Sunday, January 07, 2007

Real Estate Community Regulate Thyself

In 2006, the Rocky Mountain News has published an occasional series on Colorado’s foreclosure crisis. Chapters have shined an unfavorable spotlight on every aspect of the real estate industry; builders, Realtors, mortgage lenders and title companies. The common thread in every case is the lack of professionalism by the service providers who received commissions and fees establishing a fiduciary responsibility to the consumer. It is clear that in the great majority of foreclosure cases chronicled, the desire to close the transaction outweighed the concern for the best interest of the buyer and the real estate community as a whole.

It is time for the collective real estate industry to practice self regulation or suffer under the weight of bureaucratic efforts to stem the tide of fraud which has resulted in our status as the number one state for foreclosures throughout much of 2006. The new mortgage broker licensing law will only result in the most egregious of offenders; those convicted of a felony within the past five years to be removed from the industry. There are loop holes in the legislation and as the law is remiss by not requiring education or experience standards, no guaranty exist that the registered mortgage broker is competent to work in the mortgage industry.

The Colorado Mortgage Lenders Association (CMLA) has been a leader in self regulation among mortgage professionals. Mortgage bankers and brokers who carry the CML (Certified Mortgage Lender) credential have demonstrated through education and documented industry experience that they are qualified to consult consumers and originate mortgage loans. Mortgage originators that carry the CML designation also have agreed to a code of ethics. There are several steps that the mortgage industry can take to eliminate incompetent and unethical mortgage originators from the industry such as setting higher standards in hiring practices, completing independent background checks, requiring membership in an organization such as the CMLA, which provides a place for consumers to turn to file a complaint and force accountability.

The real estate industry has done a far better job of self regulation through licensing, enforcement, and the promotion of the Realtor designation in association with various Boards of Realtor. Real estate agents who carry the Realtor designation agree to adhere to a code of ethics and consumers must understand that not all real estate agents are Realtors. The industry could still do more to protect the public and managing brokers should bare more of the responsibility when hiring agents to their firms. In addition to the established consumer safeguards, agents should police themselves by reporting unethical practices when dealing with unethical agents.

Real estate appraisers often are subjected to tremendous pressure to “make the deal work,” when appraising a property under contract or as part of a refinance transaction. During my tenure as Chairman of the Colorado Real Estate Appraiser’s Board, I oversaw the discipline of many practitioners who were victim to the threat from mortgage lenders and real estate agents who pressured them to achieve a predetermined value for a subject property. Inflated appraisals are among the primary factors resulting in foreclosures in Colorado. As with the real estate industry the legislative structure and professional associations exist to address the most egregious offenders, the industry could benefit from more aggressive reporting of poor appraisal practices from real estate agents and mortgage lenders.

Title companies and closing agents are on the front lines in witnessing the pressure placed upon the consumer when deceptive practices come to light at the closing table. When a borrower learns that the interest rate and closing cost promised are not being delivered the closing agent is left to manage the closing and protect the borrower. Unfortunately this does not always happen as many do not feel it is their role to advocate for the consumer. I believe if a title company or closing agent recognizes a pattern of unethical practices from a real estate agent or mortgage lender; they should act to protect the consumer and title insurer by reporting those involved to the Colorado Real Estate Commission and the employing brokers.

The Bottom Line: New legislation aimed at regulation is only as effective as the enforcement, which in Colorado is limited by budgetary restrictions. If we act as an industry to raise the bar of professional practice and ethical behavior; we can accomplish the goal of cleaning up our industry in a responsible manner and elevate our professions in the eyes of those we seek to serve.


Colorado Mortgage Lenders Association -
Colorado Department of Regulatory Agencies -

1 comment:

Anonymous said...

I have written a book on mortgage fraud and written an online Mortgage Fraud and Awareness course that can be found on

My hope is more will understand the heart of this problem and assist me in my fight to prevent mortgage fraud by supporting my efforts.

I have been in business for almost 26 years, and a successful person until as a business owner became a victim of mortgage fraud, I owned a mortgage company and real estate company and I lost my companies over this issue and the fraudsters are still out there working the system. As you might imagine, I have been devastated, the guilt by association has made me feel at times shameful, depressed, and alarmed. I have felt betrayed, violated, and taken advantage of by white-collar criminals.

The Mortgage and Real estate industry is driving down the same road as the S & L crisis in the 80's, you have to ask why is this issue being swept under the table by many industry agencies and professionals? Although more executives talk about mortgage fraud but they really do not invest in the proper steps to prevent mortgage fraud.

