“Bank robbery without a gun.”
That’s how Rich Bailey describes mortgage fraud schemes in which rings of realty industry insiders bilk lenders out of millions of dollars each year.
Bailey is SVP of New Freedom Mortgage, a privately owned lender in Salt Lake City that does business in 44 states. He’s been operating for more than two years as a one-man mortgage fraud detection unit within the company, where he’s worked for 17 years.
New Freedom investigates fraudulent loans in-house before it turns them over to the Feds because it often can recover funds faster and more easily itself, Bailey said. In most cases, the lender files a civil lawsuit against the perpetrators after he finds evidence against them. The case is turned over to government authorities after a trial is held or a settlement is reached in the civil action.
Mortgage fraud is a sophisticated white-collar crime that’s been around for decades, but technology has made these scams easier to pull off and enabled fraud to proliferate. The perpetrators of the phony home-buying schemes include attorneys, closing agents, mortgage brokers, appraisers, realty agents and title insurers.
Bailey has been following the money trail in these white-collar scams for years, but he’s still amazed at how many perpetrators get away with the crime.
“What disturbs me is if someone walked into a bank with a shotgun and walked out with a couple thousand dollars, the authorities would send two agents after the guy. But if we find a loss of $60,000 (from a fraudulent loan), it’s really hard to get them to do anything,” he said.
New Freedom spends about $30,000 to litigate each fraudulent loan case. Not every case is pursued because of the expense.
“We size up the battle before we wage the war,” he said. “If we have a loss of $60,000 and it will cost $25,000 to $30,000 to litigate, we factor in what our time is worth to go after them.”
One fraudulent loan can take up to 18 months to resolve, he added.
Bailey currently is working on about 70 cases. He noted the use of straw buyers as a common characteristic of most of the cases. Straw buyers are loan applicants who perpetrators use to obtain home loans, but who usually don’t intend to occupy the properties they’re buying.
Bailey said many of the straw buyers are minority women who entered the transactions with a good credit history. Most are left with destroyed credit because the fraudulent loans end up in foreclosure.
Most straw buyers confess in depositions that they suspected something illegal was happening, according to Bailey. But they mostly seem unaware of the larger scam. The perpetrators approach them with offers of money to go along with the home purchase.
“In a lot of cases, (straw buyers) view themselves as the victim,” he said. “They were the perfect little mouse to wander into this trap.”
Another common thread in fraudulent loans is for-sale-by-owner sellers, Bailey said. FSBOs usually aren’t licensed real estate agents, so they may not detect anything out of the ordinary during the home-selling process.
Bailey described his investigations as “peeling the onion.” The process begins when a loan becomes 30 days delinquent. At that point, the lender verifies the borrower’s on-file employment and income records, then performs an occupancy inspection.
While technology has enabled mortgage fraud perpetrators to fabricate nearly any document and steal other people’s identities, it’s also enabled lenders to tighten their pre-closing audits on home loans. Bailey uses a number of online services to perform such simple checks as employer address and telephone number verification.
He also uses Web sites like MapQuest to check the distance between the borrower’s place of employment and the home being bought to make sure the commute is reasonable. The lender once discovered a mortgage fraud ring in Florida in which a mortgage broker, real estate agent and builder gathered a group of straw buyers to purchase property that was more than four hours away from where they worked.
Bailey’s experience in mortgage lending and some additional training from the Mortgage Bankers Association have enabled him to spot fraud often before the loan closes. Since he’s been on the job, the company has improved its pre-closing audit to help curtail crime.
“Our philosophy now is it’s a heck of a lot cheaper to catch the fraud up front than it is to litigate after closing,” he said.
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