[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
MORTGAGE FRAUD AND ITS
IMPACT ON MORTGAGE LENDERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND COMMUNITY OPPORTUNITY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
OCTOBER 7, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-116
U.S. GOVERNMENT PRINTING OFFICE
97-524 WASHINGTON : 2004
____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
SPENCER BACHUS, Alabama MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York
PETER T. KING, New York LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois JAY INSLEE, Washington
WALTER B. JONES, Jr., North DENNIS MOORE, Kansas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas DAVID SCOTT, Georgia
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina BERNARD SANDERS, Vermont
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
JIM GERLACH, Pennsylvania
Robert U. Foster, III, Staff Director
Subcommittee on Housing and Community Opportunity
ROBERT W. NEY, Ohio, Chairman
MARK GREEN, Wisconsin, Vice MAXINE WATERS, California
Chairman NYDIA M. VELAZQUEZ, New York
RICHARD H. BAKER, Louisiana JULIA CARSON, Indiana
PETER T. KING, New York BARBARA LEE, California
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina BERNARD SANDERS, Vermont
DOUG OSE, California MELVIN L. WATT, North Carolina
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEPHEN F. LYNCH, Massachusetts
GARY G. MILLER, California BRAD MILLER, North Carolina
MELISSA A. HART, Pennsylvania DAVID SCOTT, Georgia
PATRICK J. TIBERI, Ohio ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
October 7, 2004.............................................. 1
Appendix:
October 7, 2004.............................................. 45
WITNESSES
Thursday, October 7, 2004
Amiri, Brigitte, Staff Attorney, South Brooklyn Legal Services,
Brooklyn, NY................................................... 30
Donohue, Hon. Kenneth M. Sr., Inspector General, Department of
Housing and Urban Development.................................. 3
Matthews, William, Vice President and General Manager, Mortgage
Asset Research Institute, Inc., Reston, VA..................... 24
McCall, Marta T., Senior Vice President-Risk Management, American
Mortgage Network, San Diego, CA, on behalf of the Mortgage
Banker Association............................................. 26
Prieston, Arthur J., Chairman, The Prieston Group, San Rafael, CA 28
Swecker, Chris, Assistant Director for Criminal Investigations,
Federal Bureau of Investigation................................ 5
Trujillo, Ecima, National Field Director, ACORN Housing
Corporation, Los Angeles, CA................................... 33
Weicher, Hon. John C., Assistant Secretary, Housing/Federal
Housing Commissioner, Department of Housing and Urban
Development.................................................... 9
APPENDIX
Prepared statements:
Ney, Hon. Robert W........................................... 46
Clay, Hon. Wm. Lacy.......................................... 48
Amiri, Brigitte.............................................. 49
Donohue, Hon. Kenneth M. Sr.................................. 55
Matthews, William............................................ 63
McCall, Marta T.............................................. 72
Prieston, Arthur J........................................... 79
Swecker, Chris............................................... 90
Trujillo, Ecima.............................................. 102
Weicher, Hon. John C......................................... 111
Additional Material Submitted for the Record
Consumer Mortgage Coalition, prepared statement.................. 120
Fannie Mae, prepared statement................................... 126
Sysdome, prepared statement...................................... 136
MORTGAGE FRAUD AND ITS
IMPACT ON MORTGAGE LENDERS
----------
Thursday, October 7, 2004
U.S. House of Representatives,
Subcommittee on Housing and
Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:03 a.m., in
Room 2128, Rayburn House Office Building, Hon. Robert W. Ney
[chairman of the subcommittee] presiding.
Present: Representatives Ney, Miller of California, Hart,
Tiberi, Renzi, Waters, Velazquez, Carson, Lee, Watt, Scott, and
Davis.
Chairman Ney. Today, the Housing Subcommittee meets to
discuss mortgage fraud and its effect on mortgage lenders.
The subcommittee, along with Chairman Bachus' Financial
Institutions Subcommittee, conducted a number of hearings
concerning abuse of lending practices, subprime lending and how
to ensure credit availability for those who need it and want
it.
During these previous hearings, topics revolved around
addressing fraudulent schemes and how it affects the individual
consumer. However, consumers are not the only ones affected by
abusive lending practices. Financial institutions and other
lenders, also victims of mortgage fraud, lose millions of
dollars each year through this type of problem and corruption.
Some studies have shown that between 10 and 15 percent of
all home loan applications include some home loan fraud or
misrepresentation. Lenders can choose to absorb the loss and
reduce earnings that harm stockholders or charge higher
consumer fees to recoup those losses.
Government-insured loans that fall victim to fraud end up
being paid at the end of the day by the taxpayers. The examples
of this fraudulent behavior include elaborate schemes, straw
buyers, fake credit histories, inflated appraisals, fabricated
pay stubs and falsified tax records.
Of today's witnesses--we are happy to have all the
witnesses today--but one of today's witnesses from the Federal
Bureau of Investigation has stated that mortgage fraud has
become, potentially, a national epidemic that could expose
lenders to hundreds of millions of dollars in losses. And, of
course, those losses go down the line and affect everybody.
As a result, the Bureau has targeted a variety of fraud
schemes through its Operation Continued Action, the largest
nationwide operation in FBI history, directed toward organized
groups and individuals who are engaged in mortgage fraud.
From its inception in August of 2004 through this month,
Operation Continued Action investigators have identified more
than 245 subjects and 158 investigations in 37 States. More
than 151 indictments have been filed to date. These charges
have thus far led to more than 144 arrests, convictions and
sentences and millions of dollars in forfeiture and
restitution.
The United States mortgage market is the deepest and most
affordable in the world due to the evolution of unique funding
structures for mortgages, and Americans pay less for mortgages
than almost any other country. As a result, this country has
the world's highest home ownership rate.
Today's hearing is another important step, as we attempt to
find common ground with comprehensive solutions to the problem
of abuse of lending. I would also note, without objection, that
the record will be open for 30 days for members to ask
additional questions of the panel.
And with that, I would yield to Mr. Scott. Thank you for
joining us.
Mr. Scott. Thank you very much, Mr. Chairman. I want to
thank you, Mr. Chairman, for holding this hearing on the
subject of mortgage fraud and certainly want to extend a
welcome to all the distinguished members of the panel.
This hearing is important to me because as the Mortgage
Asset Research Institute will discuss today, my State of
Georgia has surpassed California and Florida as the State with
the highest mortgage fraud scores. In his written testimony,
the HUD Inspector General provided an example of mortgage fraud
in DeKalb County in Georgia. This particular incident occurred
just outside of my district, and represents just one of many
anecdotal stories of mortgage fraud and predatory lending in
the metro-Atlanta area.
Most mortgage scams are caused by a small number of local
fraudulent loan operators. However, the mortgage scams run by
these small operators cause enormous pain for their victims.
While mortgage fraud may be a huge problem, it pales in
comparison to the devastation experienced by individual
homeowners who are victims of predatory lending. I am concerned
that there is no way to know the exact level of mortgage fraud.
Several witnesses in their testimony identified the lack of
information as being a problem for preventing mortgage fraud. I
am very pleased that the FBI has increased its investigations
into mortgage fraud, and I believe that Congress should give
the FBI the necessary resources to expand their operations.
With the FBI's primary focus on homeland security, Congress
must also strengthen existing laws to help State and local
investigators share the workload of investigating mortgage
fraud.
In addition, Congress must continue to promote financial
literacy efforts, which is a strong priority of this committee.
I look forward to hearing from today's witnesses on the
ways to investigate, to prosecute and to stop mortgage fraud.
And I want to certainly recognize William Matthews of the
Mortgage Asset Research Institute, who is a witness today, and
his company is a subsidiary of ChoicePoint, which is based in
my district in Atlanta, Georgia.
Thank you very much, Mr. Chairman. I yield back my time and
look forward to a very informative hearing this morning from
our distinguished panels.
Chairman Ney. I want to thank the gentleman.
Also, without objection, we have written testimony for the
record--hearing no objection--from the National Association of
Home Builders, Kevin Coop, and Consumer Mortgage Coalition.
We have been joined by the gentleman from Ohio, and--he has
left, the gentleman from Ohio. He will be back.
With that, we begin the panel.
Kenneth Donohue is the Inspector General of the United
States Department of Housing and Urban Development. He has a
distinguished 21-year career, serving as a Special Agent with
U.S. Secret Service, and he later served as Chief of the
Investigation Section of the Resolution Trust Corporation. He
is a Certified Fraud Examiner and a Certified Protection
Professional.
Chris Swecker is the Assistant Director of the Criminal
Division at the Federal Bureau of Investigation, having been
named to this position by Director Mueller in July. Mr. Swecker
joined the FBI as a Special Agent in 1982. He served in the
FBI's Legal Counsel Division in the Organized Crime and
Narcotics Office. He was designated Special Agent in Charge of
the Charlotte Division in 1999.
John Weicher, Assistant Secretary for Housing, Fair Housing
Division, at the Housing and Urban Development, a position he
has now held since June of 2001. He has been here several times
on the Hill.
We welcome you back.
Prior to the appointment at HUD, Mr. Weicher was Director
of Urban Policy Studies at the Hudson Institute. He also served
as a member of the Millennial Housing Commission.
We want to welcome all the witnesses today.
I would note our most famous previous FBI agent was
Chairman Mike Oxley of Ohio, so I had to note that.
With that, we will begin with you, Mr. Donohue.
STATEMENT OF HON. KENNETH M. DONOHUE SR., INSPECTOR GENERAL,
UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Donohue. Chairman Ney, and other members of the
subcommittee, it is my pleasure to testify before you today on
the HUD Inspector General's perspective on mortgage fraud and
its impact on financial institutions. Of all the homes
purchased in the United States each year, 8 percent are
financed with FHA mortgage insurance. Each year, FHA accounts
for 30 percent of all insured mortgages. FHA has fallen off
nearly 20 percent from the same period a year ago. FHA-insured
mortgages may be more prone to mortgage fraud because FHA
insures mostly first-time home buyers with limited credit
history and little money down.
A closer look at the make-up of the FHA portfolio would
indicate that FHA's insurance risk is increasing. A comparison
of active insured FHA cases to FHA claims cases over the past 2
years shows an increasing claim rate.
As you can see from our chart, our investigative workload
has increased in more than 450 open criminal, single-family
investigations, and our arrests in the single-family mortgage
area have increased 800 percent in a 4-year period. We believe
there is a direct relationship between our increased workload
and the FHA's increasing claims rate.
The annual audit of the Federal Housing Administration
financial statement has found the FHA in basically sound fiscal
condition. FHA's claim rate, however, continues to rise each
year, and with fewer FHA mortgage applicants, there is less
premium income to cover the claims.
A future economic downturn and future interest rate
increases would provide opportunities for those who would prey
upon homeowners who cannot make their mortgage payments. We
repeatedly have found unlawful and deceptive practices and
outright fraud in mortgage lending that often exploit first-
time and uninformed FHA borrowers.
Of particular concern is illegal profiteering on the
purchase and quick resale of homes called ``property
flipping.'' the illegality arises because one or more parties
to the transaction conspire to inflate the value of the home
and pocket the excessive profits at loan closing.
Another concern is ``equity skimming.'' A common form of
equity skimming involves an investor who exploits a homeowner
facing foreclosure and other financial stress.
Mortgage fraud can go undetected, and not all fraud results
in loss to the government. This makes it difficult to quantify
the exact amount or even the estimated amount of mortgage
fraud.
Every month one in every nine FHA mortgages is reported as
delinquent. That means that 600,000 FHA borrowers are a month
behind in paying their mortgages. Some portion of these
delinquencies may be due to mortgage fraud and new mortgages
where the underwriter intentionally misrepresented the
borrower's ability to pay the mortgage.
The following are two examples that combine OIG-FBI
investigations of ``property flipping'' frauds and the results
of a recent audit of mortgage fraud:
Three conspirators preyed on unwitting FHA borrowers in
Chicago's south and west sides, saddling the new homeowners
with overvalued properties and unmanageable mortgage debt. The
fraud scheme was a typical flip. The investor would contract to
purchase a property, recruit home buyers, and then partner with
a crooked appraiser and attorney to complete the resale and
closing at an inflated price.
As you can see from the pictures on the easel, this example
of one of the properties shows how significantly it declined in
appearance and how it could potentially impact the surrounding
neighborhood when one of these fraudulent transactions
occurred.
Earlier this year, a 158-count indictment was handed down
in the Northern District of Georgia. From mid-1999 through
March of 2004, it was alleged the settlement attorney and
coconspirators perpetrated a property flipping scam. The
defendants purchased residential properties primarily in the
Stone Mountain, Georgia, vicinity and resold them at
artificially inflated prices, using the proceeds of the resale
to pay for the initial purchase.
In a recent audit of an FHA-approved lender, we found the
lenders were fabricating or altering borrower credit and
employment documents to make the loans approvable. In this
audit we found pervasive documents falsifying in 48 of 65, 75
percent, of the FHA loans originated by a HUD-approved
correspondent lender in the greater Phoenix metropolitan area.
Mr. Chairman, I appreciate the subcommittee's concern over
the increased problem of mortgage fraud. The result of these
types of financial crimes undermines the confidence in this
Nation's housing industry and frustrates honest American dreams
of home ownership. In addition, the victims include the honest
mortgage company employees that lose their jobs because they
are victimized by unsavory business practices of other staff,
the home buyers whose credit was destroyed when they had to
default on a loan that they really could never afford in the
first place, or the new FHA home buyer that is paying a higher
than necessary mortgage premium to cover growing losses to the
insurance fund.
Thank you, sir.
Chairman Ney. Thank you for your statement.
[The prepared statement of Hon. Kenneth M. Donohue Sr. can
be found on page 55 in the appendix.]
Chairman Ney. Mr. Swecker.
