Mortgage fraud blamed in more foreclosures

By Buck Wargo

Saturday, Oct. 21, 2006 | 8:03 a.m.

An increase in home foreclosures in the local housing market is revealing a growing number of mortgage fraud cases.

Investigators for the FBI, state Mortgage Lending Division and local law enforcement say discoveries of mortgage fraud will continue to increase as foreclosures give evidence that home buyers lied on their loan applications - sometimes with the assistance or encouragement of lenders anxious to close a deal.

"Mortgage fraud is just beginning to jump by leaps and bounds in this town," said Pete Dustin, a part-time white-collar crime investigator for Metro Police. Dustin said the number of complaints has risen from one or two a month to one or two a day.

"When everybody is getting paid, nobody cares," Dustin said of mortgage lenders. "The second they start instituting foreclosure proceedings, they pay attention. The lending institutions are going to start screaming."

Nevada has the second highest rate in the country of homes entering foreclosure - a rate that is expected to rise by early 2007 as mortgage payments increase sharply for those with adjustable-rate mortgages and little or no equity.

Scott Bice, commissioner of the Mortgage Lending Division, which investigates complaints and forwards cases to the state attorney general and other law enforcement agencies, said his office has 300 active complaints, many of them dealing with mortgage fraud.

"I don't see it slowing down," Bice said. "Right now with the slowdown in the market, these little things are popping up."

Among the most prevalent frauds: buyers seeking favorable mortgage terms for primary residences, even though they are buying investment properties they hope to resell quickly for profit.

In other cases, buyers inflate their incomes or otherwise fudge on their applications to secure loans.

Even though falsely filling loan applications is a federal felony that can carry a prison sentence and fine, authorities said their focus tends to be on more widespread fraud that involves several people and properties and losses exceeding $1 million in some cases.

"Mortgage fraud is a problem that we see a lot of," said David Nanz, a special agent with the Las Vegas FBI who investigates white-collar crimes. "But the FBI doesn't have the resources to investigate all of the cases."

Authorities also cite cases in which mortgage brokers, working in cahoots with buyers, submitted loan applications to various lenders for the purchase of more than a dozen properties. The buyer didn't have enough income to qualify for that many loans.

In other cases, false appraisals were used to obtain loans for more than the properties are worth, setting up schemes with an orchestrated buyer and seller that allow the seller or a management company to pocket excess funds.

There are several other fraud scenarios as well, authorities said.

"The problem with mortgage fraud, and it's true with white-collar crime (in general), is that it pays well," Bice said. "The way the system works is that people don't report fraud until there are losses. Mortgage fraud is that dirty little thing that people (in the business) don't talk about because once they start bringing it up, they are liable for their actions or losses."

Lenders, to recover losses, file lawsuits against mortgage brokers, escrow companies and title companies, officials said.

Steve Schauer, president of National Lenders Service, a local mortgage broker, said he's not surprised authorities are investigating more fraud cases and pointed out those problems in the industry hurt legitimate borrowers who want to purchase a home.

"The white lie in my opinion is that more and more lenders are falsifying documents," Schauer said. "It doesn't show up until the foreclosures happen, and it hurts all of us."

Bice and others said the blame for mortgage fraud is shared by perpetrators and the entire industry.

He cited one recent investigation in which an elderly woman who bought a home in Summerlin had a very favorable credit score of 800 and $150,000 in the bank. She stated her income as $6,000 a month even though her only income was $900 a month in Social Security.

She spent her $150,000 on upgrades to the house and couldn't afford the $3,500 mortgage, prompting foreclosure proceedings.

"She got talked into it at the builder's tract and everyone along the way was helping themselves out with her money," Bice said. "She should have known she couldn't afford a house like that, but she got caught up in it."

A version of this story is in the current issue of In Business Las Vegas, a sister publication.