By most measures, Matthew B. Cox would appear to be a mortgage lender's dream customer. The 36-year-old former Tampa resident had once worked in the mortgage business, so he understood intimately what it took to qualify for a loan. And Cox threw plenty of business at mortgage lenders in Florida, and then Georgia: An aspiring real estate investor, Cox took out $3.7 million in mortgages to finance his apparently ever-growing stable of houses.
But in reality, Cox was the industry's worst nightmare. Federal law enforcement officials say that Cox -- a.k.a. Michael Shanahan, David Freeman, and Gerald Cugno -- along with his girlfriend, Rebecca M. Hauck, masterminded a massive mortgage fraud that ensnared at least 10 different lenders, including Bank of America Corp. (BAC) and SunTrust Banks Inc. (STI). Using nearly a dozen stolen identities, the pair forged "deeds of satisfaction" to convince banks that they had paid off loans for -- and thus owned -- homes that, in fact, they were renting from the true owners.
With these fake documents, Cox then persuaded banks to lend him millions beginning in 2002 and into 2004 -- millions he and his girlfriend subsequently absconded with. So brazen was Cox that he left some of the mortgage brokers who closed his loans in Florida a copy of his novel-in-progress, titled The Associates -- little more than a barely fictionalized account of his escapades. Cox and his girlfriend are now on the lam, their faces plastered on wanted posters distributed to bankers, mortgage brokers, and real estate agents. "We want to catch him so we can put him on trial," says David E. Nahmius, U.S. Attorney for the Northern District of Georgia.
Welcome to the dark side of the housing boom. While the plunge in interest rates has triggered an explosion of housing and mortgage activity, allowing millions of Americans to buy and refinance houses, it has also given rise to an unprecedented wave of fraud. The FBI says the number of suspected fraud incidents reported by federally chartered banks, which underwrite roughly half of all mortgages, has soared nearly fivefold since 2000, to 17,700 last year, and is set to top 20,000 cases this year. No one has exact figures on how much the fraud is costing banks and homeowners, but analysts say the losses could well amount to more than $2 billion a year.
And here's the rub: With the property market at last showing signs of cooling off in some parts of the country, the banks may suddenly find themselves less insulated from mortgage scams. Says William Matthews of the Mortgage Asset Research Institute: "In a flat or declining market, the bodies are going to rise to the surface more quickly."
Why the rise in fraud? Chalk it up in large part to the sheer number of mortgages banks are handling nowadays. The plunge in rates has goosed mortgage volume from roughly $800 billion a year in the mid-1990s to more than $2.6 trillion now. To meet demand, lenders hired tens of thousands of inexperienced staffers at the same time they were working feverishly to cut the time needed to close loans. As a result, experts say lenders sometimes cut corners on the due diligence that could have caught some of these frauds.
Compounding matters is that len-ders, to cut costs, have outsourced the origination of most mortgages to independent mortgage brokers, who now initiate more than two-thirds of all home loans -- meaning that banks don't know borrowers the way they did in decades past. Banks "aren't meeting the borrower face to face anymore," says Arthur J. Prieston, chairman of Prieston Group, a Novato (Calif.) provider of fraud insurance and training. "There has been less concern for the quality of the loan and more for the quantity."
At the same time, con artists have become more sophisticated in their tactics -- through their use of identity theft or their ability to detect vulnerabilities in the mortgage process. For instance, some have exploited the logjams that have occurred in overworked county deed offices. Ownership titles that took days to be recorded now take weeks or months, and fraudsters know this leaves lenders confused about who the true owner is. In Douglasville, Ga., a fraud ring refinanced a property in quick succession with three different lenders before selling it. As a result, four lenders now claim rights to the first lien -- and the title insurers, which include Fidelity National Title Insurance Co., could be on the hook for the losses. "We're scared to death" of the potential for similar frauds elsewhere, says Fidelity counsel Robbie J. Dimon.
Some scams use sophisticated rings of buyers who flip a property at inflated prices among themselves before absconding with the loan proceeds. That was the case in Stone Mountain, Ga., an Atlanta suburb, where a 15-person fraud ring -- a group that included corrupt mortgage brokers, closing attorneys, fake buyers, and an identity thief -- flipped at least 100 houses in three neighborhoods over a three-year period, pilfering roughly $20 million in bank funds before being busted last year.
The problem could get worse for banks before it gets better. As long as prices were rising sharply in housing hot spots such as Boston, Washington, D.C., and Southern California, banks duped by fraudsters were often able to cut their losses -- or even come out whole -- by reselling the defaulted property back into a rising market. But it's unlikely that banks can count on rising valuations to bail them out of bad loans. And while the banks have been securitizing their mortgages and selling them to third parties, they are still on the hook for part of the loan if it goes bad.
Homeowners are taking it on the chin, too. In Utah, some state officials believe rampant fraud has compelled lenders there to boost mortgage rates by an extra quarter-point to help cover their losses. When property-flipping scamsters drive up house prices, property-tax hikes aren't far behind. And when scams come unraveled, home values can plummet. By the time the Stone Mountain fraud ring was busted in 2004, property values had plunged from an average of $280,000 to $180,000 -- and several of the flipped houses remain vacant, their lawns covered in weeds. "These are homes with no love," says Ann D. Fulmer, a mom-turned-fraud-hunter who helped authorities bust the gang.
In parts of the country where housing prices have risen especially quickly, homeowners have become direct targets of an increasing range of scams. There has been an explosion of "equity stripping" schemes, in which elderly or blue-collar homeowners who have fallen behind on their mortgage payments and are facing foreclosure are preyed on by scammers, who often get their leads from the mortgage-default notices that banks are required by law to file with the local courts. These legal notices "just provide a road map for scammers," says Manuel Duran, a Los Angeles lawyer who has represented fraud victims.
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In these scams, the con artists approach homeowners, offering to help them refinance -- and thus stave off foreclosure. But their real intent is to steal the equity that these homeowners have built up over the years -- either by duping the owner into signing papers in which they transfer ownership or by charging tens of thousands of dollars in exorbitant fees. The former happened to Michelle Roberts-Taylor, a 40-year-old transit supervisor who lives near Washington, D.C. After falling behind on her mortgage last year, Roberts-Taylor received a phone call from a mortgage broker who promised to help her refinance the mortgage at a lower rate. It was when Roberts-Taylor received an eviction notice that she realized she had unwittingly signed over her home to the broker. This fraud, unlike most others, had a relatively happy ending: Roberts-Taylor hired an attorney who was able to win an $85,000 settlement last December from the broker.
Will the fraud wave recede if the housing market cools off? Perhaps over time, but the banks could be in for a rough ride in the short term. Besides the potential hit from slowing home prices, an end to the boom also could prompt scammers to cash out. And some of these guys have a lot of skin in the game. Earlier this summer, a grand jury in Springfield, Ill. indicted two men for taking out fraudulent, inflated mortgages on more than 150 properties. The scheme cost lenders $8 million in losses. And they know there are plenty of other big scams out there just waiting to hit.
By Dean Foust and Brian Grow