WASHINGTON – Record-low interest rates have helped make homebuying a realization for more Americans, while rising home priceshave allowed home sellers to reap windfall profits. But in thewrong hands these same factors have also helped savvy fraudsterscommit an increasing rate of fraud against borrowers and lenders tolevels high enough to pose what some experts have described as a“growing threat” to the mortgage industry. How serious is theproblem? Consider this: according to the Federal Trade Commission,mortgage fraud is estimated to have cost businesses nationwidenearly $48 billion and consumers about $5 billion in the last fiveyears. On March 11, the Mortgage Bankers Association held a one-daysummit to address mortgage fraud. Entitled “Protecting the RealEstate Finance System: Combating Mortgage Fraud Against Lenders,”the summit brought together a cross-section of mortgage industryplayers to identify a series of recommendations to address theissue. Among the presenters was the FBI's Chris Swecker, assistantdirector of the agency's Criminal Investigative Division. The FBIofficial testified in October before the House Financial ServicesSubcommittee on Housing and Community Opportunity about mortgagefraud and the FBI's efforts in combating it. Reiterating hiscomments at the summit, Swecker told attendees that mortgage fraudis a top priority for the FBI, and “prevention of mortgage fraudshould be our collective goals. It is vital that policy makers, lawenforcement and the public understand the reality and magnitude ofthe problem and work together to address this issue.” Alsoaddressing attendees at the summit were MBA Chairman-elect ReginaLowrie, president/CEO, Gateway Funding Diversified MortgageServices who said concern about mortgage fraud “against our homefinance industry has reached such heightened levels that topmanagement of lenders has to decide how they are going to addressthis growing threat and protect their company, their employees'jobs and the borrowers they serve.” Ann Fulmer, president ofGeorgia Real Estate Fraud Prevention & Awareness Coalition(GREFPAC) called fraud against mortgage lenders “bank robberywithout a gun.” CUNA Mutual Mortgage's Tom Pisapia, VP, secondarymarketing said the diminishing refinance activity has a lot to dowith the increase in fraud the mortgage industry is seeing.“Because there are fewer deals now, you need to make sure each dealsticks,” he told Credit Union Times. “Whenever the pie gets smallerand there are fewer deals out there, we start to see more creativethings by some people as a way to get the deal done at any means.Flipping is just one of those creative techniques, but the mortgageindustry is being hit on a number of different levels.” PrimeAlliance President/CEO Joe Brancucci, VP/Chief Lending Officer,BECU, Tukwila, Wash. agrees with Pisapia's premise about the causesbehind the increase in mortgage fraud. He also adds another cause –greed. “There's big money involved in this fraud,” Brancucci says.“The perpetrators have found the holes in the system and they'reabusing them.” The difference between mortgage fraud and othertypes of fraud, he says, and what makes it all the more dangerous,is “mortgage fraud tends to be more covert and more difficult toprove.” He explains that, “What's pervasive in the mortgageindustry now are people are going in and creating flipping schemesin certain neighborhoods. They're over inflating prices and that'screating an artificial market. While in the real market propertyvalue is based on a willing seller and buyer, flipping creates anartificial market by creating a series of transactions that make itseem like the price is set by a willing buyer and seller. In mostflipping cases in fact, the buyer is an unsuspecting and usuallyuninformed person who's willing to pay any price to get into aparticular home.” The good news for credit unions, said Brancucci,is since most of them are local they're very attune toneighborhoods and the prices and values of real estate. But thatdoesn't mean CUs are immune to mortgage fraud. Brancucci said asCUs develop relationships with mortgage brokers, they need tounderstand how to manager the mortgage broker relationship. Theyneed to understand who they're doing business with, he stresses.Pisapia said CUNA Mutual Mortgage hasn't seen many incidents ofmortgage fraud, and he attributes that to CUNA Mutual Mortgage'spolicy of relying on full-blown, hands-on appraisals and usinglocal appraisers it's familiar with. The company, said Pisapia,does not use Web-based alternative valuation models. In addition,said Pisapia, credit unions “in general” don't deal with loanbrokers “so that eliminates another entire piece of the fraud pie.”With the high incidence of mortgage fraud, Pisapia said investorsare scrutinizing appraisals more now. They're also concerned withthe housing bubble, he said, and don't want to find themselves leftholding loans based on inflated appraisals if the housing bubblebursts. Among the key recommendations summit attendees offered toaddress the mortgage fraud crisis were: * explore the feasibilityof sharing corporate policies, practices and information to furtherthe development of “best practices” for the detection andprevention of mortgage fraud; * advocating for more federal andstate resources that would be devoted to investigating andprosecuting mortgage fraud; * educate mortgage lenders and lawenforcement on the importance in pursuing mortgage fraudinvestigations; and * develop initiatives to increase theaccessibility of public records for use by mortgage lenders andfraud prevention service providers in combating mortgage fraud. MBAplans to release a full report by the end of March that willinclude all the recommendations. In addition, on March 31 the MBAwill launch a Web site, “The Mortgage Fraud Against LendersResource Center” to help lenders identify, communicate and preventmortgage fraud. Designed to be a one-stop shop for the mortgagebanking industry, the Web site will contain media updates,reference links, state-by-state fraud reporting reference pages,and a searchable database of media reports about fraud violators.CUNA Mutual Mortgage's Pisapia said the company is looking atseveral third party online fraud detection tools because “we wantto stay a step ahead.” He said CUNA Mutual Mortgage “has done itshomework” and is looking to integrate third party information intothe appraisal process. Pisapia expects that to be completed by theend of 2005. In addition, Brancucci who is also chairman of theFannie Mae Credit Union Advisory Council, said Fannie Mae isdeveloping an anti-fraud lenders service which Prime Alliance plansto incorporate into the PA platform by the third quarter 2005. Inaddition, Fannie Mae's Alfred King, director of public affairs saidthe housing Government Sponsored Enterprise took several steps lastyear to address the issue including implementing fraud tools in itsDesktop Underwriter system “to help lenders do a better jobferreting out fraud.” In November, Fannie Mae also put in placeguidelines that notify lenders when red flags become evident thatsignal possible property flipping. [email protected]