May 21, 2007
Mortgage Fraud Is Up, but Not in Their Backyards
By JULIE CRESWELL
ATLANTA — The three women call themselves the All-Broad Fraud Squad.
Nearly a decade ago, concerned that mortgage fraud was threatening their pastoral towns, the women — two full-time mothers and a mortgage executive then in their 40s — got together to write down license plate numbers of suspicious cars in their neighborhoods, scour public documents for housing titles and deeds and seek the help of local law enforcement. At first they were ignored, written off as bored housewives.
Today, the three women — Ann Fulmer, Alicia Sheppard and Julia Barrette — are helping train F.B.I. agents, speaking to lending associations across the country and lecturing college students on how to identify mortgage fraud.
“For us in the industry, we could deal with mortgage fraud during the day but go to our homes at night and forget about it,” said Matt Wade with Fannie Mae in Atlanta. “But for these gutsy women, it was personal.”
The women’s upper-middle-class neighborhoods have almost nothing in common with the places where mortgage fraud has recently made headlines — like the more than $40 million scheme uncovered last fall in one of the poorest neighborhoods in Indianapolis.
Yet from coast to coast, these frauds often work the same way: Buyers gain control of properties at a low price and then sell them quickly at a big profit, rigging the game every step of the way by procuring bogus property appraisals and using false or stolen identities to obtain mortgages. While the scam artists profit in these flipping schemes, the lenders are ultimately the losers, left holding the bag when the loan on the home ultimately defaults.
And whether in a wealthy neighborhood or a poor one, mortgage fraud has a similar impact. For one thing, inflated appraisals can cause tax assessments to skyrocket. At the same time, neighborhoods swept up in fraud rings tend to be hit repeatedly, leaving many houses vacant and in disrepair and causing property values to plunge.
Today Georgia is finally getting its mortgage fraud problem under control. For the first time since 2002, Georgia fell from being the No. 1 state in the country in mortgage fraud to No. 4, according to a report released last Wednesday by the Mortgage Asset Research Institute. Community-based efforts like the one begun by the three women are credited with making a difference in Georgia, and Atlanta is being seen as a model by other cities struggling with mortgage fraud.
As the housing market cools and lenders, particularly those that made loans to people with riskier, or subprime, credit scores, take a much closer look at the mortgages they underwrote, evidence of mortgage fraud is growing nationwide.
The Mortgage Asset Research Institute said reports of mortgage fraud rose 30 percent for loans made in 2006 compared with those made in 2005. (The report also warned that it might take three to five years to uncover the full extent of fraud that occurred in loans made last year.)
Likewise, the number of fraud cases reported to the F.B.I. soared to 35,000 last year, from 7,000 in 2003. Those gains prompted the Mortgage Bankers Association to ask the House and Senate Appropriations Committees to dedicate $31.25 million in funds over the next five years for the F.B.I. and the Justice Department to combat mortgage fraud. Firms that track mortgage fraud say it costs banks and lenders more than $4 billion a year.
“The industry was in denial as to the extent of the problem for a long time,” said Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage fraud insurance and training.
The Atlanta women encountered that denial when they tried to alert regulators and lenders about the suspicious activity in their neighborhoods.
Ms. Fulmer’s Smoke Rise neighborhood, west of Atlanta, where she lived for 13 years before she moved last year, is filled with 5,000-square-foot homes with manicured lawns and backyard pools.
Ms. Fulmer, a former lawyer who had been handling civil insurance fraud cases at an Atlanta law firm, moved into the neighborhood in 1992 and was on the mommy track, she said.
But around 1996, she started to hear odd stories from her neighbors. Houses that had been on the market for two years at reduced prices were being bought at one price and sold the same day for $100,000 to $300,000 more.
The effect of these frauds hit home for Ms. Fulmer around 1998, when the inflated sales prices in her neighborhood pushed up her tax assessment by 30 percent. She was furious, and set out to discover what was happening in her neighborhood.
Ms. Fulmer began digging through property deeds and sanitation and water records at the county courthouse. She was shocked to find the same names reappearing.
