case recounted in my local paper, two men–let’s call them Mr. Smith and Mr. Jones–decided to go into the real estate development business by buying up properties in depressed neighborhoods, ‘flipping’ (that is, renovating) the houses they bought, and then selling the houses or renting them out and thereby making a profit on their investment.

So far, that doesn’t seem like a bad idea, especially when credit is readily available and the houses in question are close to a university or a major manufacturing center, or are part of a boom market like some areas in Florida or California. We’ve all watched TV shows on the Learning Channel and on the Discovery Network that chronicle the adventures and misadventures of these flipping entrepreneurs, and many of us have vicariously enjoyed their journeys while eating Cheetos and keeping our own hands soft and clean.

What we don’t see, however, are the house flippers who never flip, never sell, and then default on the loans.

Here’s how it works:

Mr. Smith buys a home in a slum neighborhood for $20,000. He hires an appraiser to value the home at $80,000. The appraiser is committing a crime at this point–the house is not worth $80,000 in anyone’s imagination–but the appraiser and Mr. Smith know each other and are working together to defraud the mortgage industry. Mr. Jones comes along and offers to buy the house (which is actually worth $20,000 or slightly less but is now appraised at $80,000) for $100,000. Mr. Jones is a ’straw buyer’. He doesn’t really want to own the house; he is working with Mr. Smith and the fraudulent appraiser.

Mr. Jones approaches an out-of-state mortgage broker who, not knowing or caring too much about the value of local real estate, is only too happy to make Jones a loan of $80,000 or even $100,000. When Mr. Jones explains he will be improving and then reselling this hot property, the broker envisions repeat business and repeat commissions when Jones buys and flips his other houses.

Mr. Jones then repeats this same process with a dozen or more other properties, all in league with Mr. Smith and his fake appraiser. They pocket the profit on the homes ($60,000 or $80,000 on just the first one alone) and then Mr. Jones proceeds to default on every single mortgage, sticking the out-of-state company who wrote the first mortgage with a $100,000 debt on a nearly worthless house.

Although FBI tables show that mortgage fraud has increased dramatically in recent years, the cases that are actually investigated are really just the tip of a very large iceberg. The FBI doesn’t have anything close to the staff it needs to launch a thorough and comprehensive investigation into this kind of scam because of the sheer volume of cases since 2006 alone.

In my own town, with our own local Mr. Smith and Mr. Jones, neither man has ever been formally charged with anything and neither have paid anything to the mortgage companies that made them the loans. The FBI will neither confirm nor deny whether the two of them are under investigation for fraud. These two men, under their own initiative, have purchased, sold, and defaulted on over 60 homes in the worst neighborhood in this city over the past two years for a net profit of over $1.5 million for Mr. Smith and over $750,000 for Mr. Jones. Their defaults account for more foreclosures in that specific neighborhood than all the other individual foreclosure cases combined.

Both Mr. Smith and Mr. Jones now claim to be disabled and speak to the press only through their spouses, who both insist no wrongdoing has occurred. None of the homes were ever rented or improved. All of them are currently vacant and in a state of serious disrepair. Mr. Jones never took out a single building permit. He claims that he planned to do the work himself but health issues intervened.

Is it possible that these two men are just a couple of enterprising fellows who fell down a flight of stairs at the same rather convenient time? I guess so. Is it likely?

What do you think?

A new and particularly nasty wrinkle on this scheme is called foreclosure fraud. While many different scenarios can be set up, by far the most common involves a ‘foreclosure rescue’ agency that approaches (or is approached by) a longtime homeowner behind on his or her house payments. You’ve probably seen signs posted around your town that say, “We Buy Houses!” Many of these agencies are set up to defraud people in danger of foreclosure. If you try to track them down or investigate them, all you will find is a list of post office boxes and vague nonspecific names attached to no specific person.

Here’s how it works: The foreclosure rescue agency offers to buy the house from the mortgage company about to foreclose on the property and then rent it to the homeowner for a set period of time, during which the homeowner hopes to improve his or her financial situation. At the end of that mutually agreed-upon period (typically two or three years), the foreclosure rescue agency promises to then resell the property to the homeowner on terms they can actually afford. The rescue agency claims to make their money on fees and appreciation, the people get to stay in their house, and everybody is happy.

Except, what really happens is that the minute the homeowners sign the house over to the ‘foreclosure rescue’ folks, the rescue agency runs right out to the easiest lender on the farthest block, cashes out the equity in the home, then disappears off the face of the earth, leaving the homeowner still about to foreclose and owing more in some cases than the house is even worth.

Foreclosure fraud is off the charts in recent years and is growing so fast no one is quite sure how many people have been hit. If you are in danger of foreclosure, read up on some of the most common schemes before you agree to talk about your situation with anyone except your original lender.

As we listen to the most recent attempts to bail out and/or stabilize the U.S. economy, we have also been hammered by lots of campaign rhetoric meant to push our emotional hot buttons by assigning blame for the current mess to individuals we might already mistrust or dislike: certain ethnic groups, minorities, members of certain financial occupations, Wall Street bankers, mortgage brokers, Democrats or Republicans, and so forth. What we are witnessing is a veritable frenzy of blaming, and it gets to be contagious. For some reason, it feels reassuring in times of crisis to find a scapegoat, to blame somebody, anybody, for what is happening. Blame, when properly or improperly placed, always creates the illusion of control. We think that if we find the right person or persons to blame, we can then proceed to hold them accountable and then fix the problem at hand.