STATEMENT OF CHRIS SWECKER, ASSISTANT DIRECTOR, CRIMINAL
INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION
Mr. Swecker. Good morning, Mr. Chairman and members of the
subcommittee. I want to thank you for the opportunity to
testify before you today about the FBI's efforts----
Chairman Ney. If you would just move the mike a little
closer.
Mr. Swecker.--in combating mortgage fraud.
Although there is no specific statute that defines mortgage
fraud, each mortgage fraud scheme contains some type of
material misstatement, misrepresentation or omission relied
upon by an underwriter or lender to fund, purchase or insure a
loan. The Mortgage Bankers Association projects 2.5 trillion in
mortgage loans will be made this year. The FBI compiles data on
mortgage fraud through Suspicious Activity Reports filed by
financial institutions and HUD Office of the Inspector General
reports. The FBI also receives complaints from the industry at
large.
A significant portion of the mortgage industry is void of
any mandatory fraud reporting. In addition, mortgage fraud in
the secondary market is often underreported. Therefore, the
true level of mortgage fraud is largely unknown. The mortgage
industry itself does not provide estimates on total industry
fraud. The industry provides incomplete or inconsistent fraud
data. Based on various industry reports and FBI analysis,
mortgage fraud is pervasive and growing.
The FBI investigates mortgage fraud in two distinct areas:
Fraud for Housing and Fraud for Profit. Fraud for Profit is
sometimes referred to as ``Industry Insider Fraud'' and the
motive is to remove equity, falsely inflate the value of the
property or issue loans based on fictitious properties. Based
on existing investigations and mortgage fraud reporting, 80
percent of all reported fraud losses involve collaboration or
collusion by industry insiders. These schemes involve industry
insiders to override the lender controls.
Fraud for Housing represents illegal actions perpetrated
solely by the borrower. The simply motive behind this fraud is
to acquire and maintain ownership of a house under false
pretenses. This type of fraud is typified by a borrower who
makes misrepresentations regarding income or employment history
to qualify for the loan.
In the past 18 months, the FBI has been evaluating the
effectiveness of its national mortgage fraud program. In June,
2004, I authorized the consolidation of the mortgage fraud
program into the Financial Crimes Section of the FBI's Criminal
Division. Previously, mortgage fraud that impacted government
programs, for example, HUD, was managed by another section.
Mortgage fraud affecting financial institutions was managed by
the Financial Crimes Section. This consolidation provides the
FBI a more effective and efficient management over mortgage
fraud investigations.
Second, I encouraged an overall strategy to address
mortgage fraud on a proactive basis, utilizing partnerships of
Federal agencies, State and local law enforcement, regulatory
bodies and private industry.
Third, I assured adequate personnel resources were
dedicated to emerging mortgage fraud problems in regions of the
country encountering the greatest levels of fraud.
And finally, the FBI adopted an overall strategy to focus
on insiders harming the industry in order to disrupt and
dismantle entire criminal enterprises.
The FBI defines industry insiders as appraisers,
accountants, attorneys, real estate brokers, mortgage
underwriters and processors, settlement/title insurance
employees, mortgage brokers, loan originators and other
mortgage professionals engaged in the mortgage industry.
Through a mandatory reporting mechanism, industry insiders
would be the front line in preventing mortgage fraud. Zero
tolerance within the industry, combined with a mandatory system
of reporting fraudulent activities to the FBI and HUD, would be
a major step in addressing mortgage fraud.
The potential impact of mortgage fraud on financial
institutions in the stock market is clear. If fraudulent
practices become systemic within the mortgage industry and
mortgage fraud is allowed to become unrestrained, it will
ultimately place financial institutions at risk and have
adverse effects on the stock market. Investors may lose faith
and require higher returns from mortgage-backed securities,
which will result in higher interest rates and fees paid by
borrowers, limiting the amount of investment funds available
for mortgage loans.
Often mortgage loans sold in secondary markets are used by
financial institutions as collateral for other investments.
Repurchase agreements have been utilized by investors for
protection against mortgage fraud. When loans sold in the
secondary market default and have fraudulent or material
misrepresentation, loans are repurchased by the lending
financial institution based on a repurchase agreement. As a
result, these loans become a nonperforming asset, and in
extreme fraud cases, the mortgage-backed security is worthless.
Mortgage fraud losses adversely affect loan loss reserves,
profits, liquidity levels and capitalization ratios, ultimately
affecting the soundness of the financial institution itself.
Over the past 5 years, the FBI has implemented new and
innovative methods to detect and combat mortgage fraud. One of
these proactive approaches was the development of a property
flipping analytical computer application, first developed in
the Washington field office to effectively identify property
flipping in the Baltimore and Washington areas. The original
concept has evolved into a national FBI initiative which
employs statistical correlations and other advanced computer
technology to search for companies and persons with patterns of
property flipping.
As potential targets are analyzed and flagged, the
information is provided to the respective FBI office for
further investigation. Property flipping is best described as
purchasing properties and artificially inflating their value
through false appraisals. The artificially valued properties
are then repurchased several times for a higher price by
associates of the ``flipper.'' after three or four sham sales,
the properties are foreclosed on by victim lenders. Often
properties are ultimately repurchased for 50 to 100 percent of
their original value.
Other methods we have used include undercover operations
and wiretaps. These investigative measures often result in
collecting valuable evidence and provide an opportunity to
apprehend criminals in the commission of their crimes and
reduce losses to financial institutions. These proactive
methods do not preclude historical investigations; however,
they provide the FBI with additional tools to conduct large-
scale investigations through operational efficiencies.
As far as trends, there are many mortgage fraud schemes.
The FBI is focusing its efforts on those perpetrated mostly by
industry insiders. The FBI is engaged with the mortgage
industry in identifying fraud trends and educating the public.
Some of the current rising mortgage fraud trends include:
equity skimming, property flipping, and mortgage identity-
related theft.
Equity skimming is a tried and true method of committing
mortgage fraud and criminals continue to devise new schemes.
Today's common equity skimming schemes involve the use of
corporate shell companies, corporate identity theft and the use
or threat of bankruptcy or foreclosure to dupe homeowners and
investors.
Property flipping is nothing new. However, once again, law
enforcement is faced with an educated criminal element that is
using identity theft, straw borrowers and shell companies to
conceal their methods and override lender controls. It should
be noted that identity theft in many forms is a growing problem
and is manifested in many ways, including mortgage documents.
The mortgage industry has indicated that personal, corporate
and professional identity theft in the mortgage industry is on
the rise. Computer technology advances and the use of online
resources have also assisted the criminal in committing
mortgage fraud.
The FBI and its law enforcement industry partners are
working together to identify these trends and develop
techniques to thwart illegal activities in this area. The FBI
focuses on fostering relationships and partnerships with the
mortgage industry to promote mortgage fraud awareness.
Over the past 2 years the FBI has spoken and participated
in various mortgage industry conferences and seminars,
including those sponsored by the Mortgage Bankers Association.
This year, we will be speaking at and participating in the
MBA's 91st Annual Convention and Expo. The MBA estimates that
6,000 industry leaders will attend that conference.
To raise awareness of this issue and provide easy
accessibility to investigative personnel, we have provided
contact information for all FBI mortgage fraud supervisors to
relevant groups, including the MBA, Mortgage Asset Research
Institute, Fannie Mae, Freddie Mac and others.
Additionally, we are collaborating with industry to develop
a more efficient mortgage fraud reporting mechanism for those
not mandated to report such activity. This Suspicious Mortgage
Activity Report or concept is under consideration by the
Mortgage Bankers Association.
The FBI supports providing a safe harbor for lending
institutions, appraisers, brokers and other mortgage
professionals similar to the provisions afforded to financial
institutions providing ``safe harbor'' information. The ``safe
harbor'' provision would provide necessary protections to the
mortgage industry under a mandatory reporting mechanism. This
will also better enable the FBI to provide reliable mortgage
information based upon a representative population in the
mortgage industry.
A recent analysis of mortgage industry fraud surveys
identified 26 different States as having significant mortgage
fraud problems. Although every survey identified Florida and
Georgia as having significant mortgage fraud-related
investigations, the survey also identified nine other States in
the South and Southwest, seven States in the West and five
States in the Midwest as having mortgage fraud problems. Once
again, these studies illustrate the need for increased
coordination among industry and law enforcement on mortgage
fraud.
In conclusion, the FBI is committed to increasing liaison
and education efforts and partnering with Federal, State and
local enforcement and private industry to combat mortgage
fraud. We support new approaches to address mortgage fraud and
its effects on the U.S. Financial system to include a mechanism
to require the mortgage industry to report, fraudulent activity
and the creation of ``safe harbor'' provisions to protect the
mortgage industry under a mandatory reporting mechanism.
Mr. Chairman, the FBI looks forward to working with you and
other members of this committee on solving this problem. I
thank you for allowing me the opportunity to testify before you
today, and I will be happy to entertain any questions.
Chairman Ney. Thank you for your testimony.
[The prepared statement of Chris Swecker can be found on
page 90 in the appendix.]
Chairman Nay. Before we move on to Mr. Weicher, if there
are any members who would like to submit their opening
statements for the record, without objection, they will be
submitted for the record.
Thank you.
Chairman Ney. Mr. Weicher.
STATEMENT OF HON. JOHN C. WEICHER, ASSISTANT SECRETARY, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Weicher. Thank you, Chairman Ney, Ranking Member Waters
and distinguished members of the subcommittee. And on behalf of
Secretary Jackson and the Department, thank you for this
opportunity to testify on mortgage fraud.
Today, I would like to provide you with an overview of
FHA's initiatives to address this problem.
Predatory practices can take many forms. Lenders that use
these tactics often target our most vulnerable populations.
Predatory loans harm borrowers by making it impossible or
difficult for them to keep up with payments, and if they miss
their payments, they risk losing their home, their credit
standing and their initial investment.
Predatory lending can rise to the level of criminal
activity and constitute mortgage fraud, knowingly undertaken by
individuals intent on profiting at the expense of others.
Actions include deliberate manipulation of property valuations,
falsification of borrower financial information, forgery of
licenses, certifications and titles, and misrepresentation of
property ownership and conditions.
FHA monitors lenders for program compliance. During the
last 4 years, FHA has completed over 3,600 lender monitoring
reviews. In about 200 of those reviews, we documented
significant findings that may constitute fraud. By statute, FHA
refers all potential fraud to HUD's Office of Inspector
General. Consequently, FHA made 1,345 referrals to the OIG to
investigate findings of possible fraud during this period.
Once we make a referral to the OIG, our role is simply to
work with them, providing them with whatever information they
may request, such as loan case binders.
Besides working with the OIG, FHA combats mortgage fraud by
working to prevent it. In this regard, FHA has made significant
efforts through consumer education, regulatory reforms and
enforcement actions.
HUD believes that our first line of protection is an
informed consumer. Housing counseling has proven to be an
extremely localized important activity to educate consumers on
how to avoid abusive lending practices. In the last 4 years,
President Bush has doubled the budget for housing counseling
and Congress has approved. In fiscal year 2004, HUD awarded $36
million in grants to counseling agencies. These grants will
assist more than 700,000 people to either become homeowners or
remain homeowners.
FHA has also developed new program requirements,
specifically targeting lending practices to protect all FHA
borrowers. In this administration, we have published eight
Final Rules, including an anti-flipping rule and two proposed
rules, and we are currently drafting five more. I list these in
my prepared statement.
And FHA has put in place a series of procedural changes
designed to deter mortgage fraud, also listed in my testimony,
such as new guidance on Social Security number verification.
In addition to establishing more stringent procedures for
participating in FHA programs, we are taking aggressive action
concerning business partners that demonstrate poor performance
and abuse of lending practices.
We now monitor appraisers based on the risk they pose to
FHA. Under the approach we inherited from the previous
administration, FHA spent $46 million over 3 years, but found
only 97 appraisers to sanction. Under our new ``Appraiser
Watch'' system, we have spent less than $1 million in the last
3 years and sanctioned over 300 appraisers.
FHA has created ``Credit Watch,'' which tracks quarterly
the default rates for the 25,000 lenders that originate FHA
loans, and enabled HUD to determine those offices where the
default rate significantly exceeds the rate in the local area.
Since ``Credit Watch'' started 5 years ago, FHA has
terminated 261 lender branches. The industry supports ``Credit
Watch.'' we sanction the worst performers and create a level
playing field for those who follow the rules.
FHA also produces ``Neighborhood Watch,'' a Web-based
software application which provides lenders with statistical
views of their performance so they can compare themselves to
others in their area. ``Neighborhood Watch'' is also used by
community groups to monitor local lenders and by HUD's OIG to
identify possible lenders for audit or investigation.
I hope this discussion of our efforts and accomplishments
has made clear that the administration and the Department are
aggressively policing FHA participants and imposing significant
sanctions on business partners found to be engaged in abusive
or deceptive behavior. We are firmly committed to protecting
customers against mortgage fraud.
Thank you for the opportunity to meet with you today.
[The prepared statement of Hon. John C. Weicher can be
found on page 111 in the appendix.]
Chairman Ney. I want to thank all three of the gentlemen
for their testimony.
I wanted to ask a question of Mr. Swecker. Do you, with the
FBI, just focus most of your time on this, or all of your time,
on mortgage fraud?
Mr. Swecker. Within the Criminal Division?
Chairman Ney. Yes.
Mr. Swecker. My responsibilities are all criminal--The
entire criminal program--so it would include violent crime,
white collar, the whole aspect of criminal violations.
Chairman Ney. I want to ask a question on the flipping
aspect.
What happens if, you know, a person has, for whatever
reason, bought a property at a lower level--maybe there was a
divorce, or a person lost their job and they moved out of town
or whatever--and they bought it; and then they are going to be
owner occupied, so they didn't have to put as much money down.
And then they turn around and find out they can sell it at
a lot higher price. But they don't have a fraudulent appraisal;
it is not fraudulent, but you know, they buy for 60 and they
sell for 90.
Ms. Waters. It is the American way.
