Real estate fraud is surging, fueled by a booming housing market, feverish refinancing activity and lax regulation, authorities say.
In the last two years, according to the FBI, reports of mortgage fraud nationally have tripled to 21,994, while the dollar value of the alleged crimes quadrupled to $1.01 billion.
The dramatic run-up in the housing market during the last four years was a boom with few equals. Abnormally low interest rates spurred refinancings, construction and speculation, while the industry developed loan products for every income and attitude.
Swindlers have lots of room to hide in an industry so flush, so busy and so much more complex than it used to be.
Mortgage fraud can be as simple as a loan applicant lying about income and as complicated as a ring of conspirators using identity theft, fake appraisals and straw buyers to steal properties from unsuspecting owners.
Much of the industry is not required to report fraud to regulators, so it doesn't.
The amount of deceit is undoubtedly much greater than the reports indicate, FBI officials say. Fraud increases the price of mortgages for all buyers as lenders pass on their higher costs.
Consumers will take out $2.8 trillion in mortgages this year, but regulation is a hazy patchwork of local and national agencies that have minimal communication with each other.
This is especially true in regard to mortgage brokers, who barely existed 30 years ago but now are key players in the loan process. Two-thirds of home buyers turn to brokers to find financing for the biggest purchase of their lives, industry associations say.
Yet in California the agencies that monitor these middlemen say they don't know the most basic facts about them, including how many brokers are operating in the state or how often there are complaints.
Regulation of brokers "has sort of fallen through the cracks," FBI Assistant Director Chris Swecker said.
Some brokers think this neglect opens the door to trouble.
"We've got to do something to better protect the consumer," said John Marcell Jr., an Upland, Calif., broker who is president of the California Assn. of Mortgage Brokers. "We need better education, and better policing."
But policing requires a regulatory agency with teeth. Real estate has no equivalent to the U.S. financial industry's overseer, the Securities and Exchange Commission. The number of fraud cases investigated by the FBI is not keeping pace with the rise in reports. The bureau's conviction rate is falling, from a national total of 256 in 2003 to 170 this year.
Policing also requires victims to come forward. In a boom, they can be hard to find.
"It's not like you have a bunch of bullet casings on the ground and a victim in the hospital," said Bill Denny, a deputy district attorney in Alameda County who prosecutes criminal real estate fraud.
"The whole industry hates regulation," he added. "Lenders never write to us and say, 'Please [pursue] this case.' "
The urge to ignore includes some of the industry's biggest players. Last summer, the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, the two largest federally chartered lending institutions, ordered them to start informing it of mortgage fraud "in a timely manner."
The regulation was developed after Fannie Mae was accused of covering up a $6-million fraud instead of reporting it.
Last week, the FBI arrested two people who operated real estate and escrow agencies in Downey and Seal Beach. Martha Rodriguez and Edward Seung Ok were charged with 10 counts of mail fraud in an alleged scheme that preyed on 70 homeowners facing foreclosure.
According to the FBI, the pair would promise to clean up the homeowners' credit by having a third party cosign the refinancing papers. But the homeowners ended up losing title to their houses while Rodriguez and Ok netted $8 million, the FBI said.
Ok's lawyer, Roger J. Rosen, said his client "didn't do anything illegal. He helped these folks out." Rodriguez's lawyer didn't return a call for comment.
In another, more wide-ranging scheme that has only partially come to light, homeowners were not victims but eager participants. This hustle, which allegedly was orchestrated by a California broker, is said to have involved hundreds of people. It illustrates just how easy it is to break the mortgage rules on a large scale, and how minimal the punishment can be if you do.
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.