NEW YORK and Providence, R.I. -- A shrinking mortgage origination sector has only intensified the presence of mortgage fraud, according to panelists at a securities conference this week. One new scheme has emerged where individual mortgage loans are being sold to more than one investor. The meeting produced predictions that 2007 vintage loans will suffer the same performance problems as those created in 2006.
"Financial fraud [in particular] is on the uptick now and it's scary because a lot of it is perpetrated by the presidents and CEOs of companies attempting to stay in business," warned John Gray, senior vice-president, fraud protection, Bear, Stearns & Co. Inc., Lewisville, Texas.
Investors are at special risk now as earlier dereliction on the front-end adversely affects loan performance down the chain, Gray said at a Securities Industry and Financial Markets Association conference in New York earlier this week.
In particular, "fraud in the form of 'double-sold mortgages', with authentic-looking closing documents, is allowing some individual loans to be sold multiple times," according to Gray, who noted that such duplicity "is made easier by the fact that investors don't talk to each other -- Fannie, Freddie, Countrywide, whoever. So long as payments are made, nobody's the wiser."
Widening the warning, Steve Halper, chief executive officer of Dataverify, said not a single investor is insulated from fraud.
"There are occurrences in all portfolios," said Halper boldly. His Chesterfield, Mo., firm provides fraud prevention and decision management technology to the secondary market. Halper portrayed perpetrators as "very flexible; they will adjust to meet new [tougher underwriting] standards."
Meanwhile, Frank McKenna pointed the finger at mortgage brokers who, he charged, "are manipulating a lot of data in mortgage applications without the borrowers' knowledge." McKenna is co-founder and chief fraud strategist at BasePoint Analytics in Carlsbad, Calif.
Continued fraud in the mortgage market is helping to drive already rising default, foreclosure and real-estate-owned statistics even higher. Eleven states registered triple-digit increases in REO filings on a year-over-year basis as of August, the same month that California recorded an increase of 471 percent in REO filings over last year.
Against this swelling tide, state banking regulators are racing to shore up the system, committing new resources and working with local legislators to craft new anti-fraud oversight and restrictions -- a daunting task given the challenge.
"Unfortunately even today we still see rampant fraud, it's crazy; I can't believe it's still going on, but it is," declared an otherwise buttoned-down John Prendergast, chief risk officer for the Massachusetts Division of Banks. He and colleague Mary Jurta, director of consumer credit division for the state of New Hampshire, spoke at a New England Mortgage Bankers Conference Thursday in Providence, R.I.
"The industry has wanted mortgage originator licensing for some time but the [New Hampshire] legislature has been reluctant, because of a fear of over-regulation," Jurta said. But, she added, current market turmoil -- a.k.a. "the conflagration" -- is generating wide state enforcement action. The target date for licensing in The Granite State is April '09, according to Jurta.
"We are experiencing a new wave of fraud," said Ann Fulmer, vice-president, Interthinx, Agoura Hills, Calif., who began fighting the problem years back as an Atlanta-area homeowner in a neighborhood rife with fraudulent activity.
At the securities conference, she said perpetrators "take advantage of what the marketplace has to offer and it's going to get worse before it gets better."
Credited with promoting what became the nation's first, state anti-fraud initiative in Georgia, Fulmer put direct losses from mortgage fraud broadly between $1 billion and $4 billion last year.
"The only way to prevent it," she argued, "is to screen 100 percent of [all] loans, because 80 percent of fraud is committed with the assistance of industry insiders."