"Willful blindness" is the heart of mortgage fraud and it expresses the contention that the industry exhibits. The “willful blindness” to obvious fraud has been ignored at so many levels of a real estate transaction for so long by industry professionals it has allowed real estate fraud to flourish to an unknown size.

If you are in the mortgage business you do not ever say the “F” word in public? You do not even dare to bring the “F” word up in polite conversation? After all, if you even mention the “F” word it makes any honest, hard working real estate professional quiver. The “F” word is a dirty word in the mortgage industry, and for good reason.

So, have you guessed it yet? What, exactly, is the “F” word?

“Fraud.” More specifically: “Mortgage Fraud.”

Don’t get me wrong: fraud isn’t a factor in every mortgage loan, or even in every mortgage or real estate branch, but the outcome of even one fraudulent loan gone badly can affect the entire real estate industry, in general, and individual practitioners, in particular.

The ripple effect of fraud is as deep as it is far-reaching. The mortgage lenders and borrowers stand to lose much more than the cost of the damages when fraud appears. At risk is their very reputation in the industry or community. And the honest hard working people know in THIS industry our word is our bond; our reputation is our bread and butter.

Who of us, after all, can afford to lose that precious commodity?

In any industry for that matter!

Where does mortgage fraud begin and how do we prevent – or at least begin to stop – mortgage fraud? They say timing is everything, and in this case there’s never been a better time to commit – or fall prey to – mortgage fraud. The unprecedented real estate boom over the last few years has led to the doubly dangerous refinancing craze that swept the nation.

This one-two double-whammy has sucker-punched its share of lenders, real estate agents and consumers, resulting in widespread appraisal fraud whereby property values are greatly – and unjustifiably – inflated to prey on the unsophisticated buyer who is then left holding the note on a property worth but a fraction of the value at which it had been improperly appraised.

The homeowner is unwittingly the first to allow for fraud, and the last to know about it. We know that fraud exists, we know who most likely perpetrates it and, in fact, the various ways in which they commit fraud. But how is the consumer, how is the potential homeowner, affected? The cost of fraud may not be felt immediately, but it’s there, lurking under the surface and spreading out like pollution to infect millions of innocent homeowners in a variety of ways both seen and unseen.

I know from my personal experience the significant cost that fraud-prevention measures have added to my operational deficit, ending my business. The price of detecting, reporting, and preventing fraud is not cheap, and there’s no doubt some of that cost – albeit as little as possible – eventually gets passed on to the consumer who comes looking for a loan.

Inflated appraisals? Could they really drive up the property taxes in a neighborhood? You bet! If the real estate boom has taught us anything it’s that the perception really does become the reality, especially if hyped by the media to the point that people believe popular opinion is the truth.

In fact, if enough fraudulent properties are improperly appraised, the ripple effect is impactful and immediate. And who pays those higher taxes? You, me, and thousands of unwitting homeowners who would never in a million years think of committing real estate fraud.

These significant costs are just the local after effects. What about the bigger picture? How about the national level? Much of the information I’ve gathered have come from government officials be they FBI agents, HUD or others.

You know when the government gets involved in a problem, not only is it big but costly. Someone has to pay those agents to track down fraud, someone has to pay to try cases of all those fraudsters, and if convicted someone has to pay to feed, clothe, and shelter them.

Who? Who will bear the brunt of these costs? Same answer as before: You, me, and thousands of unwitting homeowners who would never in a million years think of committing real estate fraud.

There’s no doubt that homeowners pay the price of mortgage fraud. The only way such costs can be avoided is to eliminate, or greatly reduce, the problem. That means you, me, and thousands of unwitting homeowners who would never in a million years think of committing real estate fraud are going to have to start thinking about it, and thinking about it soon.

Of course, that’s just what happens on the consumer end. Mortgage professionals, as practitioners working within the industry, control the mortgage fraud equation? Unfortunately, the problem is as internal as it is systemic. The person behind the act usually isn’t a professional thief – or even the borrower – it’s one or more of – the loan officer, appraiser, real estate agent, and title agent – working together during the mortgage application and approval process. In a large amount of fraud – 80 percent by some estimates – it involves an insider…

Is it any wonder? After all, loan originators and their team members have detailed access to the borrower’s information in the transaction. From social security numbers to bank account information, it’s all above board and on the table. Many of us treat such information as sacrosanct, keeping it under lock and key and using it for one purpose and one purpose only. To those who would perpetrate fraud, however, such information becomes the key they use to unlock the door to fraud.

Every part of the mortgage lending process presents another window of opportunity to unscrupulous loan originators, who by the very nature of their job description come in contact with builders, real estate agents, borrowers, processors, underwriters, appraisers, lender account reps, and title closers.

