Mortgage fraud is on the rise, and the Texas Legislature may take a giant step to squash it.
Instead of penalizing mortgage fraud perpetrators under general fraud laws, a pending bill would establish specific punishments for mortgage fraud, including imprisonment for up to 20 years and fines of up to $10,000 for knowingly making false statements.
The law would apply both to consumers applying for loans and to mortgage industry insiders who conspire to rip off borrowers.
Tightening up the mortgage industry can improve the landscape, with healthier neighborhoods, better credit histories and maybe even lower property taxes.
House Bill 716, sponsored by state Rep. Burt Solomons, R-Carrollton, is pending in the House Financial Institutions Committee, which he chairs. The bill flows from findings by a 2006 House committee study, which means lawmakers are driving this measure more than the industry.
That doesn't mean the mortgage banking industry opposes stronger penalties.
"We mortgage lenders who follow the rules lose business to people who finagle the facts. We're happy to see the problem being addressed," said Raúl Almaguer, a San Antonio loan officer for Emerald Capital Mortgage.
The House report clearly states why strong penalties are necessary:
"The financial losses can be catastrophic. Consequences to the consumer are higher loan rates and fees, stolen identities and possibly impaired credit ratings.
"Ramifications to a neighborhood victimized by mortgage fraud can include higher property taxes, inability to sell homes, increased criminal activity and abandoned properties. It often takes years for a neighborhood to recover from the damage caused by mortgage fraud."
Fueling the legislation is news last month from Houston. A Harris County grand jury indicted eight people for mortgage scams involving about 300 properties worth about $40 million.
In some cases, high appraisals were faked. The scammers would pocket the difference from the real selling price through disguised fees. Sometimes, buyers would be promised that a property would be rented to pay the mortgage. When the residence wasn't leased, the buyer's credit was damaged by the nonpayments.
The cases were cracked by the Harris County district attorney's office with the help of the Texas Department of Insurance's fraud unit.
Those are among the examples of a rising tide of mortgage fraud. The Mortgage Asset Research Institute ranks Texas at No. 7 among states with the highest incidence of mortgage fraud, with Florida at No. 1. Texas ranked No. 15 in 2001.
Early mortgage defaults, a sign of fraud, are problems in large Texas cities. Houston ranked as the third-worst city for loans originated between 2002 and '05. Dallas-Fort Worth ranked sixth. San Antonio tied for No. 11 with Columbus, Ohio, making these cities "potential fraud hot spots," according to the institute.
Lawmakers are most concerned about scams against consumers, but they also want to deter consumers who lie to mortgage bankers, especially about their incomes.
"Some potential homeowners in hot real estate markets worry about the ability to afford a home," the 2006 study says. "This worry leads to problems when borrowers, often with the help of loan originators, misrepresent their circumstances in an effort to get into homes before they are further priced out of the market."
Solomons' bill would require printed warnings on mortgage papers so that everyone knows the serious penalties involved for misleading information. The word "knowingly" is included in the proposed law and in the warning so that innocent mistakes won't send people to prison.
People already are overwhelmed by the complicated mortgage process, often involving hundreds of pages of legal language and forms. Purging fraud from those papers is a goal worth pursuing.