Chairman Ney. I am just wondering.
Mr. Swecker. That wouldn't fall into the category of
property flipping.
Chairman Ney. But if they said they were going to be owner
occupied, and all of a sudden somebody came around and said,
look, I will give you 20,000 more for that property, would that
then be fraud because they said it would be owner occupied,
turn around and----
Mr. Swecker. I think that depends on their intent at the
time they make the representation on the application and to the
loan originator. I think you would have a hard time proving a
criminal intent there.
Chairman Ney. How would you investigate intent?
Mr. Swecker. Well--you would look at all the facts and
circumstances. You know, that type of single transaction is not
where our investigative efforts would be focused. We are
looking at more systemic-type schemes.
Chairman Ney. Somebody comes in, has a fraudulent
appraisal?
Mr. Swecker. Right.
Chairman Ney. Tries to make it look like the place is worth
a lot more?
Mr. Swecker. That isn't the type of case we would spend a
lot of----
Chairman Ney. It is more an organized effort by people to
do this on a larger basis?
Mr. Swecker. Correct,correct.
Chairman Ney. How do you think law enforcement can best,
you know, combat--and I know this is not everybody in the
industry; you know, I am fully aware of that. And sometimes--
the purpose of this hearing today is, a lot of times, the
industry are victims. You also have predatory lending, that is,
upon a borrower; but in this case, it is fraud coming back up
to the lender, which can affect a lot of people.
But how do you think law enforcement can best combat it,
working through structures of the institutions, the brokers,
the bankers?
Mr. Swecker. A combination of things. I think education is
number one. I think what we have tried to do over the last
couple months here is to get some awareness, develop it within
the industry, how prevalent the fraud is, combined with some
aggressive enforcement action, so that we can get a deterrent
out there and deter those would-be fraudsters.
The third part of that is to develop or require some type
of reporting system, much like the Bank Secrecy Act requires on
other suspicious transactions. Currently, the banks are covered
under that, but the mortgage brokers and others in the loan
origination process are not required to report any type of
suspicious activity.
Chairman Ney. One question I have for any of the panelists,
if the origination volumes decline, do you think then the fraud
will drop automatically? Does it go hand in hand when there are
more originations? If it declines, will this historically drop?
Mr. Swecker. I think it does go hand in hand, but I am sure
that they will have opinions on this as well. But I think the
volume itself has created some cover for the unscrupulous
professionals that are insiders that are involved in these
fraud schemes.
So I think if volume did go down, yes, we might see a
reduction in the fraud schemes.
Chairman Ney. Any comments, Mr. Weicher or Mr. Donohue?
Mr. Weicher. I think Mr. Swecker is right about that. I
think fraud will rise and fall with the market, not necessarily
proportionally, and the bigger the market the more opportunity
there is to perhaps get away with something, given the
resources that are available to combat it.
Mr. Donohue. Mr. Chairman, I wanted to revisit something
you asked a moment ago, and that was the process by which these
cases come to be, and the actions--we, the OIG is a bit unique
in the fact that not only do we criminally investigate these
cases and address the civil side, but we also work with the
Department as far as the Department suspensions.
I must commend the department, the aggressive nature; we
have worked collaboratively to deal with these things. I do
feel, however, these debarments, as egregious as some of them
may be, may require a permanent debarment for the industry.
Chairman Ney. A permanent----
Mr. Donohue. A permanent debarment. I think some of these
matters--some are so egregious, my concern is that the folks
that might have caused these problems get back into the
industry again, and that is a concern that we have seen in the
past.
Chairman Ney. Well, my time has expired.
The gentlelady from California, the ranking member.
Ms. Waters. Thank you very much, Mr. Chairman.
You know, I am very appreciative of the time and the
attention that you give to the subcommittee and the work that
you do in organizing hearings so that we can be better informed
and make better public policy.
Now I wish I could tell you, Mr. Chairman, that I focused--
that this is one of my top priorities, but it is not. I am very
interested in predatory lending and foreclosures, and I am very
interested in innocent, hard-working people who get caught up
in schemes that cause them to lose their homes.
Now I am glad that you straighten out where you put your
time and your attention, because I am not interested in a
desperate would-be homeowner who inflates their income a bit. I
think what they should be told, when they are making
application, is that this is a crime and they shouldn't do it.
I am not interested in people who make mistakes because they
are desperate, and I essentially hope you don't put your time
and attention there. And I want you to know that oftentimes
lenders and brokers are involved in encouraging people to do
things that may be a violation of law, and people innocently
follow the advice of their mortgage bankers or brokers and they
get in trouble.
So I am not interested in spending a lot of time and
attention on catching consumers who are stupid or desperate and
make a mistake or sell their home and get caught up in
something.
Now if there are organized efforts and schemes where you
have, again, the thieves, I guess, or a group organized; and
they have a particular way that they are creating crimes--I
mean, they are involved with fraud and ripping off, then that
is something else. And I didn't know that that was a big
problem. I mean, I am worried about mortgage bankers and
brokers who do second and third and fourth mortgages and who
flip the loans and increase--and the consumer has no way of
paying off those loans. They don't even know who they sell the
loans to. Now I consider that more than predatory lending. I
consider that a kind of organized fraud, particularly when some
of these mortgage companies have a reputation for doing that.
So, I mean, if this committee hearing today, Mr. Chairman,
is about fraud that has been committed by innocent people who
fall into these schemes who are desperate and who make
mistakes, I have got to go. But if it is something else, I will
try to stick around.
I don't know what to ask you. What are you doing here? What
do you have to tell us?
Chairman Ney. We would like to have you either way, here,
but, you know, we will see what he says.
Ms. Waters. I would like to stay, but----
Mr. Swecker. I would like for you to stay.
We don't focus our resources on the individual, unwitting
borrower who has been sort of caught up in a scheme. Our focus
is on the industry insiders. I mentioned the two types of
frauds, fraud for housing, fraud for profit. Most of our
efforts are focused on the fraud-for-profit type of violation.
We are looking for something that is more systemic than
just an unwitting individual borrower who has been caught up in
a situation. Maybe they went along with it because they were
unsophisticated, but that is not our focus at all. We don't
have the resources to engage in that type of single transaction
investigation. Our focus is clearly on the insiders and the
schemes.
Ms. Waters. I want you to know that my staff also focused
on flipping, and it is not the kind of flipping that I normally
talk about. I talk about flipping by the lenders who flip the
loans and increase the interest rates and all of that. They
kind of focused on flipping in terms of buying properties,
putting some paint on them and fixing them up and putting them
back on the market.
Mr. Swecker. Right.
Ms. Waters. Now, again, you know, I am not sure that that
is fraud as they have been describing it to me. You know, it is
kind of the American way. You buy something cheap and you sell
it for more and you make a property--and, as I understand it,
that house that you fix up will not sell for more than the
market will bear in the neighborhood where you are selling it.
So if you buy a run-down piece of property in a neighborhood
where the houses are selling for $200,000, and you pay, you
know, $75,000 for it and you fix it up, and you sell it for
$200,000, I don't consider that fraud. You know, and I--you
know, I discussed that with my staff.
Is there something in that kind of flipping that I don't
know about that you consider fraud?
Mr. Swecker. What you describe is not fraud. I can't speak
for HUD, but I think I know what they would say and will say.
We don't focus on those individual quick transactions where
somebody has worked hard, put some sweat equity in the house
and made a profit. That is not where our resources are going to
go. Our resources are going to go, as I said, on the industry
insiders. If somebody has consented to be a straw buyer, that
is a different story.
Ms. Waters. I don't want to exceed my time, but if you
could give me one example of what you do, what you are talking
about. Who are you trying to catch?
Mr. Donohue. Would you like me to--Chairwoman, a perfect
example of this is when we see a pattern in the southwest part
of the United States, when we see folks come in across the
border and come in to buy, you know, come in to experience the
good life. And what happens is they are often approached by
suspected wrongdoers that go back up and suggest that they can
get into a house, and they get into it for a great price. And
they occupy these homes--and, of course, many of these people
are already illegal immigrants into this country. They get into
these units, the information is provided to them, often
fraudulent information, fraudulent Social Security numbers and
the rest, false information about earnings and the rest. And
what happens, they get into these units--and there is quite a
number of these cases.
Our focus, as the FBI has just spoken about, is not on
those individuals occupying those units. The focus is on the
people who are gaining the ill-gotten proceeds from that event.
We often call upon those very arguments as witnesses for
our cases involved. That is the focus. That is--it is a
substantial amount of that. It goes on; and, quite frankly,
some of these people occupy those homes and stay in those homes
for some period of time and paying on those mortgages----
Ms. Waters. How many of those kinds of cases have you
prosecuted?
Mr. Swecker. All the cases, the examples that we have
given, are cases involving insiders, where there has either
been a fraudulent appraisal or there has been some type of
fraud or fraudulent act on the part of insider. So in the
circumstances you are describing, only if they had got a
fraudulent appraisal would you see us go after somebody who was
just trying to put some sweat equity into a house and make a
profit on a piece of real estate. And that--again, we are not
focused on the borrower. We are focused on the insider engaged
in criminal acts.
Ms. Waters. I know, but, unfortunately, I haven't seen a
lot of prosecutions. For years we have been fighting against
mortgage brokers and maybe bankers or folks who falsify on
behalf of these unsuspecting people, tell them what to write
down. They are usually charging them too much money, too many
fees, and they are the ones who get foreclosed on. But those
guys never get prosecuted. I mean, I have worked some of these
cases for 4 to 5 years in my district, and we have a consumer
division in the District of Attorney's Office, but they just
can't seem to catch these characters.
So that is all I would be interested in, is how to get the
guys who are putting people into homes with false information,
overcharging them, too many fees, too high interest rates,
everything, foreclose on them after they flipped the loans,
sold the loans. We can't even find them. So when you all have
information about how you catch those, let me know.
Thank you.
Chairman Ney. I thank the gentlelady.
The gentlelady from Pennsylvania.
Ms. Hart. Mr. Chairman, I believe Mr. Miller has some time
constraints, so I am going to cede to him.
Mr. Miller of California. Yes, thank you.
I have been involved in development for over 30 years, and
the question was how many of these have you caught--and when I
first went into business as a young contractor I did a lot of
HUD work, and the difficulty we have we refer to the MAI
appraisals as Made As Instructed. And it is very, very simple
for an individual to buy a $210,000 home, have a connection
with a broker or an appraiser, and an appraiser will come back
with an appraisal for $235,000 that might be inflated $25,000.
But that inflation on your part is very, very, very hard to
prove. Because an aggressive appraiser can justify most
anything they want within 10 percent. If they are really
creative, I have seen it to exceed 10 percent very easily; and
for you to come back and say they committed fraud is very
difficult.
But that is the area that I have a huge concern with.
Because the minute we start selling properties--as we are
looking at this real cost of mortgage fraud--you are selling a
piece of property that is worth $210,000, and it sold for 235.
Somebody made 25 grand in costs plus--and fees. You take it
back, and you have lost money on it, and then your cost of
putting that piece of property back on the market becomes a
very, very expensive process for the system. When something is
expensive for the system, it costs everybody involved in the
system.
And there is a lot of ways of committing fraud. Putting
paint back on a house, putting a latex over a lead-based paint
is a felony, committing a fraud against somebody in the future.
So, yes, even painting a home can be fraud and leaving somebody
with a very expensive process in the future.
I guess my biggest concern in what was said--and I guess,
maybe I heard it wrong, but why would anybody be allowed to be
involved in the process being considered an acceptable vendor,
whether it be an appraiser, broker or builder--if they have
been found to be guilty of fraud at some point in time, why
would, at some point in time in the future, would they even be
reconsidered to be involved in the process? Did I misunderstand
what was said?
Mr. Donohue. Well, I will respond in that one of the
processes in which we--to step back, if we could, to the
criminal case itself--or to the civil case--we work with the
FHA and a mortgage review board to look at the sanctions that
could be moved against these folks involved as quickly as we
possibly can.
And I might say we do have an aggressive--the Department
has been aggressive in addressing these matters. I just--my
comment was that I think in some of these cases--which I feel
to be egregious cases--is my feeling is that these folks that
might have been involved should be removed, if not permanently
from the industry then substantially so.
Mr. Miller of California. I think it should be permanently.
You know, the problem I have with builders is when they
start saying it is acceptable industry standards there is
generally something wrong in what they have done. If they have
to justify their quality of construction by this is the
accepted industry standards, generally you have found out that
that is probably a builder nobody wants any involvement with.
And any type of fraud is bad. I mean, I am shocked that any
of us up here would say, well, this kind of fraud doesn't
bother me, that kind of fraud doesn't bother me. There can't be
degrees of fraud. Fraud is fraud.
Now if you have an unwitting individual that did something,
and they didn't know they were doing it, they were not aware,
that happens. But anyone who commits fraud, represents himself
to be a brother who doesn't have the wherewithal to make a
payment just to get in the home is fraud. And when that house
is foreclosed upon, somebody else is going to have to pick up
the burden because they are paying the fees. So any fraud in
the system impacts innocent people who want to be involved in
the system.
I remember when I was a young builder, I did HUD work in
east L.A. I used to go out and bid these HUD prosecutions, and
I would be awarded a contract. All of a sudden, my partner was
called in by the director of the HUD in the region saying he
wanted a third of our profits back in cash upon issuance of the
contract. Now he didn't call me in. He didn't call anybody but
my partner. We were young. I said, we are not going to give
anybody a kickback. We are low bidder. You have to continue to
give us the contracts.
Yes, we continued to be a low bidder, but, for some reason,
there was always something found wrong with the RFP. The award
we should have received on the contract was put out to bid with
somebody else, and we were off bidding another job, so--and I
don't think that is probably as predominant today as it has
been at some times over the years. But there is all types of
fraud, whether it be involved in our system or within the
builder, appraiser or broker system.
