FHA Mortgage Fraud Arrests

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While everyone has their eyes locked on Congress as it tries to solve the massive problem of how mortgage brokers are paid, I would like to remind everyone about the real problem in the mortgage industry - fraud. When all the dust settles in the mortgage industry, I believe we will find that a large percentage of the foreclosures destroying real estate markets around the country have come from instances of fraudulent mortgages.

Professional “house flipping” rings have generated huge amounts of cash which they use to help in their efforts to drag straw buyers, inexperienced loan officers and real estate agents, appraisers, and even attorneys into their crooked schemes. It isn’t the use of yield spread premium that has led to this problem. Most of the money comes from the seller side of the transactions. This will turn out to be a much larger factor in the problem than many experts think it will. Probably more significant than subprime loans, stated loans and 100% financing programs that many want to blame for the problem.

On Friday November 9, 2007 the FBI announced the arrests and indictments of 6 officers of Mortgage One Corporation, which was based in Hesperia, CA and M-1 Capital Corporation, which was based in Riverside and Rancho Cucamonga CA.

From the FBI’s press release:

The indictment alleges that the defendants engaged in a conspiracy to defraud HUD by submitting fraudulent loan application documents in order to qualify the loans for FHA insurance. The indictment further alleges that Mortgage One and M-1 Capital sold the funded loans to banks using the same fraudulent documents. HUD has identified more than 850 FHA-insured loans approved by Mortgage One and M-1 Capital that went into foreclosure and made insurance claims to HUD. Investigators estimate that the losses suffered by the government and the private lenders are at least $10 million.

With instances like these, it is amazing that the FHA program has continued to cover its costs from mortgage insurance premiums without having to dip into the treasury. In fact, in spite of such problems FHA foreclosure rates are going down!

Loan officers - please start looking closely when an “investor” who sells a lot of properties comes to you with a steady supply of loans. Particularly if they come with all the borrowers information already in hand. I know it is hard to look a gift horse in the mouth, but you must. You may have a legitimate source of new referrals that will make your living for some time to come. However, you may save your professional life by looking into the situation a little further.

Buyers - If you have had credit problems and you are looking at a home that you may feel is a little too expensive, but the seller tells you it will be no problem to get a loan, start worrying a little. If the next thing they do is offer you a little cash to help out with the payments, or the loan officer doesn’t ask for documentation of your income, run away as fast as you can. These people can get you into trouble with their schemes.

You may very well be able to get a mortgage to buy that home you want even if you have had credit problems, but it will take some effort and it will not be easy. A good loan officer can make it easier. In fact, their expertise can even be the element which makes it possible. But you will have a lot of work to do and you will have to provide documentation of your income to get a good rate.

More information on the arrests can be found in this post on the Mortgage Fraud Blog

More information on mortgage fraud can be found here

Carl Pruitt is a 22 year veteran of the real estate and mortgage businesses and specializes in using FHA loans to help borrowers with credit problems get low fixed rate mortgages.