Digital Risk In The News

All Parties Pay As Mortgage Fraud Gets More Daring

December 31, 2006
Lew Sichelman
United Feature Syndicate

WASHINGTON -- Having been in the business of insuring mortgage companies against risk for more than a century, the folks at First American Title Insurance Co. have seen their share of rogues who try to illegally exploit the inner workings of the lending process. But a recently uncovered scheme may take the cake.

In a scam the authorities have labeled "shot gunning," property owners apply for home equity loans with multiple lenders at the same time. In one case, a would-be borrower applied with three lenders over a 48-hour period. Because the lenders did not all report to the same credit bureau, none was aware the same owner had applied elsewhere.

Fortunately, First American noticed the attempted fraud when it received multiple title orders on the same property and notified the lenders of the suspicious activity before they funded the loans. The owner was not deterred, however. A few days later, the title company noticed two more orders on the same property with two new lenders and alerted them in time to avoid a loss.

Lenders weren't so lucky in dealing with a ring of con artists who obtained 10 mortgages totaling more than $1 million on a Chicago-area condominium with a market value of roughly $125,000, according to First American's valuation model.

The loan applications were made over a three-week period via lender Web sites and call centers. And because of the delay between the dates the loans were closed and the dates the liens were filed in the county courthouse, none of the lenders knew of the other liens when they were making underwriting decisions.

Lenders take it on the chin in cases like these, but legitimate borrowers also pay a price because lenders recoup these costs by raising loan rates and fees, just like retailers add the cost of shoplifting to their prices.

Borrowers have a lot more at stake in another form of shot gunning, this one involving multiple sales of the same house. In this case, the same "owner," who may not be the rightful owner at all, "sells" the same property at the same time to several unsuspecting buyers.

When each buyer uses a different lender and title company, this highly orchestrated scheme is "virtually impossible to detect," says Jeffrey Taylor, managing director of Digital Risk in Dallas.

Authorities believe the Chicago scheme is being repeated over and over by a group of Eastern Europeans known as the Russian Mafia. They use the sham as an exit strategy when they decide to leave the U.S. and return home.

After living here long enough to develop credentials and credit records, they buy the houses or condos using cash obtained illegally. Then, after living in them free and clear for a couple of years, they apply for a bunch of loans based on the equity in their houses.

"It's the `fraud of the year,'" says Paul Doman, director of First American's Lenders Advantage Equity Division. "They can pull in excess of a million dollars out of the home, enough so that they can live a good life back wherever they came from."

Title companies can spot some of the bogus loans through their own market share. But even with a 20 to 25 percent share of the title business on home-equity loans, a company such as First American is "missing a more significant share of the market," Doman says.

The First American executive reports the title business is trying to stop this and other schemes by forming a consortium in which applications for title searches are run through each other's systems. That way, multiple applications on the same property can be spotted before rather than after the fact.