Fraud by home loan borrowers is suspected to have played a part in the mortgage sector’s spectacular collapse this year.
The extent of mortgage fraud isn’t known. What is clear is that lender reports of fraud outstrip law enforcement’s ability to pursue them.
Local lenders have been working with the FBI to uncover fraud, said Pete Norell, an FBI agent in Santa Ana.
But limited resources at the bureau have put checks on the number of cases it can handle, he said.
“The number of reports we receive has been rising and are at their highest ever,” Norell said.
The Treasury Department’s Financial Crimes Enforcement Network, which collects data from major lenders, also reports increased mortgage fraud.
Fraud mostly has been linked to brokers and borrowers falsely reporting income and net worth for loans. In the worst cases, some borrowers took out loans against inflated home prices and then defaulted on payments, forcing lenders into losses on repossessed homes.
Lenders also are suspected of committing fraud on borrowers.
Fraudulent loans in 2006 are estimated at more than $4 billion nationwide.
The FBI is the main agency to handle mortgage fraud. It only investigates fraud claims of $1 million or more, according to Norell.
“We get a lot of calls from private lenders,” he said. “But the cases we take typically involve multiple offenses.”
Since the 2001 terrorist attacks, the FBI’s duties have doubled, but its resources have stayed the same, according to Norell.
Lenders have been pushing for more resources to fight fraud.
The Washington, D.C.-based Mortgage Bankers Association has asked for $6.25 million for 30 new FBI agents, two prosecutors and 15 regional taskforces to fight fraud.
Many lenders have used their own lawyers and tactics to fight the problem.
American Guardian Home Loans, a small Lake Forest-based mortgage company, claims independent brokers have put people in loans they don’t qualify for by falsifying applications.
The company has pressured brokers suspected of fraud to help recoup losses. So far, it has recovered about $2 million of $4 million estimated losses, said Kamran Khosravi, president for American Guardian.
“We have pushed the brokers to put the houses back on the market or refinance out of our loans,” he said.
Lawsuits are filed with those who don’t comply, Khosravi said.
American Guardian gets loans from brokers and originates them on its own. It handles mostly subprime loans to borrowers with imperfect credit as well as Alt-A loans in between subprime and the best mortgages.
So far, the only default problems American Guardian has had have been from fraud, according to Khosravi. The company has issued about $200 million in loans, he said.
American Guardian is pursuing 10 cases of alleged fraud. Most involve brokers who used fake banking records and pay stubs, Khosravi said.
He said his policy is to go after everyone involved in a transaction, whether they are brokers, borrowers or salespeople.
“We had one broker that closed three loans using three different identities,” Khosravi said.
American Guardian has tightened its screening practices.
The company now makes at least two calls to verify bank accounts and employment. Before, it was much more lax in confirming information, Khosravi said.
He said he feels like one of the few lenders actually doing anything about the fraud.
“I think a lot of people are giving up on this, they don’t want to talk about it,” he said.
Lenders also have committed fraud, according to the Orange County district attorney’s office.
The district attorney’s major fraud unit has no open cases at this time, and only a small number of civil cases related to mortgage fraud are being looked at, spokeswoman Farrah Emami said.
“Fraud may be out there, but people aren’t reporting it,” Emami said.
Two recently settled civil cases came after the district attorney’s office investigated the advertising practices of two local companies.
Mortgage companies Insite Financial Corp. in Santa Ana and Enterprise Mortgage Group Inc. of Irvine lost civil suits concerning misleading letters sent out to the public, according to the district attorney’s office.
Both cases settled with each party having to pay $20,000 in penalties.