But any time we--and your job is very difficult. I don't
know how--unless it is something very, very egregious where you
can go to court and prove fraud--it is very difficult with an
appraiser, like I said, anywhere within a realm. And if there
is any association between a broker builder and an appraiser,
the system will be impacted in a negative fashion through fraud
that is very difficult to prove. You might suspect individuals
of having problems, but to prove it is very, very difficult.
But I think this is an issue that erodes the system, and I
think it is something that--if we are allowing people who have
been found guilty of fraud to reenter the system and be
acceptable, I think maybe we should look at that.
But thank you for your efforts. I would encourage you. This
is an area we need to effectively deal with.
Thank you. I yield back.
Chairman Ney. Thank you.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much, Mr. Chairman.
Mr. Donohue, in your testimony, you talked about the 158-
count indictment in the Northern District of Georgia concerning
flipping. Could you give me an update on where we are on that
case?
Mr. Donohue. If you don't mind, I am going to have my--I
was going to have my head of investigation come up here, but he
just advised me that the case is still open and for that I am
prevented from getting into specifics at this time.
Mr. Scott. Okay. Could you give an indication as to why
Georgia has just catapulted to the front on this issue? What is
peculiar? What are the circumstances in Georgia that have
allowed it to get to the head of the class on this?
Mr. Swecker. You know, the figures that we have are based
on an intelligence assessment that we have done which relied
heavily on private industry, such as the Mortgage Asset
Research Institute.
I can't tell you why Georgia is in there. It may be just
volume of transactions--and as we mentioned earlier, within
that volume, it provides cover for the unscrupulous brokers and
appraisers and others that are willing to commit fraud. So it
may just be a function of the volume.
Mr. Scott. Mr. Swecker, is that right? Swecker?
Mr. Swecker. Yes.
Mr. Scott. Concerning the FBI, you mention in your
testimony that the mortgage fraud in the secondary market is
often underreported, so the two-level mortgage fraud is largely
unknown, that the mortgage industry itself does not provide
estimates on the total industry fraud and that the industry
provides incomplete and inconsistent data. And yet you say
mortgage fraud is pervasive and growing and that, for the past
18 months, you all have been doing an internal valuation of the
FBI in terms of your effectiveness. Could you tell me what you
are finding out in terms of your effectiveness and specifically
what level of funding is currently allocated to the FBI toward
mortgage fraud?
Mr. Swecker. I am not sure about the level of funding. I
would have to get back to you on that.
But I can tell you I think our efforts have been very
successful. We are trying to provide a very visible deterrent
along with HUD and other investigative agencies. We are trying
to get the word out there that these schemes are out there. If
you get caught, you are going to go to jail, and we are hoping
that we will have some deterrent effect.
We have been very aggressive with undercover operations.
This started about two to two and a half years ago--and at that
time I was the agent in charge in North Carolina. We saw an
immediate spike as the interest rates went down in mortgage
fraud schemes.
As I mentioned earlier, I think there is a lot of cover
provided in just the volume, and it is a very competitive
industry. The mortgage broker industry, loan originations are
very lucrative. I think in all of that volume we have just seen
some unscrupulous people set up brokerages that are devoted, in
some cases, almost exclusively to fraudulent schemes, and then
they disappear after the house of cards starts to come down.
But the reason we came out with our press statement about 2
weeks ago, we wanted to get some education out to the industry
and public. We wanted to develop some awareness and provide
some deterrent to see if we could get this problem--talk this
problem down in a sense.
We have created a mortgage fraud initiative nationwide,
where we have all of our field offices looking for this type of
fraud, not individual borrowers, unwitting folks who have been
caught up in a scheme, but more the systemic fraud schemes
where we have 100, 200, 300 frauds being perpetrated by one
company.
Mr. Scott. What can we in Congress do to help the FBI
expand these investigations?
Mr. Swecker. What I mentioned about reporting requirements,
if we could extend the reporting requirements to the entire
mortgage industry, not just the banking institutions
themselves. There are a lot of other types of mortgage-related
businesses. If they were required to report and if you were to
give them the safe harbor provision, then we would be able to
identify these schemes and address them.
Mr. Scott. Thank you.
I yield back the balance of my time, Mr. Chair.
Chairman Ney. I thank the gentleman.
The gentleman from Arizona.
Mr. Renzi. Thank you, Mr. Chairman.
I have a little favor to ask, Mr. Weicher, and I apologize.
It is not so much fraud related.
You made a statement that your organization did a hell of a
job recently to reacting to an issue in Arizona. Myself and
Congressman Shadegg sent your department a letter. We have got
one of these down-state assistant providers in Arizona called
Family Housing Resources. They were removed from the Web site,
removed from a list of assistant providers.
When you get back--I haven't seen you in so long--if you
get a chance could you go down in your Department and reach
down and grab this issue and see if we can resolve and get
these guys back in shape? We have got 2,100 Arizonans who
benefited these--award-winning people, nothing to do with
fraud.
But it is good to see you here, and I thank you for the
work.
Mr. Weicher. I thank you, Mr. Renzi. We will be getting
back to you on this, we expect, next week. We are aware of the
issue. I will go back and have appropriate conversations, but
we are expecting to be able to get it--to deal with it by next
week.
Chairman Ney. The gentlelady from Indiana.
Ms. Carson. Thank you very much, the three of you, for
being here.
I am Julia Carson from Indianapolis, Indiana. You had
mentioned that you are doing some work out in the Midwest, and
I would also think that would be Indianapolis.
Indianapolis had one of the highest rates, if not the
highest rates, of predatory lending and foreclosures in the
whole Nation. I am sure you are aware of that. We have had
extensive town hall meetings to try to pinpoint the problem.
There is no one particular entity that seems to be the problem.
You have got real estate agents, you have got mortgage brokers,
you have appraisers who seemingly have been engaged in this
whole fraud issue. Inflated appraisal prices, humongous
foreclosure rates, predatory lending against everybody, not
just senior citizens or those who are of a low income.
They will use techniques to inflate the prices, get some of
the money from the bank, pay off the home buyer, and then the
home buyer is stuck with repaying that money plus others.
I was wondering if somebody could tell me if it is
appropriate, it may not be, what your opinion is on this free
payment, home down payment for home buyers, and if you have had
any experience with this group called Nehemiah. They seemed to
have worked extensively in my district. If you cannot answer, I
respect that, because that is a policy question.
Mr. Weicher. Ms. Carson, we permit down payment assistance
in the FHA program, and Nehemiah is one of the nonprofit
entities which provides down payment assistance. We have been
reviewing, and the Office of Inspector General earlier working
with us have been reviewing, the experience that we are having
with the loans that have down payment assistance, and have been
conducting an investigation and analysis really of our loan
experience with down payment assistance.
Ms. Carson. Have you investigated Nehemiah specifically?
Mr. Weicher. I think ``investigation'' is the wrong word. I
misspoke. We analyze our experience with the loans, what the
default rates are, comparative default rates, with loans that
do not have down payment assistance to see if there are changes
that would be appropriate to make in the program.
Ms. Carson. I have long held the view, I am in the minority
with this view, but that not everybody should be a homeowner.
Number two, we created a help line that got over 800 calls
initially. It is called 1-800-722-HELP, and that is when people
are about to sign their name on a paper buying a home, nobody
reads that fine print up and down the line, that tiny writing
for the most part. If you have 2 or 3 weeks to read it, that is
different. So we have volunteers funded by Fannie Mae where the
credit bureaus are checking out applications before people sign
their name to a long-term commitment in terms of buying houses,
and it has worked extremely well. As a matter of fact, we have
to see if we can get more staff to handle those inquiries prior
to the time people sign their names.
In this whole mortgage field, predatory lending, it is not
isolated. It is not one group or the other. I guess you call it
the buddy program, they are all involved in this mess together.
I would hope you would do something that is high profile, that
would discourage future events, but I don't know how that would
work. People rob banks every day. Robbing banks is high
profile, but they still rob banks. Maybe with your creative
collective minds you can come with up something, because
consumers are being injured immensely by all of this.
Mr. Donohue. Congresswoman Carson, I have been advised the
OIG did an audit of Nehemiah for 2 years, and we can get you a
copy of that.
Ms. Carson. I would appreciate that.
Mr. Swecker. I would like to quickly address this issue,
the borrowers are often the victims. That is exactly the type
of violation we are looking for is a scheme that affects
multiple loans. What you are describing is an area where the
FBI would apply some resources to investigate. We are aware of
Nehemiah. There are several field offices that have received
information about some of the things that they have been
involved in. I could not discuss what we are doing with it
because it is ongoing, but we are aware of the group.
Mr. Miller of California. Would the gentlewoman yield?
I have been involved with quite a few nonprofits, and HUD
stays on top of them. I am not speaking to Nehemiah, but I have
known many others who have come in with questions and concerns
on how HUD really has diligent oversight. HUD watches the
resales. They watch those. If there is discrepancies, they
watch those.
Ms. Carson. But you take a name like Nehemiah, anybody that
goes to church is going to trust Nehemiah. You know what I am
saying.
Mr. Miller of California. I have heard about some
companies, they get involved with an appraiser, a broker and a
builder. When that happens, that, to my previous comment, makes
it very difficult; but how do you prove there has not been an
inflation of $25,000 in an appraisal? That comes over to
nonprofits also.
Mr. Ney. Thank you.
Ms. Velazquez.
Ms. Velazquez. Mr. Swecker, one of the difficult things
about tracking unscrupulous individuals engaging in mortgage
fraud is they move from company to company and their histories
on loans to new employers, and they begin to take advantage of
families again. The creation of a national database has been
raised as a way to curb fraud and protect unsuspecting
families. Can you comment on this suggestion and the possible
pros and cons of such a database?
Mr. Swecker. I think that plays into the reporting
requirement.
Ms. Velazquez. I am so cautious when it comes to the
Federal Government and a database.
Mr. Swecker. That would be the best mechanism, or some type
of fraud reporting center. We would love to have the
information. We could do a lot with it. We use a lot of
computer analysis right now with the existing SAR process, and
we are getting a lot of case initiations off that.
The debarment process is something that HUD and some of the
regulatory agencies are involved in, and I would defer that
question to Mr. Donohue.
Mr. Donohue. It needs to be said that by a fact regulation,
when the FBI comes upon an investigation involving FHA fraud,
they advise us. We in turn, involving commercial fraud, advise
them. It is a statement to the cooperation.
Finally, organizations like the MBA and so on have been
very active lately in passing on information to us with regard
to wrongdoers. The communication link is there and getting
better as we go along.
We look at these debarments and suspensions activities
rather well. There is an awful lot of discussion going on as to
try and see if we can make sure these names are provided for.
We at HUD are pretty pleased with getting heads up with regard
to folks that go back in. I feel we cannot do enough in
ensuring, as the Congresswoman said, staying on top of these
things and making sure the same people do not come back in.
Ms. Velazquez. Thank you.
Mr. Weicher.
Mr. Weicher. We are in the process of developing a rule now
for FHA programs establishing a loan officer registry which
will increase our ability to monitor the performance of loan
originators. It will help us track loan officers, unscrupulous
loan officers, as they move from company to company. That is in
the development stage. It is not yet a proposed rule, but we
are working on it, and we think it will be useful.
Ms. Velazquez. Mr. Weicher, the foreclosure rate of 11.68
percent on FHA loans exceeds the national foreclosure rate by
7.35 percent. This figure is alarming, and HUD needs to do more
to protect families from unscrupulous lenders abusing this
program. We will hear later from Ms. Amiri from the Foreclosure
Prevention Program of South Brooklyn Legal Services, who serves
families in my district. There are several interesting
suggestions in her testimony that I want to hear your thoughts
on.
First, can you comment on her recommendation that HUD
should commission an independent appraisal or appraisal review
for every transaction to ensure the accuracy of the market
value of the property and to prevent fraudulent appraisal?
Mr. Weicher. Ms. Velazquez, I think if we were to
commission a separate appraisal beyond the appraisal that is
required as part of the loan application, we would be spending
a great deal of time and funds.
Ms. Velazquez. And we would be saving a lot of families'
homes, too.
Mr. Weicher. We have established a system whereby we track
the performance of the appraisers who do business with us. We
know the name of every appraiser on every loan. There are
25,000 appraisers who have the authority to write appraisals on
FHA loans. We track the performance of the loans on which they
have done appraisals. We look at the early default rates on
those loans, because if there is something wrong at the front
end, if there is something wrong in terms of predatory lending
or a corrupt appraisal, it is very likely to show up in the
first year or two after the loan has been performed. We look at
the performance of each appraiser over the first year or two on
the business they are doing, and if their performance is out of
line with the normal default rate in their area, we sanction
them. We throw them out of the program.
In the 3 years we have been doing this, we have removed
over 300 appraisers from FHA's program. That is a little over 1
percent of all of the appraisers who do business with us, but
we have the attention of the appraisal industry. I hear often
from appraisers and from appraisal organizations about the way
that Appraiser Watch is working.
Ms. Velazquez. I can see that when you have 11 percent on
FHA loans that exceeds the national rate.
Mr. Weicher. That is the 30-day delinquency rate.
Ms. Velazquez. She also suggests that HUD should extend the
prohibition on resale from 90 days to 6 months. What are your
thoughts about that?
Mr. Weicher. This is the antiflipping rule that I mentioned
whereby we will not insure a mortgage if the home has been sold
twice within 90 days, and if the period between sales is
between 3 months and 9 months.
Mr. Ney. I have to get the other two Members in before the
vote. Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman.
I thank the witnesses for being here. They probably think
they walked into a combat zone. They came expecting to be
patted on the back and applauded for what they are doing.
Actually they do need to be applauded for what they are doing
because this is an important part of what is going on in the
industry. Unfortunately, you walked into a committee that
recognizes the magnitude of the problem that you are dealing
with, which is, in effect, efforts to defraud lenders pales in
magnitude when you look at its volume compared to the extent of
predatory lending.
