TEXT OF STORY
Kai Ryssdal: Even as the housing market gropes for the end of its slide, those rising interest rates aren't making mortgages any cheaper. Unless you cheat.
A new study from the Mortgage Asset Research Institute says mortgage fraud in 2006 was up 30 percent from the year before. The head of the Mortgage Bankers Association figures that's just the tip of the iceberg, because the number included only included banks — not private lenders that aren't federally insured.
From WCPN in Cleveland, Mhari Saito reports that in some neighborhoods, fraud has completely skewed home prices and raised questions about the late days of the housing boom.
Mhari Saito: When contractor Chris Mansour bought his $340,000 home in the Cleveland suburb of Solon four years ago, he was moving up. His daughters could go to one of the region's best public schools. They could do their homework in their roomy, eat-in kitchen, or play in the living room with vaulted ceilings.
But it wasn't long before police started to regularly visit homes on the street and neighbors started to move in the middle of the night.
Chris Mansour: Well, like one particular house two doors down from me at this point has had six different residents in four years. And that's not an exaggeration. And actually seeing people on the street move from one residence to another residence on this same street . . . I mean, just something didn't make sense.
Over half of the homes on his street are being investigated for mortgage fraud.
Solon police say everyone — from the builder to the mortgage broker to the title company — were in on taking out loans and splitting the cash, with no intention of repaying them. Often, fraudulent owners had the cheek to rent the homes out for more cash. Some scammers did make mortgage payments as they borrowed still more by refinancing or taking out equity lines.
Solon detective Christopher Viland:
Christopher Viland: While the housing market was good and they could keep transactions going to keep themselves afloat, it didn't come to anybody's attention. So it wasn't until the market went into a slump and people couldn't make the notes anymore that a lot of these things came to light.
One of the homes under investigation was bought with a loan from Argent, one of the country's 10 largest subprime lenders. A spokesman for the Orange Country company says Argent has zero tolerance for fraud, and procedures to prevent it.
But Cleveland-area appraiser Robert Ruckstuhl says lenders were simply too focused on making money to notice.
Robert Ruckstuhl: How many times can you see the same names of the same brokers, or same loan officers, or the same borrowers coming through your system and not raise a question or raise a red flag?
Prosecutors are finding mortgage fraud all over the country. The FBI calls it one of the fastest-growing economic crimes, skimming at least $1 billion off the lending industry in 2005. Experts say the boom in mortgage fraud is tied directly to the boom in subprime lending and relaxed underwriting standards.
Scott Gilbert: As the lenders loosened up their rules, it made it easier for fraudsters to come in and take advantage of those changes to the rules.
Scott Gilbert heads the white-collar crime unit for the Cleveland FBI office. The so-called industry innovation that makes him the craziest are no-document loans. These are mortgages that require little or no proof of income. Last year, nearly half of all subprime loans were no-doc loans.
Gilbert: It's much easier to commit fraud, because you can fake the bank statements and there's no real verification of history or work employment.
In 2005, Eloise Anderson used no-document loans to borrow over a million dollars to buy four homes in five months, including one in Solon. Not bad for a U.S. postal worker making $55,000 a year. A county grand jury said Anderson lied to lenders about her income. She didn't return calls.
Dale Grubb lives across the street from one of Anderson's houses. He says he saw various people going in and out, but didn't know who they were. And the most upsetting thing is not knowing what the fraud will do to his biggest asset.
Dale Grubb: If we needed to sell the house, we have no idea what value it now has, given that we have a large inventory of houses now on the street in foreclosure at a questionable value — nowhere near what their actual value is.
Many in the industry, like Detroit realtor Ralph Roberts, say at the end of the housing boom, lenders were frantically boosting their loan volume and selling off loans to Wall Street. Many lenders rewarded local brokers that sent borrowers their way with hefty commissions.
Ralph Roberts: They were getting millions of dollars in bonuses for bringing business in the front door. Well the problem is the quality control on those deals coming in the front door wasn't being managed.
In Ohio, a new state law has clamped down on no-document loans, and prosecutors have launched highly public anti-mortgage fraud efforts.
But privately, law enforcement isn't so sure anyone will ever pay for the damage. That's because sentences for mortgage fraud are relatively light — from two to six years — and that's if defendants get jail time.
In Cleveland, I'm Mhari Saito for Marketplace.