While the need to assign blame is completely understandable, especially in an election year, it unfortunately obscures the sheer volume of criminal activity that took place at every level of commerce during the height of the housing bubble. Even at the most basic level–the level of buying a single house–an underpaid local reporter was able to uncover millions of dollars of what was, for all intents and practical purposes, most likely out and out fraud. And that’s just in one small mid-western city. All the poor people on that entire side of town didn’t cause as much damage as those two guys and their fast thinking. And that’s at the very lowest, most transparent level of the whole mess. Now multiply that scenario by every city in the U.S., and square with every level of finance and speculation, and you’ve got the mother of all criminal messes.

So far, few people are going to jail for any of this. But maybe at some point a few should.

At the very least, it’s food for thought.

8 comments to Mortgage and Foreclosure Fraud Mushroom in the Wake of Housing Bubble

  • This is definitely an eye opener. In my city, there was all kinds of offer to do this, but I was never comfortable with this and a lot of people took as being afraid…..i guess my guts were right all along

    Nice blog!

  • SteveP

    I have reviewed hundreds of foreclosures through out florida and georgia and found that the over 70% were the above described “fraud for profit” scenario where the scammers tricked the lender into over lending on cheap properties and walking away with the excess cash generated by the mortgages that were 2 to 10 times greater than the real value of the property. The remaining 30% we made to individuals and families with mexican surnames and based on tax assessor photos of the properties which revealed numerous vehicles parked on the property, I strongly suspect these were actually illegal immigrants. I bet if congress would do the research, they would find that the mortgage market would not have collapsed if these fraud for profit and loans to illegals had not been made. This said, why didn’t the bail out bill require future mortgages to be subject to more fraud prevention measures and require future mortgages only be made to those legally present in the US?

  • Evelyn Black

    Hi Moyo and Steve,

    I don’t think fraud at the bottom of the process is receiving the attention it should. Everyone right now is a lot more obsessed with the Dow and Wall Street and the Fed–it’s sexier and makes for better news copy. But I think mortgage and foreclosure fraud are beginning to become more of an issue. I read this Sunday that the FBI has requested more money for mortgage fraud investigations multiple times over the past four years and been turned down by the Bush administration–since 9/11 the bulk of their budget has gone to foreign counterintelligence work and terrorism, leaving them woefully understaffed right when this kind of fraud is off the charts.

    There’s no question in my mind that these issues need to be addressed but I don’t expect much in the way of action until after the election. I’m astonished though by the prevalence of this problem and by how many people are just getting away with it while we focus instead on the intelligence or moral weakness of individuals who were sold bad ARMs.

    Thanks for taking the time to comment. Your thoughts and opinions are welcome and appreciated.

  • MannyfromNYC

    As long as certain politicians who helped instigate this whole nightmare are almost guaranteed reelection (Maxine Waters, Barney Franks, Gregory Meeks, etc.), we will never stop this from repeating itself. As long as Franklin D. Raines remains Obama’s housing advisor instead of doing a long stretch in some penitentiary, things like this are likely to occur in the future.

    As long as people continue to push social agendas without regard to secondary effects, get ready to what Yogi Berra referred to as “deja vu all over again!”

    And lastly, in the immortal words of philosopher George Santayana: “Those who don’t learn the mistakes of history are bound to repeat them!”

  • Evelyn Black

    Thanks for taking the time to express that opinion Manny. Of course you know I disagree, but in this country we still can do that. All the best to you.

  • Excellent!

    This should be much more publicized, especially before the election, although it’s too late to let the chips fall where they may. The world has already been bailed out.

    Watch the student loan fiasco fall as the next domino…

  • Evelyn Black

    Thank you Stephan. I think we’re only seeing the beginning of this mess. You’re right, I fear. More is on the way with student loans, credit cards, etc. Thank you for your comments!

  • re: Fraudulent Foreclosures, Illegal Seizures & Evictions, 1099 fraud upon the IRS

    A thorough investigation is needed for the FORECLOSURE FRAUD which is causing people to FALSELY lose ownership of their properties and become evicted; it cheats Investors, and certain mortgage companies. This fraud occurs when debt collector attorneys deliberately file judicial foreclosures under names of defunct mortgage companies, or companies which do not own the promissory notes, effecting illegal seizures. Those collectors charge fees far beyond “Acceleration Clauses,” thereby making it impossible for borrowers to recover their properties or bring current mortgage arrears. Incredibly (through use of another’s identity), the foreclosure “plaintiff” is actually sometimes the disguised collector. SEE:

    Collectors make even more $$$ from protracted litigations for “Unfair Debt Collection Practices,” etc. (*Example of foreclosure litigation in: “Super Future Equities v. Wells Fargo Bank, et al.”) Accordingly, people actually HAVE NOT lost ownership of their properties, but those owners don’t know it!! For predatory and deceptive mortgage lenders, foreclosure frauds are bonanzas because it makes possible real estate FLIPPING frauds, and misleads Investors concerning housing markets. SEE:

    Foreclosure fraud also enables mortgage companies like Wells Fargo Bank to file with the IRS false 1099-A’s and 1099-C’s and receive unlawful tax write offs and tax credits. SEE: Also, some unscrupulous debt collector attorneys are committing fraud in Bankruptcy Court by filing sham “lift stay” motions via use of movants which lack STANDING. For irrefutable proof and extensive details about real estate fraud, visit:

    Barbara Ann Jackson
    Law & Grace, Inc.

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