This is protecting lenders from people who are defrauding
lenders primarily, which is what you are talking about. But on
the other side is a category of predatory lending that is of
enormous magnitude, and that is what this committee has focused
a lot of its attention on. Part of that goes to, just to
illustrate the point that I am making, the definition of
industry insiders that is set out on page 3 of Mr. Swecker's
testimony. It does not include, except tangentially, I guess
you could say, other mortgage professionals engaged in the
mortgage industry.
So essentially what you all are doing is protecting lenders
from unscrupulous people, which is an extremely important part
of protecting the integrity of the system. But when you talk
about seven plea agreements on page 6 of your testimony, Mr.
Swecker, and we see probably seven predatory loans being made
in an hour in that same Charlotte market that you have
described, and what you walked into is not a reflection on the
value of what you are doing, it is a reflection on the
magnitude of our concern about what is going on on the lender
side where people are being charged higher interest rates than
they should be charged, where lenders are flipping the loans to
get more origination fees and what have you.
I don't want you to go away from here discouraged, I am
just trying to put this in perspective for you. There is a
much, much greater in magnitude problem on the lender side than
the one that you have identified here. I am trying to put that
in perspective for you.
Second, I want to just make clear that nobody goes away
thinking that all Nehemiah organizations are terrible people.
Nehemiah organizations are all over the United States, and I
suspect the quality of what they are doing varies from locale
to locale. The Nehemiah organization in my congressional
district, for example, I think, has done some commendable work.
And I don't know what is going on in Indianapolis with
Nehemiah, but I do not want folks to leave here thinking we
have indicted the whole Nehemiah organization.
I don't really have any questions. I think the work you are
doing is commendable. It is necessary. I would like to see an
equivalent fraud unit focusing its attention on predatory
loans, which are not by definition fraudulent loans. There is a
whole different standard apparently.
With that I yield back.
Mr. Ney. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Mr. Weicher, Mr. Miller made an interesting point earlier
that wrongdoing is wrongdoing, and he did not like this
distinction that some Members were drawing between fraud aimed
at borrowers and fraud aimed at lenders. His point was
wrongdoing is wrongdoing. Let me follow that to its logical
conclusion.
We have considered and are considering on the floor this
week a bill that would name companies in this country that do
business with terrorists or who do business or financing with
organizations connected to terrorists. We also in this country
have a practice of naming companies who trade with sanctioned
nations like Libya or Iran or Iraq. We are going to publish a
list, I believe, next week of companies who have traded with
sanctioned nations.
Under Mr. Miller's premise that wrongdoing is wrongdoing,
how do you feel about the idea of HUD publishing a list of
companies that regularly engage in predatory lending?
Mr. Weicher. We do that now. We publish in the Federal
Register the names of the entities who we sanction through the
Mortgagee Review Board, which I chair at HUD, and which
consists of six assistant secretaries and the director of the
enforcement center. We review cases of predatory lending, of
carelessness, of failure to follow our rules.
Mr. Davis. Do you just name people that you sanction, or do
you try to quantify people who regularly engage in the
practice, because they are two different things?
Mr. Weicher. We name the people that we sanction. We name
the penalty that is being imposed at the same time. Some of
those are civil money penalties, and the dollars relate to the
severity of the violations. And we suspend or debar for 3
years, 5 years, or indefinitely the most egregious offenders,
and we publish that information as well.
Mr. Davis. Mr. Swecker, I spent 4 years as an assistant
U.S. Attorney in Alabama, and certainly admire the work that
the Bureau does in this area. When I was with the U.S.
Attorney's Office, we regularly worked with our State attorney
general and regularly worked with State agencies to combat all
kinds of crime in the white collar and violent crime areas. Is
it helpful to the FBI if State agencies and State attorneys
general are themselves allowed to regulate and get involved in
the area of mortgage fraud and predatory lending?
Mr. Swecker. Yes.
Mr. Davis. As you know, one of the controversies that we
regularly have in this body are the degree to which States are
to be given an opportunity to regulate in this area, the degree
to which States have an opportunity to be a laboratory and to
police unfair predatory lending practices. Would you agree it
is helpful to law enforcement if States have an opportunity to
have a robust structure in this area to look for violations?
Mr. Swecker. Absolutely.
Mr. Davis. Thank you.
Mr. Chairman, since this is the last hearing of the year,
as a new member, let me thank you for your leadership and for
your example in the 108th Congress.
Mr. Ney. Thank you. And I thank you for your constant
attendance at the hearings.
We will dismiss the first panel, and recess for the votes
on the floor. We will convene the second panel after this
break.
[Recess.]
Mr. Ney. I want to thank the panel for your indulgence. I
was also waiting to see if another Member would show up. I will
go ahead and begin hearing the opening statements. We
appreciate you being with us today.
On panel two we have Mr. William Matthews, vice president
and general manager, Mortgage Asset Research Institute, Reston,
Virginia; Ms. Marta T. McCall, senior vice president, risk
management, American Mortgage Network, on behalf of the
Mortgage Bankers Association; Mr. Arthur J. Prieston, chairman,
The Prieston Group, San Rafael, California; Ms. Brigitte Amiri,
staff attorney, South Brooklyn Legal Services, Brooklyn, New
York; and Ms. Ecima Trujillo, national field director of ACORN
Housing Corporation, Los Angeles, California.
We will start with Mr. Matthews.
STATEMENT OF WILLIAM MATTHEWS, VICE PRESIDENT AND GENERAL
MANAGER, MORTGAGE ASSET RESEARCH INSTITUTE, INC., RESTON,
VIRGINIA
Mr. Matthews. Chairman Ney and Ranking Member Waters and
members of the subcommittee, I am pleased to be here today to
talk about mortgage fraud. The Mortgage Asset Research
Institute, also known as MARI, builds and maintains cooperative
databases in the mortgage industry and is used by financial
institutions to screen new business relationships.
MARI was founded in 1990 and was acquired by ChoicePoint
Services in June of 2003. One of MARI's cooperative databases
is called the Mortgage Industry Data Exchange, or MIDEX. This
database was established on the premise that unethical and
illegal activities in the residential mortgage industry could
be significantly reduced through the responsible exchange of
information on mortgage lenders, investors and insurers.
The MIDEX database is cooperative in nature and contains
different types of information. First of all, it has nonpublic
incidents of alleged fraud or material misrepresentation and
serious misconduct by mortgage industry professionals and
companies. These incidents are contributed by members of the
cooperative database and include over 400 lenders, mortgage
insurance companies and mortgage investors.
The second type of data we have is public sanctions and
legal actions. These are collected from over 200 Federal and
State regulators in the mortgage, securities, commercial
banking, real estate and appraisal industries.
The third type of data more positive in nature, is State
and Federal licensure data on mortgage companies and
professionals.
Today, thousands of companies and professionals are
searched each day through MARI's MIDEX database by its
subscribers to screen prospective and existing business
relationships in order not to do business with unscrupulous
individuals and companies.
The topic today is mortgage fraud, and a basic definition
of mortgage fraud is when a consumer or professional
intentionally causes the financial entity to either fund,
purchase or insure a mortgage loan when the entity would not
have otherwise done so if it had possessed the correct
information.
We have heard by other testimony in the first panel that
there are different types of fraud, and people defined it as
fraud for property and fraud for profit. I would expand that to
say there is consumer fraud, fraud for property. There are also
two types of fraud for profit. One is commission fraud. This is
where one or more industry professionals misrepresent
information in a loan transaction in order to receive a
commission. Commission fraud is a more common practice in the
industry and is a concern to mortgage lenders. It can result in
harm not only to consumers but to lenders as well.
The third type of mortgage fraud is fraud for profit and
consists of systematic collision by industry professionals to
steal a significant amount of funds from mortgage companies.
This type of fraud usually involves multiple properties and
parties in various disciplines within the mortgage industry,
such as: mortgage originators, appraisers, real estate agents,
closing agents, builders and title companies. Fraud for profit
usually results in significant, if not catastrophic, losses to
financial entities.
Let me give a quick example of mortgage fraud that we see
in our MIDEX database. It typifies some of the problems that
people are having in the industry. In 1997, the National
Association of Securities Dealers (NASD) debarred and
sanctioned an individual for taking investor funds of $10,000
and converting those to his own personal use. Since this
individual could no longer be a stockbroker. He became a loan
officer with a national lender. At the same time he set up his
own mortgage company, unbeknownst to his employer.
It turned out that the employer examined over 500 loans
originated by this individual, 20 percent of which had inflated
appraisals resulting in losses to the financial institution of
approximately $2.5 million. In August 2002, this individual
pled guilty to wire fraud and received a sentence of 5 years
probation and no jail time.
This incident illustrates the need for proper hiring
procedures in the mortgage industry and a central repository to
track professionals who are found guilty of fraud or unethical
behavior in the industry.
Our MIDEX database has a significant amount of information
in it, and I would like to point out some of the trends that we
are seeing of alleged fraud or material misrepresentation in
the mortgage industry. These trends were derived from
submissions from our subscribers. First of all, during the past
4 years there has been a shift in the States with the greatest
problems. Georgia and Nevada have caught up and surpassed
California and Florida as the States with the highest fraud
scores. In the past, fraud rates from California and Florida
have led the Nation by substantial margins. They continue to
have high fraud scores, but Florida now ranks third, and
California has slipped to eighth place behind Utah, South
Carolina, Colorado and Illinois.
The second trend is early payment default data information
from a company out of San Francisco called Loan Performance.
This information indicates that problems in several
metropolitan areas are consistent with the overall results that
MARI database subscribers have reported to us. Early payment
default is defined as a loan that is 90 days or more delinquent
within the first year of that loan.
The third trend, the types of problems found in loan files
such as false verifications of employment, inflated appraisals,
land flips, et cetera, seems to have been relatively stable
over the last 4 years.
I appreciate the opportunity to testify on MARI's behalf
regarding the impact of mortgage fraud and its impact on the
mortgage industry. Fraud is a significant problem, and the
types of fraud are increasing, and the types of fraud that are
occurring are becoming more severe. Fraud not only causes
losses to financial institutions--it can devastate
neighborhoods, and it can also result in higher prices to
consumers. Thank you.
Mr. Ney. Thank you, Mr. Matthews.
[The prepared statement of William Matthews can be found on
page 63 in the appendix.]
Mr. Ney. Ms. McCall.
STATEMENT OF MARTA T. McCALL, SENIOR VICE PRESIDENT, RISK
MANAGEMENT, AMERICAN MORTGAGE NETWORK, SAN DIEGO, CALIFORNIA,
ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION
Ms. McCall. Good morning, Mr. Chairman and subcommittee
members. As stated earlier, my name is Marta McCall, and I am
the senior vice president for risk management at American
Mortgage Network in San Diego, California, a wholesale lender
that deals nationally. I am here today on behalf of the
Mortgage Bankers Association, and I would like to thank you for
inviting MBA to testify on the growing problem of fraud
committed against mortgage lenders and the threat it poses to
our real estate finance system.
Addressing fraud is not easy, but MBA believes that the
industry needs stronger enforcement, better communication, and
increased innovation if it is to protect the system from the
costly damage of mortgage fraud. Residential mortgage finance
in the U.S. has developed from a relatively localized system
with few participants to one with many specialized
organizations working interdependently to make the efficient
and low-cost delivery of home loans possible. Consumers have
been the primary beneficiaries of this change as more mortgage
products are reaching more home buyers than ever before.
Mortgage bankers play a central role in this system
allowing funds to flow from the capital markets to consumers.
Lenders underwrite loans, then extend credit on terms and
conditions appropriate for the level of risk involved. In this
capacity mortgage bankers bear nearly all of the risk of
mortgage fraud. Simply defined, mortgage fraud is the giving of
false information that deceives a lender into extending credit
beyond the limits of what would normally be extended if the
true facts were known.
Lenders, because they advance large sums, can lose
significant amounts of money. Mortgage fraud costs the industry
and consumers millions of dollars each year. While no reliable
numbers are available to measure the extent of mortgage fraud,
the trend data that is available is troubling. The FBI reports
a fivefold increase in mortgage fraud investigations from 2001
through 2004.
Fraud schemes are as varied as the imagination of those who
commit them, oftentimes orchestrated by industry insiders who
know how to exploit the system at the expense of lenders and,
depending on the type of fraud, at the expense of taxpayers,
consumers and communities.
Lenders spend large amounts of money and resources
attempting to detect and prevent mortgage fraud. Despite these
efforts, they continue to find themselves victimized by fraud.
I would like to advance three principles the MBA believes would
improve lenders' ability to manage the costs of fraud.
First, investigation and prosecution of mortgage fraud by
law enforcement agencies needs to increase. Mortgage lenders
victimized by fraud are more than willing to provide
information and assist in the investigation of the fraud they
uncover, but these same lenders get frustrated when cases are
not prosecuted.
Secondly, communication between mortgage lenders and the
State and Federal agencies that investigate and prosecute
mortgage fraud needs to improve. The current system of mortgage
fraud reporting is a one-way street. Mortgage lenders report
fraud, but rarely receive feedback about their reports. I would
however, like to note that the FBI is working closely with the
MBA in discussing solutions to this problem.
Finally, the mortgage industry needs to continue to develop
better industry tools and improve lender communication to
combat fraud. We need the help of policymakers in furthering
these tools and communication.
I would like to highlight three issues as examples of the
problems lenders face in this regard. First, many States have
licensing laws whose purpose in part is to track loan officers,
brokers and appraisers. Unfortunately, there is a lack of
uniformity among these State efforts, which can lead to
loopholes that criminals can exploit by moving from one State
to another.
Secondly, communication between mortgage lenders is
hampered by the fear of lawsuits if one company discloses to
another the results of its investigations. Some form of safe
harbor is critical for the type of communication necessary for
lenders to protect themselves and consumers from fraud.
