Mortgage Fraud Booming

ALERT:

• If you've been swindled by a mortgage broker in the state of California, file a complaint against a them through both the Department of Corporations and the Department of Real Estate.


• The Department of Corporations provides this page of forms on its website.


• The Department of Real Estate provides this page of forms on its website.

David Streitfeld, a staff writer for the Los Angeles Times, writes today about the booming housing market, and how fraudsters have hitched a ride to big bucks along the way.

The story points out many very interesting aspects and explanations. Among them is the observation that regulation of brokers in California "has sort of fallen through the cracks," says FBI Assistant Director Chris Swecker. There's no way to understate that. However, I don't understand how the state can get away with saying that it doesn't know the most basic information about mortgage brokers, including how many are operating in the state, or how many complaints there might be.

The state of California requires that the Department of Real Estate license brokers and real estate agents. You can look up the license of an agent at this link, and even check to see if there have been any complaints filed against them. This database has names, addresses, years licensed, etc...

However, as Streitfeld's story points out:

The Department of Real Estate says there are 127,000 people in the state who hold advanced real estate licenses. All of them can act as brokers. License revocations have doubled in the last two years, the department says, but it had no data on how many of the cases involved brokers.

What's going on? The California DRE and the Department of Corporations are both responsible for regulating mortgage brokers. How can they possibly get away with throwing up it's hands and saying "not our fault."

In addition, the number of brokers in the state appears to actually be more than the 127,000 quoted in the Times story. It's 130,000 as of October in the DRE's stats, and was growing up to that point. Total brokers and real estate agents were 466,790.

Here's a snippet of a sample scam detailed in Streitfeld's story:

The scheme worked like this, according to the lender that issued the broker's loans: The broker put his clients in loans in which they paid a higher-than-normal interest rate in return for negligible closing costs. These loans generate so much money for lenders that they pay brokers a big finder's fee for them.

To keep the homeowners quiet, the broker split the loot with them. Many of the participating homeowners liked the deal so much they allowed the broker to keep refinancing their loans every few months. Each time, the broker received a new finder's fee and the homeowners earned enough cash to pay their mortgages for a month or two.

The scheme violated California regulations against deception by brokers. But here's what happened when the broker's deceit was finally discovered: nothing. In fact, California regulators say they never heard of the case.

For more on what the state has done, see the Mortgage Loan Bulletin from the DRE.

— The Boy in the Big Housing Bubble