Around the same time Ms. Fulmer started realizing something was wrong in her neighborhood, Ms. Sheppard, a mother of three, and her husband, a lawyer, built their home in 1995 a few miles away. About a year later, five homes in Ms. Sheppard’s neighborhood nearby were bought by a company that said it would renovate them and lease them to professional football players.
Instead, nobody moved in for months, the grass grew high and packages were delivered to vacant homes, a possible sign of drug trafficking.
About six months after the homes were sold, people began moving into the homes at night. Soon loud parties and prostitutes started disrupting the once-quiet neighborhood. One evening in July 1998, after the Sheppards had watched a movie, they heard gunfire outside.
“We ran to our study window like idiots and see a guy striding down the street holding an automatic weapon,” Ms. Sheppard said.
Ms. Fulmer and Ms. Sheppard finally met in 1999 at the Smoke Rise Golf and Country Club, where they began comparing notes.
“Ann had already gone to the authorities and was accused of being a bored housewife,” Ms. Sheppard said. “Nobody at that time understood what mortgage fraud was and the collateral crimes that go with it.”
What they needed to grab the attention of prosecutors and law enforcement, Ms. Fulmer said, was a victim — a lender who was losing money because of fraudulent loans.
That same year, Julia Barrette, an operations manager at a Georgia-based mortgage lending company, noticed that more investors were asking the company to buy back loans that had been sold but had since defaulted.
“We started investigating the files and finding some fraud,” Ms. Barrette recalled. “But we were lending in 13 states and did not sense any pattern at the time so we initially thought we just had some bad apples.”
But as the problem continued, the mortgage company sent out a notice in April 2000 to agents who worked on closings that said if a seller of a home had owned the property for less than 12 months — a sign the property might be the target of a flipping scheme — they needed to stop the closing immediately and contact the office.
Shortly after the flier went out, Ms. Barrette received a call from Ms. Fulmer. “Are you having a problem with flipping?” she asked Ms. Barrette.
Ms. Fulmer and Ms. Sheppard had finally found their victim, a lender who was losing money because of fraud.
In July 2000, about 34 people, including state regulators, local law enforcement officials, community leaders, F.B.I. agents and representatives from the Internal Revenue Service and Social Security, met in Atlanta to persuade prosecutors that Atlanta had been victimized by widespread mortgage fraud.
While it is difficult to explain why some cities are hit harder by mortgage fraud than others, some suggest Atlanta may have been a target because of a wide disparity in the prices of homes in a single neighborhood. When there is a $100,000 house next door to a $300,000 house, it is easier for those who are planning a fraud scheme to inflate appraisals, experts say.
The grassroots effort begun by the women eventually linked a network of community leaders, industry professionals and federal regulators who now share the information they gather on mortgage fraud. The network is called the Georgia Real Estate Fraud Prevention and Awareness Coalition, or Grefpac, and it is run largely by volunteers and financed by contributions and some corporate sponsorships.
Because of Grefpac, a nonprofit group, federal prosecutors in the state now have caseloads made up entirely of mortgage fraud crimes. Two years ago, Georgia became the first state to enact legislation to specifically address mortgage fraud, and state prosecutors have more than 200 cases in their office. Other states are considering similar laws.
“I think there had been a perception that it was just the lenders who were losing money and if the lenders weren’t willing to come forward, we couldn’t prosecute the crimes,” said Gale McKenzie, an assistant United States attorney in Atlanta who attended that meeting. “They showed the U.S. attorney at the time that there were in fact quality-of-life issues and that this was more than monetary issue.”
Some experts blame lax state regulations for fueling mortgage fraud.
Utah, for instance, is one of a handful of states that do not disclose the sale price of homes, making it easy for those who are planning a fraud to artificially inflate a home’s appraised value to obtain a mortgage. And until last year, Colorado was one of only two states that did not require mortgage brokers to be registered.
“I think when people realize the full scope of mortgage fraud out there, they’re going to find that it is substantial with a capital S,” said Ms. Fulmer, who now works for a mortgage fraud detection firm called Interthinx. “The fraudsters have been working together for a while to commit fraud. Now it’s up to authorities and regulators to start to work together to try to stop it.”
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