Finally, unlike credit and economic risk, the
responsibility for mortgage fraud is borne fully by mortgage
lenders. Investors require the repurchase of loans when fraud
is discovered, but lenders have no practical recourse to those
who commit fraud as the offenders are either out of business,
have little capital from which to compensate the lender, or
cannot be located.
These are just three examples of the issue that MBA is
grappling with in helping the industry develop the tools needed
to protect lenders, taxpayers, consumers and communities from
the potentially devastating effects of mortgage fraud.
Thank you for the opportunity to testify here today. The
mortgage industry looks forward to working with Congress,
Federal and State agencies in furthering collective efforts to
combat mortgage fraud.
Mr. Ney. Thank you.
[The prepared statement of Marta T. McCall can be found on
page 72 in the appendix.]
Mr. Ney. Mr. Prieston.
STATEMENT OF ARTHUR J. PRIESTON, CHAIRMAN, THE PRIESTON GROUP,
SAN RAFAEL, CALIFORNIA
Mr. Prieston. Good morning, Chairman Ney, Congresswoman
Waters, and members of the committee. My name is Arthur
Prieston. I am chairman of The Prieston Group, partner of the
Mortgage Banking Group of the law firm of Lanahan & Reilly in
California. I have been involved in the mortgage industry my
entire professional life, first as an attorney specializing in
mortgage fraud civil prosecution, and now as a provider of an
integrated suite of mortgage fraud protection, mitigation and
indemnification services in the industry.
Our companies protect hundreds of lenders around the
country with mortgage prefunding quality control and due
diligence; fraud detection and prevention training; and ongoing
education in quality lending and best business practices.
Through our insurance division, TPG protects against fraud with
our lender representation and warranty insurance coverage.
Through our law firm affiliation, we mitigate losses
associated with mortgage fraud. We have the most experienced
mortgage banking staff in the country, and they specialize in
loss mitigation, fraud investigation and recovery analysis.
In the past 2 years the combined resources of The Prieston
Group are protecting over $50 billion in residential loans, and
have resolved and/or paid in excess of $40 million in losses
due to mortgage fraud on behalf of our clients, making TPG the
largest mortgage fraud service provider in the Nation. We are
in the trenches. The pervasiveness of mortgage fraud and its
increasing impact on our industry is a direct consequence of
the extraordinary speed of growth and demand on the real estate
financing delivery system that is both complex and faceless.
At the same time, the remedies available to address these
attacks on lenders and borrowers by sophisticated mortgage
fraudsters are antiquated and ineffectual. Complex mortgage
fraud schemes, the most damaging, are necessarily dependent on
third parties to the transaction. It is these parties, such as
appraisers and settlement agents, among others, who can, if
held accountable, prevent mortgage fraud, but in many cases
have no liability for losses due to mortgage fraud.
The extent of mortgage fraud--and we have talked about
statistics throughout some of the testimony heard today,
discussing numbers such as 10 percent of all loan applications
is commonly quoted and accepted as fact, but the truth of the
matter is the industry has been unable to unequivocally
substantiate that statistic. The extent of fraud varies
depending on geographic location, origination channel of the
loan, the lender's commitment to quality originations, and the
accountability of all participants in the transaction.
Historically we know that a high propensity of fraud occurs
in urban markets. The more notable markets at the current time
include Chicago, Cleveland, Atlanta, Salt Lake City, Brooklyn
and Detroit, to name just a few.
Mortgage fraud is not only here to stay, its incidence is
becoming more widespread. Within the experience of The Prieston
Group, our insurance and legal claims have risen over 40
percent in the last year. We believe this is attributable to an
increased awareness of successful methods and techniques to
commit fraud. Left unabated, we believe mortgage fraud will
continue to grow, and despite comments earlier that it may
decrease as the market decreases, we do not believe that to be
the fact.
Victims of mortgage fraud--and we understand that the title
of today's committee meeting is based upon the effect on
lenders--is primarily on the borrower. Mortgage fraud affects
all those who are involved directly and indirectly with the
loan transaction. Borrowers, of course, in many instances are
the primary victims. In many for-profit schemes, borrowers are
duped into providing financial data, identity, or in many
circumstances falsely advised as to the insignificance of
fraud, and lenders are not affected so long as payments are
made. We know that is not true. Lenders are affected
significantly and sometimes resulting in closure of the
business.
Our firm has represented over 100 small businesses or
family-operated businesses employing tens of thousands of
people who have been driven to the brink of business failure as
a result of having to repurchase fraudulent loans.
We discussed earlier predatory lending versus mortgage
fraud and whether or not it is one and the same. We believe
predatory lending is a significant problem in the country and
needs to be resolved. Mortgage fraud in its current industry
context does not include predatory lending per se, but rather
relates more specifically to the types of fraud perpetrated on
lenders and borrowers alike.
Predatory lending legislation is intended to address the
scam artists who rip off unsuspecting borrowers with abusively
high-cost loans. In many instances, such loans fall into the
subprime credit classification for no reason other than the
interest rate associated with that loan. Notwithstanding the
definitional confusion associated with predatory lending and
the types of lending practices it is intended to prevent,
mortgage fraud affects all loans alike, both prime and
subprime, and borrowers alike regardless of their credit.
Can predatory lending practices be considered acts of
mortgage fraud? Absolutely, but most statutes do not directly
address, prevent or provide remedies for the types of fraud,
such as flipping, occupancy, application and appraisal, that
are the most prevalent.
Most lenders maintain rigorous standards for preventing
fraud through automated detection systems, hands-on
reverification of financial data, and rereviewing of property
values. They pursue claims against all participants in the
fraud, both criminal and civil.
Although we support recent actions by the FBI and the
Department of Justice to promote the prosecution and deterrence
of mortgage fraud perpetration, there is no better tool to
prevent such actions than by hitting all of those contributing
to the transaction where it hurts the most, in their wallets
and in their pocketbooks.
Many of these fraudulent residential mortgage loan
transactions, but for the participation of third parties such
as appraisers and settlement agents, the fraud would never have
succeeded. They are the gatekeepers. However, as a result of
current laws in various States, these particular parties are
immune from liability.
In a typical fact pattern, the original appraisal is
ordered by the mortgage broker. Upon completion of the
appraisal, it is submitted to the lender by the mortgage
broker, and submission of the appraisal report to the lender is
standard. However, if, in fact, that appraiser has been
negligent, grossly negligent, or fraudulently misrepresented
the appraisal, the lender cannot bring their action in many
States against that appraiser to recover. California and Texas
and a few other States have adopted the Restatement 2nd of law
in order to do so.
Finally, settlement agents. In many instances, settlement
agents are acutely aware of when a flip transaction is about to
occur. This is the result of their knowledge of contemporaneous
transactions, coupled with their knowledge of a contract of
sale indicating extraordinary increases. They are aware of
sources of down payments, that the alleged borrower does not
exist. Settlement agents are the linchpin to the fraud
transaction. However, to date there are no flip statutes in the
conventional lending industry firmly requiring the agent to
disclose their knowledge or suspicion of the flip to the
lender.
In conclusion, I hope members of the committee understand
mortgage fraud is a serious problem in the economic lives of
all Americans. Mortgage fraud is so devastating because it is
so insidious. People often do not know when it has victimized
them until it is too late. The fact is mortgage fraud carries a
financial penalty that reverberates throughout our economy. We
all end up paying the price for mortgage fraud one way or the
other, either directly or through higher fees or insurance
costs or other hidden taxes. Mortgage fraud is most assuredly
not a victimless crime, and I support the actions of the
committee that has recognized mortgage fraud for the dangerous
blight that is, and hope that we do everything we can through
legislation, enforcement and prevention to eradicate it.
On behalf of myself and The Prieston Group and the mortgage
banking industry, I thank you for your time and attention.
Mr. Ney. Thank you.
[The prepared statement of Arthur J. Prieston can be found
on page 79 in the appendix.]
Mr. Ney. Ms. Amiri.
STATEMENT OF BRIGITTE AMIRI, STAFF ATTORNEY, SOUTH BROOKLYN
LEGAL SERVICES, BROOKLYN, NEW YORK
Ms. Amiri. Mr. Chairman and members of the subcommittee,
thank you very much providing me with an opportunity to testify
today regarding mortgage fraud and predatory lending.
I am a staff attorney at South Brooklyn Legal Services, and
I am a member of the National Association of Consumer
Advocates. I represent low-income homeowners who have become
the victim of predatory lending and have fallen into
foreclosure or are on the verge of foreclosure.
We are inundated with hundreds of homeowners each year who
seek our assistance because they are on the verge of losing
their homes. We receive referrals from all over New York City,
from churches, communities groups, the courts, elected
officials and government agencies. In recent years we have been
overwhelmed with requests for assistance from families who have
been the victims of property flipping. Most of these homeowners
are young working families, often single mothers who are
raising children alone, and are African American, Latino or
West Indian.
Because property flipping has a devastating impact on low-
to moderate-income, first-time home buyers and low-income
communities throughout the country, it is these families and
the communities in which they live that are the true victims of
the mortgage fraud, which is the subject of the hearing today.
I have had conversations with attorneys all over the country,
and they have all told me the same thing: Property flipping is
devastating to families and their neighborhoods from rural
Oklahoma to urban areas such as Chicago. We must address this
problem as a national problem.
The property flipping scams we see almost always involve a
one-stop shop. They target first-time home buyers who are
unsuspecting and promise them they will take care of all
aspects of the home-buying process.
The scheme is enormously profitable. The business model is
simple. We have discussed property flipping before, but
basically the one-stop shop purchases the house cheaply, makes
cosmetic repairs, works with a lender and appraiser to
fraudulently overappraise the house, and then induces an
inexperienced and unsophisticated home buyer to purchase the
property. Families who have fallen prey to these companies will
inevitably describe how much they trusted the salespeople who
were employed by these one-stop shops, who repeatedly assured
them they were in good hands, but at the same time were using
high-pressure sales tactics. Families are often enticed by
advertising slogans such as, ``Why rent when you can own,''
because they have spent their entire lives living in rented
apartments, and they seek the American dream of homeownership.
The fraudulent overappraisal is the key to the scheme. The
flipped properties are often overappraised by tens of
thousands, if not hundreds of thousands, of dollars by
appraisers colluding with the one-stop shop and the originating
lenders.
One-stop shops generally work with one or a few originating
lenders that cooperate in the scheme, and the scheme is
successful because the originating lenders are willing to make
the loans based upon the bogus appraisals, but then turn around
quickly and sell them into the secondary market.
The home-buying process is complicated, but the one-stop
shop makes it sound easy by promising to take care of all of
the details. By providing all of the real estate professionals
for the transaction and by gaining the trust of the families,
the one-stop shop completely isolates the families and prevents
them from seeking outside assistance or help. The families are
often kept in the dark because they often do not see the
documents relating to the purchase and financing of the home
until the actual closing. And at the closing table, they are
pressured into signing these documents they do not understand.
The attorney that is brought to the closing does not explain
anything to them because the attorney actually works for the
one-stop shop. Any protestations by the homeowner are usually
met with assurances from the one-stop shop that they can afford
the loan by the rental income, or threats that the buyer will
lose her down payment if she walks away.
The monthly mortgage payments are often unaffordable
because the properties do not produce the rental income and
also because the lender or one-stop shop falsified income on
the mortgage application to make the deal go through.
The property flipping cases that we saw several years ago
when this scheme became prevalent exclusively involved loans
that were insured by HUD's FHA program, and in these cases, the
originating lenders and the lenders that purchased the loans on
the secondary mortgage market did not risk financial loss
because they were guaranteed a full return on the loan through
the FHA insurance. Indeed, either the family would stay
current, or they would default, and the house would be sold at
foreclosure, and the lender would recoup all of its losses.
But my office recently started seeing a number of property
flipping cases involving conventional mortgages where the
originating lender worked in concert with the one-stop shop to
inflate the value of the property, and then immediately sold
the mortgage into the secondary market to obtain a full return,
or even a premium, on the loan.
Most loans today are immediately sold into the secondary
market. In the property flipping cases that we have seen, this
means that the originating lender will not even hold onto the
loan for even a day before it is sold into the secondary market
and it escapes financial risk and sometimes liability.
If the secondary mortgage market, lenders and companies
that buy these loans, conducted proper due diligence, spotted
the red flags and refused to purchase these loans, the
originating lenders would not have the ability to make these
loans.
Just briefly I would like to tell you about Ms. W, who
represents the type of clients we represent. She is African
American, 68 years old, a retired school aide living on Social
Security. She sought to purchase her first home after being
priced out of her long-term apartment. After seeing an
advertisement for a one-stop shop, she made an appointment to
look at homes. She gave the one-stop shop $20,000, her entire
lifesavings, as a down payment. What she did not know was the
property she was purchasing had been flipped. It had been
bought by the one-stop shop only 3 months previously and marked
up $169,000. She was also unaware that it was intentionally and
fraudulently overappraised by almost $150,000. She also did not
know that the attorney that the one-stop shop arranged to
represent her actually worked for the one-stop shop. When she
showed signs of wanting to back out of the deal, they
threatened to keep her down payment.
The loans were unaffordable. The mortgage payments far
exceeded her income, and when she moved in, she started to
realize the problems with the transaction. One thing that she
realized was that the property was not a legal two-family,
which meant that the rental unit upstairs was illegal, and she
could not collect the rent income.
I would like to jump to some of the suggestions that we
would like to make to try to prevent these types of schemes
from occurring.
First, for FHA-insured loans, HUD should commission an
independent appraisal, appraisal review, or some sort of
quality control before the loan is made. I understand this will
take a lot of resources, but even if it started by focusing on
the hot zones that HUD has already designated as predatory
lending areas, that would be a good start.
Second, HUD should extend the current antiflipping
regulations, which currently prohibit FHA insurance for homes
bought and sold within 90 days, to prohibit insurance for homes
bought and sold within 6 months.
Third, in 2003 HUD proposed and passed a regulation that
would hold originating lenders liable and accountable for
appraisals, but they should go one step further with that as
well.
