With the housing boom over, its dark side is coming to light, including fraud. Government data show more criminals – and more consumers – lied to sell or buy expensive homes.
Pam Houchen, the former mayor of Huntington Beach who helped dupe lenders and borrowers in a real estate scam, is a good example of a national phenomenon. The local scheme contained an element common to other cases nationwide: people tricking banks and consumers out of their money. Such shenanigans, which fall under the umbrella of mortgage fraud, ballooned as the housing market heated up, according to government data and industry experts.

Masked mortgages

With the housing boom over, its dark side is coming to light, including fraud. Government data show more criminals – and more consumers – lied to sell or buy expensive homes.

Pam Houchen, the former mayor of Huntington Beach who helped dupe lenders and borrowers in a real estate scam, is a good example of a national phenomenon.

The local scheme contained an element common to other cases nationwide: people tricking banks and consumers out of their money.

Such shenanigans, which fall under the umbrella of mortgage fraud, ballooned as the housing market heated up, according to government data and industry experts.

The increase in fraud could be another factor leading to more defaults and foreclosures now that the boom is over, experts say.

That's bad news to the many mortgage companies based in Orange County, because they face losses when fraud involves inflated home prices.

Peter Norell, who leads a Santa Ana-based white-collar crime unit of the FBI, said fraud is being fueled by the volatile housing market, an increase in loans available to consumers and the widespread use of automated lending systems.

"The market is riper than ever before" for fraud, Norell said.

Lenders are reporting more signs of suspicious banking activity to federal agencies. For a seven-county area that includes Orange County, 4,326 such reports were filed in fiscal 2006, nearly double from 2005, according to the FBI.

And the 2005 total was up 30 percent from the prior year.

Yet lenders may be getting smarter at spotting fraud before they fund loans. Although they reported more suspicious activity, they managed to lower their losses in 2006 by 15 percent to $76.8 million.

Experts say the scope of mortgage fraud is unknown because many cases are never reported or even discovered. But they agree fraud rose with the market, and some think it could spike again as the market cools and mortgage brokers and agents struggle to keep commissions rolling in.

While the FBI doesn't break out statistics for Orange County, Norell said the county probably sees the same types and amount of fraud as other areas.

In the Houchen case, which culminated in her September sentencing to 37 months in prison for fraud and corruption, members of a fraud ring sold condos improperly converted from apartments.

They duped lenders and borrowers by backdating documents to make it appear that apartments had been converted before city laws regulating the process took effect, Norell said.

Nationwide, more fraud cases each year involve straw buyers, which often means a criminal has stolen someone's identity, according to a fraud report released last month by the Financial Crimes Enforcement Network and experts.

The report said lenders are making more loans using automated systems and never meeting borrowers in person, a process that creates more opportunity for fraud.

In addition, lenders are making more "stated-income" loans, in which borrowers say what they earn, pay a slightly higher interest rate and don't have to prove their income, such as by producing tax returns, the report said.

Once again, such practices make fraud easier, it said.

It's not just consumers who are fraud victims.

Irvine-based New Century Financial, which makes loans to borrowers with risky credit profiles, fell prey to a bold fraud scheme in Colorado. Convicted drug dealers bought and sold homes at inflated prices while in and out of prison.

The fraud ring started when two convicts met in federal prison in Colorado and decided to become mortgage brokers, reported the Denver Post, which cited complaints and indictments in U.S. District Court in Denver.

Colorado did not regulate brokers at the time. It now requires brokers to register but does not require licenses. (In California, one can be a mortgage broker with a real estate broker license, which is most commonly used. There are other licenses that allow for brokering loans, although the Golden State has no specific mortgage broker license.)

New Century made loans on four homes tied to the fraud ring and sold the loans to investors, according to the company.

Marc Loewenthal, a senior vice president with New Century, said in an interview with The Orange County Register that his company bought back all four loans from investors. He declined to state the specific cost to the company, but said unraveling fraud is "expensive" for lenders and investors.

Since the Colorado homes were sold at inflated prices, the hoodwinked lenders probably lost money. Critics say that the practice of mortgage companies' selling loans to investors passes on the risk to the investors and thus removes the incentive for lenders to scrutinize loans for fraud.

Loewenthal, however, says it's standard procedure for lenders to repurchase loans sold to investors if fraud is revealed later.

"Our reputation is at risk," he said. "Investors don't buy from you if they think you are marketing or peddling fraudulent loans."

New Century has spent about 18 months working with Carlsbad-based BasePoint Analytics on a computer system to detect potential fraud, Loewenthal said. The system, now in place, looks for suspicious patterns, such as appraisers who tend to overstate the value of property, he said.

Appraisers, brokers, borrowers and others identified by the system might be put on a "stop list" of people with whom the company won't do business, he said.

He said the system has helped the company avoid making nearly $1 billion in suspect loans so far this year.

Lenders are doing more to prevent fraud, but is the government?

FBI supervisor Norell said his agency is deploying significant resources to the problem.

"We are still working every major fraud scheme that goes on in the Orange County area," he said.

He said the Secret Service, the Orange County District Attorney's Office, police agencies and postal inspectors are all doing their part.

"It's not just the FBI out there," Norell said. "There are a number of other agencies that do good fraud work."

However, as the industry gets more competitive, companies are under pressure to bring in business, creating an environment ripe for fraudulent activities, some experts say.

The Orange-based parent of Ameriquest Mortgage, for example, agreed in January to pay $325 million to settle allegations of predatory lending. The company was accused of overcharging and defrauding consumers.

Fraud and other unethical behavior by account executives and mortgage brokers will likely increase as the housing market slows, said Don Currie, founder of HighTechLending Inc. in Newport Beach.

He said loan volume is falling with the market, and people who work on commission are struggling to keep up their incomes.

"A lot of people go to desperate measures to keep their production and lifestyles up," Currie said.

And more consumers stretch the truth when home prices or interest rates are high, Currie and others said. They exaggerate their income and assets to qualify for loans.

Sometimes customers lie to qualify for a home they want to occupy. Or, when buying a second home, borrowers falsely say they will live there in order to qualify for better interest rates, he said.

Currie said the second-home lie, which might seem harmless, contributes to defaults and foreclosures, which hurt the market. In tough times, an owner will default on a second home before his own home, he said.

"It's probably one of the most rampant misrepresentations that you have," Currie said.

Consumers, whether they participate in fraud or not, ultimately pay for it, experts say.

Norell said banks eventually pass on the cost of fraud to their customers.

"Lenders are in the business of making money," Norell said. The added cost to each consumer is probably low, he said, but "there is an overall cost."

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