Feds: Good Times for Mortgage Fraudsters
by Paul Springer
A new report from the FBI shows burgeoning opportunities in real estate – if you don’t mind being a criminal. Back during the nadir of the global financial crisis, the development of the TARP plan took place alongside talk about modifying mortgages or otherwise helping financially crimped individual homeowners.
While the bailout helped some big institutions get on their feet, there was no help for the little guy. A gigantic bolus of foreclosed residential properties continues to clog the bowels of the real estate pipeline, preventing unknown sums of capital from being invested in property and, ultimately, in other markets.
And the vast mess of foreclosed properties creates a situation where prices are kept low and builders are cautious about entering a new market when the value of large numbers of foreclosed homes is difficult to determine.
Massive amounts of capital is sitting on the sidelines, where investing in “safe” stuff brings negligible returns and does nothing to stimulate the economy.
The Department of Justice and FBI continue to prosecute mortgage fraudsters. But their new report on last year’s activities alarmingly says it’s not possible to estimate the total amounts being harvested by fraudsters: “Total dollar losses directly attributed to mortgage fraud are unknown.”
The strength in fraud is marked by the weakness in residential lending, buying and unemployment. At the same time, the report says the range of perps is extensive:
Mortgage fraud perpetrators include licensed/registered and non-licensed/registered mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives.
And that’s not all you get. Ripping off American homeowners is now a global industry: “Asian, Balkan, Armenian, La Cosa Nostra, Russian, and Eurasian organized crime groups have been linked to various mortgage fraud schemes, such as short sale fraud and loan origination schemes,” the report said.
The variety of scams is also kaleidoscopic:
Prevalent mortgage fraud schemes… included loan origination, foreclosure rescue, real estate investment, equity skimming, short sale, illegal property flipping, title/escrow/settlement, commercial loan, and builder bailout schemes. Home equity line of credit (HELOC), reverse mortgage fraud, and fraud involving loan modifications are still a concern for law enforcement and industry.
While huge numbers of foreclosures are tied up in paperwork or held by institutions, it’s impossible to negotiate with a buyer, as mortgage modifications are few and far between:
According to the Home Affordable Modification Program (HAMP), of the 2.9 million eligible delinquent loans (60 or more days delinquent as reported by servicers through December 2010, but excluding FHA and VA loans), only 521,630 have been granted permanent modifications, while 1.5 million are in trial modifications.
Extensive anecdotal information and reports in the media suggest that a lot of these “trial modifications” are just periods in which homeowners get jerked around by big banks with Kafkaesque application processes leading nowhere.
At a time when the DOJ expects the housing market to stay stagnant this year, “The current and continuing depressed housing market will likely remain an attractive environment for mortgage fraud perpetrators who will continue to seek new methods to circumvent loopholes and gaps in the mortgage lending market.”
The whole mortgage modification thing just never got off the ground, the DOJ says:
Fitch rating agency anticipates a re-default rate on loan modifications between 60 and 70 percent for subprime and Alt-A loans, and 50 to 60 percent for prime loans. Defects in servicer foreclosure procedures have stalled the process throughout the country thereby lengthening the process further. Fitch states that it will take four years to remove the backlog of properties and return the market to balance.
And new foreclosures continue to outpace modifications.
The resulting liquidity logjam has been bad for everyone, buyers and sellers alike. It’s bad for the capital markets because an entire asset class – one that typically leads during economic recovery – is impaired. It’s bad for state governments because property tax revenues are getting stomped.
Meanwhile, the climate for government spending isn’t exactly ideal, but regulators and politicians alike are still squirming to find some interventionist means to stimulate the economy. Interestingly, the federal government has been willing to bail out corporate giants, as well as buy garbage investments, but seems to balk at buying some of this foreclosed property from banks. Even if they get stuck with the stuff for a while, it might be enough to get this sector back on its feet. And that would be good for everyone.
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