Fourth, lenders and companies that purchase conventional
and FHA-insured loans should conduct appraisal reviews and
search for red flags prior to purchasing the loans. They should
keep track of the lenders that make bad loans, underperforming
loans, and illegal loans, and stop purchasing them from those
companies.
Thank you again for this opportunity and your invitation to
provide testimony today.
Mr. Ney. Thank you.
[The prepared statement of Brigitte Amiri can be found on
page 49 in the appendix.]
Mr. Ney. Ms. Trujillo.
STATEMENT OF ECIMA TRUJILLO, NATIONAL FIELD DIRECTOR, ACORN
HOUSING CORPORATION, LOS ANGELES, CALIFORNIA
Ms. Trujillo. Chairman Ney, Congresswoman Waters, and
members of both subcommittees, thank you for the opportunity to
address you on the important issue of mortgage fraud. My name
is Lez Trujillo, and I am the national field director of the
ACORN Housing Corporation.
ACORN Housing builds and rehabilitates homes, and it is one
of the largest providers of housing counseling services in the
country. ACORN Housing works closely with our sister
organization, ACORN, the Association of Community Organizations
for Reform Now.
Mortgage fraud is a national problem. In recent weeks much
of the attention has been about how lenders are hurt by this
form of fraud, but it is more important to look at the people
who have been taken advantage of all over the country. While it
hurts the bottom line of financial institutions when they are
taken advantage of, it devastates the lives of citizens when
they are victimized by these scams.
Let me begin by describing a case in Baltimore. In 1998,
Matilda Watson, a participant in the welfare-to-work program,
bought a house with American Skycorp. The loan officer
falsified information on her application to get the loan
approved, including nonexistent child support payments. Matilda
thought $54,000 sounded high for the house in that
neighborhood, but her realtor insisted that an FHA lender would
not approve a loan if the house was not worth it. When she
later asked about home inspection, she was assured the lender
would make sure the house was in good shape.
As soon as Matilda closed on the loan, she found out the
house was falling apart. The furnace stopped working, the
upstairs plumbing leaked into the kitchen, and the lighting was
faulty.
Most tragically for Matilda and her family, the Department
of Social Services deemed the house unfit for her children to
live in, and they removed her children from the home. American
Skycorp abused the FHA program to obtain loans on homes with
inflated values and amid promises of future repairs.
African-Americans received 77 percent of the company's
loans. The Maryland Attorney General's Office noted, where the
consumers default, and the property is foreclosed upon, the
practice hurts the neighborhood in which the consumer lives.
When ACORN brought these problems to light, they were sued
by $10 million by Skycorp for defamation of character. The suit
was quietly dropped when the Federal Government successfully
prosecuted the company for the same practices ACORN had accused
them of.
Another scam we have come across is the purchase of
contract for deed, which has been called nothing less than
modern-day share shopping. Houston ACORN discovered that the
developer, Jack Markman and his associates, have targeted up to
800 families in the city in this scam. All of the home buyers
we talked to monolingual Spanish-speaking immigrants, and they
signed contracts in English, which they did not understand.
The main problem with the contract is that residents would
have to wait 20 to 30 years before they could become owners of
the house. In many cases, there are no legal descriptions or
maps with the contract. Most of these loans have high interest
rates and unjustified tax and insurance payments.
The insurance appears to have a $5,000 deductible. The
insurance company offices are based out of the Turks and Caicos
Islands, and they do not have a license to operate in Texas.
One home buyer's house burned down not long ago, and she was
never able to get money from the policy. After intimidating
families to move out, Markman has sold these houses time and
time again, making large profits each time.
Since early 2003, over 140 families have joined ACORN in
taking a variety of options to address their concerns. The home
buyers want marketable title to their homes, and to ask for
local and State protection. There is an incentive to be
reckless in a market driven by value and securitization--
because too many participants from lenders to brokers to
appraisers make money up front--and there is an incentive to
take action to harm borrowers. This is especially apparent in
the super hot market where business is done with lawyers and
all the protections.
Because so much money is made up front in the form of
points and fees, and in the form of yields and premiums to
brokers, there is less reason to insure that the loans perform,
there is also less access to legal resource because of the
prevalence of mandatory arbitration costs.
Unfortunately, it is not just fly-by-night operators who
have been involved in these scams. Even a larger lender like
Wells Fargo was recently accused of pressuring appraisers to
justify large loans. We have found that this practice has
targeted the most-vulnerable consumers, including low income
people, the elderly, and immigrants. These vulnerable home
buyers are more likely to be in the subprime market, and are in
effect, punished twice. They pay more for the risk, and then if
things go wrong, they face the consequences.
We need both national protections against predatory
practices in a State and local action. The States need to be
able to respond quickly to the problem. Federal action cannot
preempt their ability to protect their citizens. This is why we
oppose the OCC's preemption of the State laws. We also need
housing counseling to insure that borrowers can spot bad
lenders, and that borrowers are connected with reputable market
participants.
Finally, we need a strong community investment act that
provides incentives for responsible financial institutions to
lend under server communities and lower ratings for those that
participate in predatory practices. The FDIC should not weaken
this law.
Mortgage fraud is a complicated and troubling issue. While
it causes heartache for banks and other lenders as they look at
their bottom line, it causes far worse anguish for many of the
families we represent. Their experiences must be a part of the
debate on how to end mortgage fraud.
Thank you for the opportunity to address you today. I am
happy to answer any questions you may have.
Chairman Ney. Thank you very much.
[The prepared statement of Ecima Trujillo can be found on
page 102 in the appendix.]
Chairman Ney. I wanted to ask Ms. Amiri about the One Stop.
If you don't have--I understand about problems maybe with One
Stop and who is running it. If you don't have the One Stop, how
do you get guidance or counseling to people if you don't have a
One Stop?
Ms. Amiri. How would you give guidance and counseling to a
first-time home buyer?
Chairman Ney. Yes.
Ms. Amiri. When we do first-time home buying training
sessions as well, we tell them what to look out for--always to
get their own attorney, get their own building inspection and
get a sense of the conditions of the property prior to----
Chairman Ney. But you provide legal services, don't you?
Ms. Amiri. We do. We do.
Chairman Ney. You provide them free?
Ms. Amiri. To low income and moderate homeowners. But we
also train other community advocates. We speak to first-time
home buying counseling sessions to warn people about what not
to get into--because obviously it is easier if they don't get
into a bad loan in the first place rather than come to us after
they have already gotten into it.
So we would warn them in lots of different ways about how
not to get into a bad loan as a first-time home buyer.
Chairman Ney. Thank you.
Mr. Matthews, would a national registry work best if it
covered all loan originators, who would be--if we had a
national registry, who would be in that?
Mr. Matthews. I think that one of the issues today is that
there is not as much accountability in the mortgage industry as
there should be. And if you look at the history of the
industry, it has gone from this--a very personalized industry
affiliated with saving and loan companies to a much more
depersonalized industry with mortgage brokers.
I think the answer to your question is that it would
definitely be appropriate for loan originators--whether it be a
broker or retail loan officer to be in a national registry. And
that way you can track not only the company's performance, but
the individual's performance as he or she goes from company to
company, or migrates from State to State.
Chairman Ney. Because I knew there was a case, I was on a
roundtable one time where somebody had done something--just
moved to another State. I think, you know, if you look at the
overall picture, I have had a lot of mortgage brokers and
bankers come to us and say--and they did in the State of Ohio
when I was in the legislature and say we want to tighten this
up--you know, we want to take the fraudulent side out of it--
you know, police their own type of situation, which I think has
been good--because the vast majority of them are decent people.
But there has got the to be a way to find the ones that
aren't and not have them escape State to State. And that is
maybe why I thought a national registry--pretty comprehensive
it would have to be though. You can't just have that group in
or that group in--and I think you have to have that pretty
comprehensive, I would assume.
Mr. Matthews. Absolutely. Just recently, Ohio passed laws
to expand the regulation to loan originators. And if you look
at the securities industry, what they went through in the
1970s, the State security agencies banded together to create a
central repository to track the registration and performance of
stockbrokers, and so that would be something that I think would
be appropriate for the mortgage industry as well.
Chairman Ney. Whoever would like to answer this. On the
first panel, I asked if it made a difference whether the volume
of loans, the originations, decreased as it relates to a
corresponding decrease in mortgage fraud cases. In other words,
does this only go up exponentially when the loan volume
increases, the fraud increases, or can you have a loan volume
decrease and the fraud still continues steady? If anybody
would----
Mr. Matthews. I think there are some countercyclical
aspects of the mortgage industry. As loan volumes decrease,
mortgage fraud will not necessarily correspondingly decrease. A
lot of times it will increase. And part of the problem is that
the industry is commission-based.
So if I am in a boom time with significant refinances
because of low interest rates, I am making a significant income
as a loan broker or a loan originator. As rates rise, and my
ability to originate loans goes down, my income will go down as
well. Consequently, loan originations will often push through
problem loans in a slow market in order to get a commission.
Chairman Ney. The last question I have if anybody wants to
answer. Each one of you, I think, has touched upon or mentioned
appraisals in the system are, or at least a few of you have.
Wouldn't it behoove a loan originator to have some type of
random check on appraisals, to have, you know----
Ms. McCall. I would like to address that.
Chairman Ney.--idea for my colleagues. I better mention
that, but we were talking about it. Wouldn't a random check be
good?
Ms. McCall. Yes.
Chairman Ney. To make sure your appraisers are giving you
the right info.
Ms. McCall. You are exactly right. We do that. There are
several things that we do. First of all, many lenders will
approve appraisers.
Chairman Ney. Does the industry as a whole do it?
Ms. McCall. As an industry as a whole, you will either
approve appraisers or you will use a list of excluded
appraisers. There are a couple of lists out there that are
readily available. Unfortunately they are not comprehensive,
such as the Freddie Mac list or the FHA debarred list.
Chairman Ney. But beyond that--because I went one time, and
they said here is a list, and I said I definitely don't want
that guy, because I knew him, and I definitely didn't want him,
but he was on the list.
Ms. McCall. So there are a couple of other things.
Chairman Ney. But I am saying, even if they are on the
list, do you go out and--okay, here is your approved list. I
know you have got that. But do you ever go out and double-check
an appraisal randomly?
Like here is Susie Smith on the approved list to be an
appraiser. She says this house is worth this. Is that ever
randomly checked?
Ms. McCall. Yes, it is both done randomly, and it is done
on an adverse basis. We do it pre-funding and post-funding.
There are QC requirements that necessitate lenders--all
lenders--to necessitate QC which includes a component of
verifying on your 10 percent sample or statistical sample
actually go out and randomly choose appraisals to reverify.
We also do it in the pre-funding basis in two areas, one
when the underwriter actually gets the transaction and looks at
the appraisal. Many of the underwriters have received training
to look at the appraisals and question the right things. And in
those cases, we can use several tools. There are automated
tools. We can send appraisers out to the property to inspect to
tell us, yes, we really do think that value is good. And then
the third kind of thing that we would do on a prefunding basis
would also be--from a prefunding QC perspective--which is not
typically part of the origination process, but does occur
before the loan funds. Obviously that protects us, and it
protects the consumer from buying a home that is overvalued.
Chairman Ney. Thank you.
The gentlelady from California.
Ms. Waters. Mr. Chairman, I would like to thank all of our
panelists for participating today and a special thanks to Ms.
Trujillo with ACORN all the way from California, and of course
legal services, and those of you who are working really in the
vineyards with all of the problems that our consumers have and
particularly our low-income seniors.
You know, I just went through one of these home-buying
experiences. It is very difficult, I am sure, for many of our
low income and middle class working people to negotiate their
way through the purchase of a home, and nobody is helping them.
First of all, I was surprised that someone would put a
stack of papers in front of me and say just sign. Nobody
explains what they are. Nobody explains the fees. You have to
ask one by one, what is this fee, what is this for. And then
you discover there is something called a county transfer fee.
And you call the county, and they say, we don't have anything
to do with that. And then if you are lucky, you know, they say,
well, we will take it off.
Then I discover that, you know, the real estate people,
brokers times, the mortgage--well, the real estate salespeople
are sometimes getting kickbacks on everything. Kickback on the
hazard insurance policy. You know, people are pushing you, get
it from this one, get it from that one. Well, what is all of
this about? People are getting a commission, they call it. I
call it a kickback. They get a commission on the hazard
insurance--and, guess what, the appraisals are being marked up.
And, guess what, the real estate salespeople and others are
getting a commission on the appraisals. I want to know, why is
an appraisal for this place 1,500 by this person, another
person told me they can give it for 750 and another lender
says, oh, we will give it to you for free.
So, I guess what I am saying is, while we are talking about
fraud, and we are talking about the harm to the lender, and we
are trying to talk about harm to the consumer, that is not
everybody in this business, I want to tell you.
The first harm, I am going to tell you, is that most people
don't know what they are doing and they can't negotiate a
purchase because it has gotten really implicated and nobody
really explains. Even if you do sometimes a first-time home
buyer course, and you try and cover everything that they will
encounter--first of all, many times, they are not talking to
anybody face to face. You know they don't like to talk to you
face to face any more.
What they like to do is you called the lender, and they put
you on the telephone to an underwriter or somebody, and they
fax or e-mail you some papers, and they tell you to sign them
and send them back and you fax and sign and send them back, and
fax and sign and send back, and here is this first-time home
buyer or somebody by themselves trying to do all of this.
I guess there is no requirement in law that the buyer must
be walked through the contract, every aspect of it, step by
step, and there is no requirement of that in law. I am telling
you, nobody offers you anything. So despite the fact we are
talking about fraud to the lender and fraud--this whole
industry needs a real review, Mr. Chairman, a real review. And
the average consumer needs a way by which to have someone
review a contract before they enter into it and sign it,
because there are so many decisions to be made.
