The proposal, from the Office of Federal Housing Enterprise Oversight (OFHEO), an independent agency within the U.S. Department of Housing and Urban Development (HUD), cites a case involving Fannie Mae which, in December, consented to hand over some $7.5 million in an agreement with the U.S. Justice Department.
The Justice Department had accused Fannie Mae of accepting money it knew had been lost by Government National Mortgage Association (Ginnie Mae) in a fraud scheme involving First Beneficial Mortgage Corp, Olympia Mortgage Corp, and United Homes LLC.
Fannie Mae, which is the second-largest U.S. financial institution behind Citigroup, did not admit wrongdoing in the consent order.
"This and other frauds in the mortgage industry reflect the need to deter and, if necessary, detect and remedy fraud," the proposal says.
Among other tasks, the OFHEO, regulates two government-sponsored enterprises (GSEs) -- the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Attracted by the run up in home prices and acting with growing impudence, an underworld of grifters have spawned a pandemic of mortgage fraud in the United States.
The Federal Bureau of Investigations received 17,127 reports of mortgage fraud in the fiscal year that ended Sept. 30, 2004, compared to only 6,936 reports in the previous fiscal year. A Google search of current news articles on the morning of Feb. 23 revealed 120 hits for current news stories about "mortgage fraud."
The proposal identifies mortgage fraud, a close cousin to predatory lending, as "a material misstatement, misrepresentation, or omission relied upon by an Enterprise (GSE) to fund or purchase -- or not to fund or purchase -- a mortgage, mortgage backed security, or similar financial instrument."
The FBI says 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders -- lawyers, appraisers, mortgage lenders, title and escrow workers, mortgage brokers and real estate agents --who conspire to get mortgages for more than the actual value of the property and then walk off with the difference. Often, the scam includes inflated appraisals on properties distant lending companies never see.
OFHEO's proposal says GSEs must notify OFHEO if the GSE is requiring the repurchase of a mortgage backed security or other instrument, or if it is declining to purchase an instrument because of suspected fraud.
Failure to comply would subject a GSE or its board members, officers, or employees to supervisory actions by OFHEO, including the issuance of cease-and-desist proceedings and monetary penalties.
There is a 30 day public hearing period before the proposal likely becomes a regulatory mandate.
The OFHEO also issued a separate advisory, requiring the GSEs to notify OFHEO of investigations, legal proceedings, or civil or criminal actions by any governmental authority or private party. The advisory, effective immediately, details the establishment of procedures and deadlines for making such notifications.
"Filing of a knowingly false or misleading report or failure to report the occurrence of an event in accordance with this advisory may subject the Enterprise and its board members and any responsible officer to supervisory action," the advisory says.
To learn how you can avoid being defrauded see "Mortgage Fraud Inflates Housing Bubbles".
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