"People are deceiving lenders at an alarming rate," said Jonathan Kempner, who heads the Mortgage Bankers Association.
Citing FBI estimates that mortgage fraud may have totaled as much as $4.2 billion in 2006, Kempner said the fraud has contributed to the recent wave of loan delinquencies and foreclosures.
But how innocent is the mortgage industry? Were lenders, as Kempner said, "the principal victims of mortgage fraud?" Or did the industry, with its lax standards, create an atmosphere in which fraud became pervasive? And did some mortgage firms aid and abet the fraud?
"(The mortgage lenders) knew the bad credit quality of the loans being originated, they took their profits, and now the ship sinks," said Bob Simpson, president of Investors Mortgage Asset Recovery Co. in Irvine, Calif. "They will all walk away rich. And we are left with neighborhoods full of foreclosures."
Simpson, whose company investigates mortgage insurance claims, said he has found that many mortgage brokers encouraged borrowers to overstate their income to qualify for high-priced mortgages. He tells of how a mortgage broker told one of his employees he could qualify for a modest home loan based on his salary.
"But if that loan's not enough for you, we'll use stated income," the broker said. "Stated income" is the industry buzzword for estimating a borrower's salary. That, in many cases, means lying about what you make.
Simpson tells of how a manicurist gained a jumbo mortgage using a loan application that said she was making $90,000 per year. An exterminator gained a loan by saying he made $132,000. A rental car worker was listed as making $144,000.
Simpson can't believe the mortgage firms were unaware of what was going on. "How can you look at a loan application saying that some part-time manicurist working out of her home is making $7,500 a month without being a little suspicious?" he asked.
Mark Miller, a bankruptcy attorney in San Diego, said some brokers wrote "backward loans." If a house was priced at $500,000, for instance, the broker would calculate what kind of income would be necessary for a $500,000 loan and then pencil that into the application.
Of course, the borrowers weren't really making enough money to afford the mortgage, especially after the interest rates on their adjustable loans headed skyward. So the homes eventually went into foreclosure and the owners declared bankruptcy, which is how they landed in Miller's office.
Naturally, the borrower was usually a willing participant in these lies. When home prices were skyrocketing, some buyers were so eager to enter the market that they didn't mind lying to get a loan.
But there's anecdotal evidence that suggests that not all borrowers knew about the lies in their loan applications.
Simpson said he has run across loan applications in which false information appears to have been added by the mortgage broker. "You can tell by the handwriting," he said.
Miller said that in one bankruptcy case he's handling, the borrowers never saw any of the actual loan documents for their home and were not present when the documents were stamped by a notary public.
"The mortgage guy told them, 'Don't worry. I've got a notary I deal with,' who happened to be a relative," Miller said.
The borrowers thought they were signing up for a fixed-rate loan at 7 percent interest. Instead they got an adjustable-rate loan that has since ballooned to 14 percent, driving them into bankruptcy.
San Diego attorney Ronald Marron is handling more than half a dozen cases involving allegations that mortgage brokers duped their clients into taking out unaffordable adjustable-rate loans with the help of dubious stated income.
"All of my clients had easily verifiable income, but instead they put them into stated income loans, or liar loans as they should be called," Marron said. "They tell the borrowers, 'We want to get you more money, but you won't qualify unless you say you're making more money.'"
In at least one case, the broker took it upon himself to adjust the income. The broker sent a loan application saying the borrower was making $2,500 a month, but it was rejected by the lender. So the broker allegedly changed the income to $8,000 a month. The loan went through, but the borrower could not make the payments because he wasn't making $8,000 a month.
Such cases are rare, of course. There are plenty of honest mortgage brokers out there.
Even so, the mortgage industry bears some responsibility for the proliferation of fraud. During the boom years of the real estate market, the industry put much of its emphasis on generating loans that required no documentation for income and no down payments. That was an invitation to fraud.
"Let's say you're running a bar in a college town and you advertise that you don't card your customers," Simpson said. "Are the underage college students who come to your place for a drink culpable? You bet. But are you to blame as well? Absolutely. Usually, law enforcement would come down harder on you than them."