Each one of these positions or areas needed to get a mortgage leaves an opportunity for fraud!

The American Epidemic. Consider that phrase for a moment. Epidemic may sound like a strong word to you, but after considering the latest figures on real estate fraud it is my sincere belief that the word is, in fact, not quite strong enough!

According to the FBI’s May 2005 Financial Crimes Report to the Public, the number of mortgage fraud reports filed has escalated nearly 150% since 2003. The report also showed that 80% of the cases involve either overstated property appraisals or non-existent properties. Early estimates are that in 2006 mortgage fraud could increase by as much as 60%, since home sales are slowing and interest rates are rising.

Mortgage Fraud statistics point to nothing short of an epidemic. And yet, really, what do we know about fraud? In point of fact, it’s not what we know about fraud that’s dangerous; it’s what we don’t know. What’s worse is the staggering amount of opportunity with which the American real estate mortgage industry provides those who commit fraud.

According to the Mortgage Bankers of America, or MBA, their 2005 Mortgage Originations Forecast estimates some $2,738,000,000,000 (that extra trio of zeroes isn’t a typo; that’s over 2 trillion dollars!) in new loans.

This staggering number includes about 20 million in new mortgages required to cover new and existing home sales. Those are big numbers, and now even the MBA is including the likelihood of fraud in their statistics, estimating that 10% to 15% of mortgage loans have some kind of fraud involved. This means that between 2 to 3 million home loans originated this year could be fraudulent; that equates to over "7,500" new fraudulent loans every business day and if estimates are correct for 2006 that could "12,000" new fraudulent loans per day.

Now, that is an epidemic…

Who benefits from such fraud? By my own calculations based on such industry standards, loan officers and others in the mortgage transaction accounted for roughly $8 billion in loan fees and commissions for fraudulent closed loans while real estate agents and real estate companies themselves raked in over $13 billion in commissions from those fraudulent transactions.

The statistics on fraud may be sobering, but what’s worse is the sparse amount of stopgap measures currently in place to prevent this all too common felony. Many of us come to the industry by way of other careers. With the real estate bubble growing exponentially, and the resulting refinance craze declining with rising interest rates, it is not uncommon for experienced mortgage professionals to be working alongside relative newcomers from diverse careers.

Clearly, the amount of money to be made in real estate – both residential and commercial – lends itself to abuse. New employees mean new training, and lack of new training leads to old mistakes. The growth of fraud is insidious; it creeps up on us, taking us by surprise until, before we know it, someone we work with, someone we work for, or even those who work for us, is committing fraud.

It’s so easy, so slick, and until now so largely un-enforced. A number fudged there, a figure left out here, a bogus appraisal, a friend of a friend who plays it fast and loose with a client’s verification of rent and a newly scrubbed credit report, and soon enough a mortgage loan is approved, “clear to close,” but is in fact fraudulent.

Once a white-collar criminal gets away with it, the process quickly becomes addictive. Success breeds more success, and before long such crafters of fraudulent mortgage loans clearly begin feeling that not only are they above the law but, in fact, they aren’t doing anything wrong in the first place.

But those of us who take our profession seriously, who are in this business to help sincere, hardworking, law-abiding citizens obtain housing in a fair market for a mortgage that works for them can think of little worse than those who prey on the innocent, the righteous, the unsophisticated and the trusting.

Fraud can happen to anyone: employees, buyers, sellers, investors, and owners. It can happen anywhere: big cities, small towns, storied and well-recognized firms and smaller mom and pop businesses who just want to do the right thing.

Do you think “epidemic” is too harsh a word?!?

According to the Mortgage Bankers Association of America, “…the U.S. Attorney and others have suggested that as much as 80 percent of mortgage fraud can be avoided through aggressive fraud awareness and detection efforts.”

Why do all mortgage companies not use the preventative tools available? That’s where I come in: I became a specialist in preventing mortgage fraud, based on my personal experiences with mortgage fraud I ended up with a doctoral degree from the school of hard knocks. Much like most people, I “never thought it could happen to Me.” after all I am a mortgage professional with 25 years of business experience

But it did.

It can.

And if the statistics prove out, it probably will…

Even after all I’ve been through I still work every day full of hope that progress can be made in preventing mortgage fraud because of all the good, honest, hard working people in the Real Estate & Mortgage industry – and mostly for all of the people that deserve to buy a new home as they need good, honest help in accomplishing the American dream of owing that home!!!!!

We have to believe that good will prevail!!!


Michael S. Richardson