Mortgage Fraud Is Prime

Amid a jump in the number of foreclosures, federal and state prosecutors have stepped up efforts to crack down on mortgage fraud.

The scrutiny by prosecutors comes as the housing industry undergoes a shakeout, further exposing fraud schemes said to be as rampant as ever.

Federal prosecutors in a number of jurisdictions -- including Houston, Los Angeles, Phoenix and New York -- have indicted dozens of mortgage-industry professionals in recent months for their roles in a variety of alleged scams that were operating as recently as June.

Fraud Alert • On the Case: Federal and state prosecutors have beefed up their investigations into mortgage fraud. • A New Wrinkle: The jump in foreclosure rates has sparked an increase in what are known as "foreclosure rescue" scams. • State Action: At least one state has banned the foreclosure rescue practice.

Under Scrutiny: 1,200 Cases

The Federal Bureau of Investigation has stepped up probes into mortgage fraud with 1,200 cases under investigation compared with 436 in 2003 and 818 in 2006. The increased scrutiny stems in part from a flood of leads from banks: The FBI received more than 35,000 mortgage-fraud reports totaling almost $1 billion in losses last year, up from nearly 7,000 reports totaling $225 million in losses in 2003.

Federal prosecutors obtained 204 mortgage-fraud convictions last year, generating $388 million in restitutions and $231 million in fines. An FBI report in May said "mortgage fraud is pervasive and growing." Many of the schemes have been around for some time but continue to crop up, despite increased awareness and scrutiny by lenders, regulators and borrowers.

"We're getting new cases faster than we can close out old ones," FBI spokesman Stephen Kodak said.

The increase in foreclosures was "providing criminals with the opportunity to defraud vulnerable homeowners," the FBI report said. State prosecutors, meanwhile, are targeting an area of mortgage fraud known as "foreclosure rescue."

There are different variations of foreclosure rescue, but in general the scheme works like this: Rescue companies target homeowners facing foreclosure with what is termed as a temporary refinancing or sale. The homeowner gets to remain in the home and make monthly payments until they get back on their feet. But the new payments are often more than the mortgage was, forcing the resident deeper into debt. Often they move out or get evicted, and the new owner sells the home and pockets the equity.

The jump in foreclosures is helping to fuel the rescue scheme. Foreclosure filings were up 55% in the first six months of this year compared with the year-earlier period -- and on track to top two million homes for the year, according to RealtyTrac Inc., an Irvine, Calif., company that compiles foreclosure data.

'New Wave of Fraud'

The number of homeowners who enter into foreclosure rescue deals is unknown, but the National Consumer Law Center, an advocacy group for low-income residents, called the scheme a "new wave of fraud" affecting "thousands upon thousands" of homeowners.

This month, a Maryland man became the first in that state to be criminally prosecuted for a foreclosure-rescue scam. In June, Massachusetts became the first state to temporarily ban the rescue practice after a 70% spike in foreclosures. Several states have passed measures in recent years designed to regulate foreclosure-rescue operators.

State prosecutors in Illinois, Massachusetts, Ohio and Washington have filed civil suits against foreclosure-rescue companies in recent months. Idaho Attorney General Lawrence Wasden warned residents in June to be wary of foreclosure rescue deals. "Many of these schemes are designed to fail so that consumers lose their homes to the so-called rescue company," he said.

Ohio Attorney General Marc Dann called the rescue scams "contemptible." After filing civil lawsuits against six rescue companies this month, Mr. Dann said: "I can think of little that is more shameful or sleazy than attempting to profit from the misery and fear of [homeowners] who face foreclosure and are willing to do anything -- to grab on to any ray of hope -- that may enable them to keep their homes."

Massachusetts Attorney General Martha Coakley sued 19 individuals, including three attorneys, in March for their alleged roles in a foreclosure rescue ring. The suit, filed in state Superior Court in Boston, alleges fraud, conspiracy and deceptive practices were used against several homeowners, including Steven Thomas, a church pastor, who bought a home in December 2004 for $235,000 and borrowed $47,000 the same day for repairs.

Less than a year later, he was behind on his mortgage and facing foreclosure. According to the attorney general's lawsuit, Leo Desire, a broker at Primary Mortgage Resource Inc., of Brockton, Mass., offered to refinance the home and requested a $1,500 deposit. However, Mr. Desire later said refinancing wasn't an option, according to the suit, and suggested selling the home to a "trust" that would enable Mr. Thomas to remain in the home, then buy it back in six months.

Mr. Thomas couldn't be reached to comment. According to court documents, he sold the home for $335,000 in January 2006, but never received almost $43,000 owed to him after fees and expenses were paid. The home was never placed in a trust, and went back into foreclosure after the new owner failed to make the mortgage payments, according to the suit.

Mr. Desire says the allegations in the suit have been taken "out of context." He denies any wrongdoing and is fighting the suit.