You have--I wish everybody could negotiate their interest
rates, I mean, but it goes, everything now from 4.7 to 7. And
don't tell me it is on a different kind of loan, fixed-rate
mortgage, 30 years. I mean the interest rates, you know,
differences are this wide. I don't know how people know that
they can negotiate it or, you know, what to ask for it, but
this is a very difficult business now. It is very complicated
and people are left alone to fend for themselves. I am not so
worried about the lender, I mean, as I am the consumer in all
of this.
Lenders may get ripped off, but they have got enough money
and enough lawyers and enough expertise to protect themselves
and to go into court and to do a lot of things. But the poor
consumers don't have much of anything. I appreciate whatever it
is the government is doing for lenders and for consumers, but
it is not enough for the consumer, I tell you. It is just not
enough.
And, again, I don't know how--you indicated that you
advised people to go out and get a lawyer. Well, that adds to
the cost. I mean, most working people and poor people just
can't pay lawyers fees, you know, I don't know what lawyers
charge to be involved. I think here in Washington D.C., you are
required to have a lawyer, but in most places you are not.
So, while we are looking at this, and this is good that it
raises a subject. I think, Mr. Chairman, that one of the things
we might want to consider is a complete review of the home
buying mortgage process and figure out how we can eliminate
some of the confusion, the obstacles, and require, you know,
more information to the consumers at the time of the signing of
the contract, that people don't just get thrown a bunch of
papers that they have to sign and told to walk through them,
each line by line.
I guess, and let me just say, it may be a good idea to have
a database. But, Mr. Matthews, did your company have a database
in Florida?
Mr. Matthews. A database in----
Ms. Waters. A database in Florida for felons who were----
Mr. Matthews. We do have a database, it is nationwide. It
includes derogatory data such as sanctions taken by regulators.
Ms. Waters. No, this is on a different subject now. Aren't
you the guys who developed the database for the identification
of felons in Florida who were supposedly prevented from voting
because the law does not allow them to vote? Was it your
company? ChoicePoint? Was it ChoicePoint?
Mr. Matthews. I am with Mortgage Asset Research Institute.
We are a subsidiary of ChoicePoint. I am not familiar with the
database that you are talking about. I am not sure if
ChoicePoint developed that or not. That is not in my field of
expertise.
Ms. Waters. Well, you better check your parent company,
because I think your parent company developed a bad database,
and that database was racked with problems and inconsistencies
and names, I am not blaming you for it, but if CheckPoint is
your parent company, maybe you ought to know what that is all
about. So that when somebody hears that name, you know, the
ears go up and they think, oh, no, we don't want you to develop
a database. Check it out and see what they can tell you about
that.
Mr. Matthews. I will follow up on that. Thank you.
Ms. Waters. Yes. Thank you.
That is all, Mr. Chairman.
I yield back.
Chairman Ney. Thank you.
The gentlelady from California.
Ms. Lee. Thank you, Mr. Chairman, I want to thank you and
the ranking member for this very important hearing today. I was
in a markup, so forgive me if what I ask is redundant.
First, let me just say it seems like the more we support
and push for the American dream to become real for ordinary
Americans, the more scams we are faced with by legitimate
professionals. It seems like the more--we want to include more
people in homeownership, an opportunity is grabbed by the pros
the figure out how to scam them. And I have got to say that,
because I have many, many constituents who continue to go
through this.
Today, I just have a couple of questions on--I am trying to
get a handle on the definitions between flipping, speculation
and chunking. I mean, what--what are the lines drawn and what
is the difference between flipping and speculation and then
speculation and chunking, or are all of those definitions kind
of--connote the same practice? Who can answer that? I am not
sure who to direct the question to.
Mr. Prieston. Thanks, I will take it, it looks like----
Ms. Lee. Okay.
Mr. Prieston.--by default. Primarily the issue of flipping,
I think is the one--the speculation is not so much a mortgage-
fraud related term as a general term as it relates to real
estate and properties, misleading the actual, you know,
appraised value, inflating values on the sale of raw land as
well as land to be developed. It could very well be that this
is a fixer-upper, and with a good appraisal that relates to an
increased value of the property if certain amounts of money
were put into it. You could speculate on that property--and
essentially with that fraudulent appraisal, recoup benefits in
a fraudulent manner. That is essentially speculation.
The flipping, however, is a little bit more complex. It
relates to the idea where you purchase a property, many times
these are HUD properties that require levels of renovation. You
purchase a property, I would say a value of $15,000. You then
sell that property for $150,000. And the way to do that is
essentially to have dual escrows. You have to have an inflated
appraisal. You have to have a duped borrower or, in fact, a
straw borrower on the other side of the transaction, that the
properties are bought and sold simultaneously, and the lenders
are unaware this is happening because recordings only go back
so far and it takes a bit of time before these multiple
transactions actually hit. And then as a result, a gain of
$135,000 is made instantaneously.
And in my presentation of my testimony, one of the issues I
brought up was the fact that a settlement agent is a
gatekeeper. It is a gatekeeper in that they are privy to all
the transactions that are going on. Yet, they do not have
liability, unless of course they are guilty of some level of
malfeasance. They don't have a liability to communicate what is
happening in front of everybody else's eyes in that room.
Ms. Lee. So flipping does not have criminal penalties at
this time.
Mr. Prieston. It can. It can have criminal penalties. It
does give rise to criminal penalties in certain circumstances.
And some agents--as Agent Swecker said earlier today--and some
of the larger scams--and some of the larger scams such as in
Brooklyn, there have been criminal penalties imposed upon
settlement agents.
But in the--let us say--less sexier claims where you have,
say, $2 or $3 million in losses with 30 borrowers involved, the
settlement acts have gone free. And the lenders who have the
resources to act on behalf of the borrower and on behalf of
themselves can't necessarily prosecute that settlement agent in
varying States throughout our country. Because, again, there
isn't that duty that arises.
Chunking basically comes from this idea that you can, you
know, churn a loan in and out. Brokers like to take their
commissions rather quickly. They can move a person, a property
rather quickly. They can make a loan, and then 60 to 90 days
later, put them in another loan. And they take a piece along
the way - and it is kind of moving them from one property to
the next rather quickly, thinking that now they have taken
advantage of yet another or more beneficial rate--lying to that
borrower, misrepresenting to that borrower--that, in fact, it
is a more beneficial program when it is not----
Ms. Lee. Are there criminal penalties?
Mr. Prieston. And under the statues that this committee has
helped promulgate under a rather confusing web of criminal
penalties such as mail fraud and wire fraud and false
instruments, yes. But, again, we are here to talk about maybe
kind of cleaning that up little bit.
Ms. Lee. Sure. Let me ask Ms. Amiri, with regard to the
inflated appraisals and independent appraisal review. Are
there--I mean, there are no national standards now. What do
States have or do we have that is just a minimal kind of
requirement for appraisers, because it sounds like there are
none. It is kind of a free-for-all.
Ms. Amiri. Well, I can talk about individually with New
York. The New York Department of State oversees appraisers and
sets certain guidelines for their professional licensing. There
is also a national organization, USPAP, which I can't remember
the name, what the acronym stands for, but they also set best
standards, best guidelines, best practices for appraisers on a
nationwide basis.
And in New York, for example, the guidelines of this
appraiser association have set on a national basis--have just
been codified into our State regulations. So there are--the New
York State Department of State should be the ones who would be
going after these appraisers and disciplining them.
So, I only am aware of what is going on in New York, and I
can't talk about it nationally.
Mr. Prieston. Just to add to that, again, there is no
better way to put a stop to deterrence and deterrence on a
civil level where we can act fast and move quickly with a great
deal more resources. If we have the legislation in place, we
can act on behalf of the State as well as on behalf of the
borrowers. Again, we do have those issues relative to----
Ms. Lee. So would this be State legislation or national?
Mr. Prieston. Well, it is a national issue as well as State
level. It depends upon the type of transaction. You have FHA-
type loans, which, of course, you have Federal preemption
involved--but then, of course, you have State level, case law.
And there was case law in New York which created a necessity
for privity of relationship between the appraiser and the
lender. Otherwise, the lender can't sue the appraiser.
Ms. McCall. I did have one other comment on that. And
talking about the different State laws, what happens is there
is this kind of national requirement for all appraisers in
preparing appraisers. They need to construct them in a certain
way. They need to make certain representations. And so that is
very standard nationwide.
However, State to State, the rules for becoming an
appraiser, the experience that is required, the number of the
bond--whether you need one or not--is different from State to
State. And so it does make it difficult as a national lender to
understand exactly what the experience level of your appraiser
is. There are also different and varying degrees appraiser
levels.
Ms. Lee. Yes, I have wondered. In California, for example--
and I am from Oakland, the Bay area. I see--and I have often
wondered if part of the high cost of housing and the median
cost of the house--of course, in my district is now, what,
$500,000. Could that be part of that be because of these
inflated appraisals? I mean, after 6 months, another appraisal.
I mean, I have seen houses go from 200,000 to 350 in 6 months
from 350 to 500, and then all the other houses in that area go
to 550 then in 6 months there, is one sold for 600. You know,
so I know the appraisal process is part of this totally
outrageous, the lack of affordable housing.
Mr. Prieston. I am from the Bay area as well.
Ms. Lee. See----
Mr. Prieston. I can totally relate to what you are talking
about. And the affordability issues of housing and how volatile
that market is slowly becoming because of those extraordinary
increases in value. We saw that during the dot.com era on the
peninsula.
The good news is the Bay area is one of the low areas as it
relates to fraud and mortgage fraud. There is a good reason for
that. It is because in the Bay area you have something called
title companies that you have to go to--and you don't have
settlement agents that are separate and distinct--or closing
attorneys that are separate and distinct--that is why you don't
have flipping occurring there.
It is a very important distinction. When we go into those
title insurance companies, guess what, the title insurance
company is going to be liable if in the event there is a flip
that is going to occur. So you don't see those transactions
there. And that is why, comparatively speaking on the indexes
and in our company where we receive claims around the country,
it is the lowest area.
Ms. Lee. But you see speculation though, you see the houses
purchased for 200,000 and in 3 months they go on the market for
500,000.
Mr. Prieston. That may be something more due to an
overheated market as opposed to fraud.
Ms. Amiri. If I could add to that what we are seeing in
Brooklyn is actually what you described in certain
neighborhoods. The one-stop shops are now--have a large market
share. And so what they are doing is they are using their sales
to legitimize these astronomical prices in neighborhoods in
Brooklyn that you would never imagine houses would be going
for. So if you look at an appraisal from one of these one-stop
shops, they are using comparable sales as a measurement of what
they are going to sell your house for.
Ms. Lee. And appraisals are so key though in developing the
comparable sale criteria?
Ms. Amiri. Right.
Mr. Prieston. You are absolutely right. I mean, let us move
the Bay area out of the question and bring it back to Brooklyn,
where we all know about the sensitivities and the pain that
many, many homeowners have undergone and borrowers that never
should have owned four- to six-unit buildings in that area.
Let us keep in mind that what Ms. Amiri said just now is
exactly right. That what is happening is one is begetting the
other. They start out with one fraudulent appraisal, and now
you have 10. Now you have 10. And what they do is they keep the
payments going for enough time so the loan remains current and
alive, and therefore the value of the property stays
consistent.
Once you have one or two condominium complexes in Houston,
hundreds of those just like that, for that very reason, in that
same manner, you get two or three, you use the same $30,000 as
a payment, you get an appraisal, you get one or get two, now,
you get legitimate appraisers while looking at those comps and
seeing that those are legitimate transactions.
Now, it has been simply masked completely and almost
undetectable if it goes on long enough. And the key here is
letting it go on long enough. If those payments are made month
after month with the proceeds of the first loans, then you can
mask it for a year. And now you are beyond those early payment
default detection programs that the industry knows about and
can spot right away. And the whole thing implodes from about 18
months to 2 years from the original funding dates.
Ms. Trujillo. I also have something to add to that. What we
see is that appraisals--and some of these older value
appraisals are shifting a little bit, not only from mortgage
brokers, but also to prime lenders, to regular lenders. And
that appraisers are forced to meet the number. I mean, we, I,
have worked in Oakland for 7 years before moving to L.A., and
every single appraisal meets the price, especially for the
purchase.
Now, the only thing that we see is loan flipping, where
appraisals meet the new price of the house, essentially high-
priced areas, where families are refinanced four to five times
within the same year. Magically, the appraised value always
keeps increasing at a crazy rate.
Ms. Lee. Yes.
Ms. Trujillo. It is something that we are looking at in
general. Many of these cases involve fair housing violations,
because they targeted specific demographics. And that is how we
have been able to catch most of the actors and, also, you know,
luckily, if a lender breaks any hope or risk of violation, that
is also where we can get, dissect the whole case and figure out
what happened. It is very regular, or, you know, normal now for
appraisals to always meet the price.
Ms. Lee. Thank you.
Thank you very much, Mr. Chairman. I mean, this is mind
boggling because as we try to make sure that the American dream
is real for everyone in America, what--what we are seeing is
that people are getting messed over, and their lives are being
shattered. And the institutions that are supposed to support
them really aren't. And, I mean, I hope we do have a further
hearing on this, because somehow we have got to get a hand on
this. Because otherwise no one will be able to buy a home in
America.
Thank you very much.
Chairman Ney. Thank you. I want to thank the witnesses and
members for being here today.
Also without objection, there is a statement that Fannie
Mae wants to put in the record, hearing no objection.
[The following information can be found on page 126 in the
appendix.]
Chairman Ney. Also I would, without objection, the staff
will be able to make conforming or technical changes to the
language, and also some members may have additional questions
for the panel. They may want to submit them in writing. Without
objection, we will keep the hearing open for 30 days for
members to submit and receive answers.
I want to thank you again for your patience.
Thank you very much.
[Whereupon, at 1:12 p.m., the subcommittee was
adjourned.]
A P P E N D I X
October 7, 2004
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