State, U.S. preparing loan fraud crackdown

By J. Patrick Coolican (contact)

Wednesday, Feb. 20, 2008 | 2 a.m.

The FBI and the IRS are teaming up with Nevada Attorney General Catherine Cortez Masto, state regulators and Metro Police to tackle a surge in mortgage fraud that is overwhelming Nevada authorities. The announcement of a task force is expected early next month.

Nevada led the nation in per capita foreclosures in 2007, and many analysts say the bad loans were frequently prepared fraudulently.

The effect of those foreclosures has rippled across the economy, driving down home prices and forcing contractors out of work.

According to a law enforcement source who asked for anonymity because the new task force hasn’t been officially announced, the group will focus on big-volume players.

Law enforcement distinguishes between “fraud for the home” and “fraud for profit.”

The former involves someone fudging his reported income to buy a more expensive house than he can afford, while the latter refers to attempts to steal hundreds of thousands of dollars by making loans and reselling them, knowing the loan buyer might never get repaid.

Fraud for profit is 80 percent of the mortgage fraud problem and will be the focus of the task force, the law enforcement source said. “They work on volume. You need insiders. You need title companies, brokers, appraisers, straw buyers. You need people who’ve gone in on a wholesale level and bought large amounts of property. And they’re going to be the target (of the task force) right off the bat.”

The prosecutions could pull the lid off what had been a red-hot industry, particularly in Southern Nevada. Similarly, multiple investigations and intense scrutiny threw Wall Street into turmoil after the technology boom and bust.

A recent study by BasePoint Analytics, a fraud research company, provides evidence of the widespread nature of the problem. The analysis showed that 70 percent of “early payment defaults” — nonpayments in the first months of a mortgage — could be traced to loan applications with significant misrepresentations.

The news of a redoubled effort against mortgage fraud in Nevada comes as other states are becoming more aggressive.

Some securities regulators and state attorneys general have launched litigation to determine whether the recent spate of mortgage fraud was caused by just a few bad apples or was systemic and institutional.

Nadine Ballard, head of consumer protection for the Ohio attorney general, said her office is working under an Ohio law passed last year that prohibits lenders from trying to influence appraisers. The law seeks to prevent borrowers from borrowing more money than a home is worth, which is a frequent scam.

Ballard has launched two sweeps of cases against 12 companies accused of trying to influence appraisers, and more are coming, she said. Andrew Cuomo, New York’s attorney general, is moving forward on similar cases.

Baltimore and Cleveland, meanwhile, are suing mortgage lenders for damages after being rocked by the foreclosure mess.

The model in these cases is New York Gov. Eliot Spitzer, who as his state’s attorney general often used obscure securities laws to launch investigations into prominent companies that yielded embarrassing and damaging evidence. That allowed him to force the companies into big settlements and changes in their behavior.

It’s not clear whether the Nevada task force will engage in the same kind of pugnacious tactics by filing wide-ranging civil or criminal cases, or both.

Significant cases against big institutional players would serve two purposes, said Christian Weller, a senior fellow at the Center for American Progress who has studied the foreclosure issue.

“You raise the visibility of an issue, and you might get a little money that at least on the margins will help troubled homeowners,” he said.

Jim Campen, executive director of Americans for Fairness in Lending, a national umbrella group of consumer and activist groups supporting tougher regulation of the lending industry, said the lawsuits filed were only the beginning of a larger movement, though it’s not clear Nevada is joining that movement anytime soon.

“This is a huge mess with many dimensions and things keep coming to light,” he said. “We’re only beginning to see the lawsuits that will be forthcoming in the coming months and years. Once one state figures something out, others will say this applies to us, too ... If you win, it sends a message: Don’t mess with us.”