The Real Deal Miami

A market in real estate fraud

Today’s conditions may be setting the stage for a return to the worst behavior of the boom and bust
By Kenneth R. Harney | December 16, 2011 01:01PM

Could today’s seductive conditions in the housing market — severely marked-down prices, record
low interest rates and hundreds of thousands of foreclosures waiting to be resold — be breeding
new generations of the very practices that led to the crash?

In an ironic twist, there are signs that the wreckage left over from the housing bust may be
reigniting dubious real estate schemes and fraud. According to researchers:

— Property flippers are back in action in places like South Florida and Las Vegas,
where condo prices crashed but are now seeing appreciation again in some areas.

—So-called “floppers” are defrauding banks by hijacking short sales at prices below
what legitimate purchasers are willing to pay. In these schemes, real estate agents
obtain fraudulent appraisals to convince banks to sell houses at below-market
prices to investor groups. The investors then flip the houses at fair market prices
to ordinary homebuyers and split the quick profits.

— Creative “credit enhancement” companies are “renting” investors the bank
account balances they need to demonstrate to lenders that they have the financial
wherewithal to qualify for a mortgage. The accounts are for real, but they don’t
belong to the loan applicants who claim them. Account names are assigned to
applicants — who pay for the service — but they are never allowed access to the
money. When mortgage underwriters check to verify the deposits — which are
in reality fraudulent sub-accounts — they are told the money is in the name of
the loan applicant. One investigator pretending to be a purchaser was verified as
having funding available in the amount of $850,000. The loan application was to
buy 935 Pennsylvania Ave. NW, in Washington D.C., which is the headquarters
building of the FBI.

— Investors are hoodwinking lenders into giving them low down payments
and rock-bottom interest rates by lying about their intentions to occupy the
property they plan to buy as a principal residence. Some investors consider such
dissembling nothing more than a fib, but in reality it’s bank fraud. Researchers
at the Federal Reserve Bank of New York have documented that widespread
falsehoods by investors about occupancy played a major but previously
unrecognized role in the real estate bust.

To Ann Fulmer, a former white-collar crime prosecutor who is now a vice president with
mortgage fraud analytics company Interthinx, this all amounts to a “past is prologue” situation –
– the market conditions are ripe for a reprise of some of the worst behavior of the boom and bust.
Her firm’s latest study of mortgage fraud nationwide, covering loan origination and other data
from the third quarter, found that applicants’ dishonesty about their employment and income
was up 9 percent from the same period the year before and a stunning 50 percent from the third
quarter of 2009. The reason: Borrowers increasingly are falsifying W-2s and other records in
order to meet the tougher debt-to-income thresholds lenders adopted following the bust and
recession.

Interthinx works with major mortgage lenders to spot fraud and has access to vast loan
application databases, credit bureau data and other information, and runs it all through
proprietary models to establish estimates of fraud risk. For example, when an applicant claims
to be purchasing a home as a principal residence, Interthinx pulls credit bureau files and public
records and may find that the applicant already has other homes listed as principal residences.
The anti-fraud systems also spot cases where buyers apply to multiple lenders for the same
property.

For the sixth straight quarter, the states that Interthinx ranked riskiest for mortgage fraud are
the same that experienced the most explosive booms and the most crushing busts between 2004
and 2008: Nevada, Arizona, California and Florida. California alone accounted for half of the
10 highest-risk metropolitan areas in the most recent rankings. Miami-Ft. Lauderdale and Cape
Coral-Ft. Myers, Fla., are high on the list as well. Metropolitan Washington, D.C., which had
been ranked sixth in fraud risk earlier this year, dropped to 24th place in the most recent study.
San Jose, Calif., saw a 16 percent jump in “identity fraud” schemes where loan applicants seek
–and get — new identities and credit histories good enough to qualify them for mortgages that
would otherwise be beyond reach.

Deja vu? “I wouldn’t be surprised,” Fulmer said. “There’s so much money on the sidelines”
looking for high returns in the face of a volatile stock market and low yields on conventional
investments. If you have larceny in your heart, mortgages and houses can be tempting targets.

Ken Harney is a syndicated real estate columnist.