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Do you want to save your home?" screamed the flyer delivered to hundreds of homeowners in foreclosure-ravaged Ohio. "Guaranteed help. We will stop the anguish that you are going through." The offer, from a company called Foreclosure Solutions, seemed like a godsend to Murry Smith and his wife, Jacki, who were six months late on the mortgage for their home near Toledo. "A representative came to our house," says Smith, 42, whose trucking business had hit hard times.
"He had reference letters up the wazoo from people they had helped." So Smith forked over $1,200 that was earmarked for other bills. Unfortunately, Foreclosure Solutions was nothing more than a con. "They didn't do a darned thing," says Smith.
Just when you thought the story of the U.S. housing crisis couldn't get any uglier, it has. The subprime disaster hasn't stopped the unbridled greed that created the housing bubble. It has simply forced those looking for an angle to find new ways to get rich quick. Mortgage fraud has doubled since 2007, according to the FBI—and the fraudsters include everyone from individuals fudging loan forms to thieves who steal millions from lenders and victims alike.
Incredibly, some of those swindlers are engaging in the same reckless speculation that helped create the bubble. They're borrowing to snap up distressed properties they're certain will go up in value (sound familiar?). For instance, in April, nearly four in ten homes in Phoenix were bought by absentee buyers—not to live in, mind you, but to profit by, according to a survey by the New York Times.
This time, banks are scrutinizing loan applications more closely than in the go-go days, with higher standards for income and employment. So speculators and their brokers are padding their applications. You can now even buy a phony W-2 document online. How convenient.
Such deceit made up 61 percent of mortgage fraud cases reported in one recent?study. There is no way of telling how many of these buyers are already in over their heads.
Then there are the outright crooks robbing the down market's victims. Maybe the most notorious ?is Joy Jackson, who made a killing by dashing dreams. In a type of scheme that is becoming increasingly common, Jackson convinced troubled homeowners in the Washington, D.C., area to sign over the titles of their homes to third-party straw buyers working for her company, supposedly so she could stabilize their mortgage and repair their credit.
Instead, Jackson used the straw buyers to take out new loans against the homes' existing equity, which Jackson pocketed before returning the deeds to her victims. Prosecutors estimate that Jackson and her associates bilked more than $35 million before they were caught—money that helped finance her $800,000 wedding party, complete with a Porsche for one of her attendants and a serenade by Patti LaBelle. Fortunately, the party's over for Jackson, who pleaded guilty in March and faces up to 30 years in prison.
It's true that some people now cashing in on housing are doing so through legitimate means. But some of them helped make this mess in the first place. Case in point: a team of former executives from failed mortgage giant Countrywide Financial, whose parent company paid an $8.6 billion settlement over charges that the company pushed thousands of home buyers into loans they couldn't afford. Countrywide's former president, Stanford L. Kurland, and 11 of his former coworkers are snapping up cut-rate properties at pennies on the dollar through a new firm called PennyMac. Kurland confessed to steering his old company into the subprime business (though he personally never faced penalties). Business in the new firm, a top Kurland aide boasted earlier this year, is "off-the-charts good."
The housing industry obviously needs better oversight. We'll never recover if we can't make people confident that real estate markets are legitimate again. But prosecutors are overwhelmed: Last year, the Treasury Department received 62,000 reports of mortgage fraud; the FBI's caseload has doubled in the past two years. Congress recently approved $265 million more per year to bolster the FBI's mortgage and financial fraud program and grow its staff from fewer than 250 special agents to 410—an important start. But that's still less than half the number of agents the FBI had on financial fraud in the early 1990s.
One good solution comes from Kansas congressman Dennis Moore, who wants to tighten requirements on mortgage lenders to verify claims of applicants' income and employment. (The House passed his legislation; the Senate has yet to vote on it.)
More broadly, President Obama has pledged to end a national "cycle of bubble and bust" using federal regulation if necessary to prevent another economy "built on reckless speculation [and] inflated home prices." He may even appoint a federal official empowered to watch for bubbles that threaten the economy and to take actions such as pushing banks to curtail lending to buyers of certain kinds of risky assets.
In the short term, though, proactive measures can help stop the madness. We need to educate consumers about the enduring hazards of the housing market and encourage those already in trouble to use the free federal help and advice that is available. Our government needs to wake up. It's time we stopped letting crooks make the housing market their home, sweet home.
Do More
- Get (honest) help. The Homeownership Preservation Foundation hotline (888-995-4673) will get you to a federally approved foreclosure prevention counselor. And it's free.
- Be a watchdog. Think you smell a housing scam? Call your state attorney general or a local FBI office.
- Educate yourself. The Department of Housing and Urban Development offers consumer information on mortgage fraud, predatory lending, and home buyers' rights.
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