Farkas is Tip of Mortgage Fraud Iceberg

High-Profile Arrests Point to Troubling Trend of Costly Schemes
Farkas is Tip of Mortgage Fraud Iceberg
This week's high-profile mortgage fraud arrests should serve as a chilling wakeup call to banking institutions, experts say.

On Wednesday, authorities announced the arrest of Lee Farkas, once at the helm of wholesale mortgage lender Taylor Bean & Whitaker, charging him with a $1.9 billion fraud scheme tied to the government's Troubled Asset Relief Program (TARP) funds.

And then on Thursday, the President's interagency Financial Fraud Enforcement Task Force revealed that since March 1, Operation Stolen Dreams has arrested 485 people for their involvement in mortgage fraud losses exceeding $2.3 billion. The operation also has resulted in 191 civil enforcement actions, which have resulted in the recovery of more than $147 million.

Further, the FBI on Thursday released its 2009 Mortgage Fraud Report, which says reported incidents rose 5 percent (67,190 reports) in fiscal year 2009, when approximately $14 billion in fraudulent loans are estimated to have originated.

These events and numbers are staggering, but no surprise to industry experts who track mortgage fraud.

"When the stakes are high, people who are adept at manipulating their numbers, as well as their relationships, create massive risks for these types of events," says Mike Urban, senior director of global fraud solutions at FICO, a provider of decision-management and predictive-analytics solutions.

And yet, according to mortgage fraud expert Cindi Dixon, chief executive of Florida-based Mela Capital Group, not nearly enough institutions are heeding the warning signs.

"Many clients I am looking at really are not taking the proper steps," Dixon says. "I'm not seeing the sense of urgency that you would think we would see."

The Damage

According to the FBI's new report, the most common mortgage fraud schemes include loan origination, foreclosure rescue, builder bailout, equity skimming, short sale, illegal property flipping, reverse mortgage fraud and loan modifications.

Emerging trends in mortgage fraud include the defrauding of economic stimulus plans or programs such as TARP, property theft or fraudulent leasing of foreclosed properties and tax-related fraud.

In the Taylor Bean case, Farkas was indicted on charges of conspiracy and bank, wire and securities fraud for defrauding the Federal Housing Administration, private investors and TARP. Authorities allege that Farkas filed false information to get TARP loans through Colonial Bank of Alabama, Taylor Bean's biggest lender. Colonial Bank failed last August - one of the biggest bank failures of the year.

Despite the negative global impact of foreclosures related to mortgage fraud, Dixon says most lenders continue to approve bad loans.

"When things are high and the economy is good, a lot is overlooked," she says. "When the economy is down, then you get more into the mis-manufacturing of numbers, such as for TARP loans, as an example."

Quality control and mortgage tracking through systems such as the Mortgage Electronic Registration System [MERS] should be a given -- MERS tracks borrowers who have applied for loans. But Dixon says many mortgage lenders often don't want to use MERS because they fear it gives the competition too much information about their own loan-lending practices.

The Solutions

Urban says the need for more due diligence and proactive measures on the part of mortgage lenders is painfully obvious - underscored by the latest trends.

Among the solutions suggested by Dixon and former mortgage banker Robert Nolan, president of Ivystone Consulting Group LLC in Marietta, GA:

  • Regional Lending - Banks can learn from credit unions on this front. Leaning toward a more traditional loan-approval model, which relies on lending to borrowers the institution knows and property values the institution understands, is only possible when an institution lends locally. "That's hard for large national banks, when they're really looking at generating profits," Dixon says.
  • People and Technology - Underwriters should double-check tax returns and loan documents via analytical tools and the Internet. When systems are completely automated, fraudulent reports can slip through. "Technology should be used as an underlying layer for underwriting, and you've got to have good underwriters who know what they're looking for," Dixon says.
  • More Training for Loan Officers -Training staff to recognize the warning signs borrowers physically display when they are lying is key. "When they come in to get the loan, we should be catching it," Nolan says.

For more on mortgage fraud, see:

About the Author

Tracy Kitten

Tracy Kitten

Former Director of Global Events Content and Executive Editor, BankInfoSecurity & CUInfoSecurity

Kitten was director of global events content and an executive editor at ISMG. A veteran journalist with more than 20 years of experience, she covered the financial sector for over 10 years. Before joining Information Security Media Group in 2010, she covered the financial self-service industry as the senior editor of ATMmarketplace, part of Networld Media. Kitten has been a regular speaker at domestic and international conferences, and was the keynote at ATMIA's U.S. and Canadian conferences in 2009. She has been quoted by CNN.com, ABC News, Bankrate.com and MSN Money.

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