FBI, federal prosecutors lining up mortgage fraud indictments

Supervisory Special Agent Dean C. Bryant said the FBI’s extensive probe into the alleged schemes – first reported by Springfield Business Journal in February 2007 – has turned up evidence that individuals from various real-estate sectors conspired to defraud lenders by inflating the value of area homes.

“I will tell you that some of the cases certainly involve tens of millions of dollars,” Bryant said. “So there’s a lot of money involved, and we’re aggressively pursuing the investigations – obviously, because of the heartache and stress it’s put on all these homeowners.”

Bryant said the FBI has worked closely with the Internal Revenue Service and U.S. Attorney’s Office on the investigations, which gained significant momentum early last year. The local emphasis on mortgage fraud reflects a national crackdown by the U.S. Attorney General’s Office, he added.

The FBI was actively investigating 1,338 cases of alleged mortgage fraud nationally as of March, according to www.fbi.gov statistics. The FBI investigations netted 321 indictments and 260 convictions in fiscal 2007, during which the agency opened 462 new mortgage fraud cases. Suspicious activity reports last year totaled 46,717, compared to 35,616 in fiscal 2006.

“It’s not just happening here,” Bryant said. “It’s everywhere.”

Skewed values

The FBI defines mortgage fraud as the intentional misstatement, misrepresentation or omission by a mortgage loan applicant.

Bryant said pending investigations here have primarily focused on fraud-for-profit schemes, which typically involve multiple loans and elaborate schemes to gain illicit proceeds from property sales. These schemes often involve real estate agents, mortgage brokers, builders and appraisers, who inflate the value of a home to obtain loans worth more than the property, Bryant said.

“The bank or the credit union is going to base the amount of money they’re going to loan on an appraised value of the home,” he said. “In a lot of these mortgage fraud cases, it seems that it ultimately comes back to the value of the house not being what it should have been.”

Pam Long, owner of Pam Long Appraisal Services in Nixa, said there’s been plenty of speculation about which Springfield-area appraisers knowingly participated in mortgage fraud. Local appraisers routinely face pressure to inflate property values, she said, adding that ethical ones know better than to take the bait.

“Don’t overstep your bounds,” Long said. “I think the investigations have put that foremost in everyone’s minds. You have to document, document, document and be able to prove everything, because Big Brother is watching.”

With home loans being approved at alarming rates and with little or no money down, Long said some appraisers were doing drive-by appraisals and automated valuations. She said others were flat-out cooking appraisals.

Foreclosures – some brought about by fraud – will likely have more of a long-term impact on area property values than the false appraisals used to defraud lenders, said Long, who believes the majority of local appraisers are honest and accurate.

“There’s always a greedy bad apple in every cart,” she said.

Welcome changes

Appraisers aren’t the only professionals bracing for the anticipated mortgage fraud indictments – and the consumer distrust that could follow.

Doug Andrews, president of the Greater Springfield Board of Realtors, said the organization’s members are bound by a code of ethics that requires them “to protect the public at any cost.” GSBOR also has committees that review ethics complaints against area Realtors and sometimes forwards them to the Missouri Real Estate Appraisers Commission in Jefferson City, he said.

Andrews, a Century Realty broker in Marshfield, also pointed to state and federal reforms aimed at beating back mortgage fraud. In early April, the Missouri House unanimously approved a bill criminalizing mortgage fraud.

House Bill 2188, sponsored by Republican Rep. David Pearce, would make mortgage fraud a felony punishable by civil and criminal penalties, including jail time and fines up to $5,000 per occurrence. The legislation also authorizes the Missouri Real Estate and Real Estate Appraisers commissions to suspend or revoke licenses for mortgage fraud and the commissioner of the Missouri Division of Finance to prohibit offenders from doing real estate lending in the state.

Brown and Wagner Mortgage co-owner Steve Wagner welcomes more regulation of mortgage brokers in Missouri, where licensing is essentially available to anyone who cuts an $800 check to the state.

“You can basically operate out of the trunk of your car,” he said, noting that his company is held to higher standards as a lender approved by the U.S. Department of Housing and Urban Development.

Wagner said Springfield’s mortgage lending market has experienced a cleansing in the past year as less scrupulous outfits have closed their doors in the face of the subprime crisis and fraud.

Andrews said the mortgage industry crash caused, in part, by fraud schemes combined with the subsequent housing slowdown have made it much harder to conceal the scams – and much easier to spot the ones still operating.

“Those people who might have been involved in defrauding the public and creating artificial markets – they’re pretty much unable to manipulate (real estate transactions) in a down market,” he said. “They created a down market they can’t work in anymore.”

With housing sales showing signs of life locally, Andrews is confident the Springfield real estate market will bounce back from any distrust brought about by the expected mortgage fraud indictments.

“Is there possible fallout from this? Absolutely,” he said. “We work hard to keep that trust. And any time that someone breaches trust, it affects all of us. But when that trust is breached, we’re pretty severe in our own sanctions.”