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Fraud Comes Home With Easy Loans

Mortgage scams are plaguing Chicago's poor and threaten to become a nationwide financial epidemic, the FBI says.

November 13, 2005|David Jackson | Chicago Tribune Staff Writer

A white-collar crime wave is raking Chicago's poorest communities, robbing vulnerable families of their homes and draining billions of dollars from the U.S. economy.

Over the last five years, as home loans have become easier to get and identity theft has blossomed, mortgage fraud has surged.

FBI officials say it threatens to become a national financial epidemic. Gang members call it "the new street hustle."

"If you are still making money selling drugs, you are an informant or about to be busted. Mortgage fraud is the thing to do now," identity thief Christopher Scott said in a prison interview.

Mortgage swindlers buy buildings dirt-cheap or use cons to gain control of people's homes. They apply for mortgages, take the cash and disappear, leaving buildings empty and victims destitute.

David Shank's broad face flushes with shame as he says: "I was taken for a ride."

Shank, 46, who is mentally disabled, lost the house he owned free and clear after a fraud-laced $94,000 mortgage was orchestrated by Scott and a home loan executive who had served prison stints for rape and truck hijacking.

Blending face-to-face scams with computer forgery, fraud crews typically include loan executives, appraisers and scouts who troll for victims.

Drug-dealing gangs, including Chicago's Black Disciples, have adopted the financial crime, the Chicago Tribune found. Mortgage swindling helped that gang solidify control over street corners, launder money and acquire safe houses for operations.

And giant lending companies, including the market-leading CitiFinancial, a division of the global bank Citigroup Inc., were ensnared in major fraud schemes.

In federal and Illinois cases filed since 2000, the Tribune identified 524 Cook County homes used by swindlers. Those homes -- which prosecutors say represent a fraction of the frauds in the Chicago area -- were clustered in low-income and minority communities. In the 41 Chicago census tracts hit hardest by mortgage fraud, 39% of the residents lived in poverty, nearly twice the city rate, and 96% were African American.

Economic ripples spread when swindlers take a house.

As buildings wind through foreclosure court, they often fall vacant, becoming magnets for criminals. Then city agencies must spend more for police patrols, board-up, demolition and litigation.

Landowners across the region must pony up the lost property tax revenues. Many of the mortgages are federally insured, so taxpayers are on the hook for those as well. Stock investors lose money in the complex secondary market, where home mortgage loans are pooled and resold.

And stung lenders pass on losses to other borrowers or fold, said Chicago Title Insurance Co. Regional Counsel Douglas M. Karlen.

On Chicago's South Side, the fraud could undermine decades of homeownership gains.

"The impact of these losses might make a lender say: 'If 10% or 20% of deals in the neighborhood are fraudulent, maybe I won't go back,' " Karlen said.

Nationally, the FBI mortgage fraud caseload increased fivefold from 2001 through 2004. Low interest rates drove home loan applications, and off-the-shelf software made it easy to fabricate the paperwork.

Mortgage fraud losses reported by lending companies have topped $1 billion so far in 2005. Unreported losses may be far larger, the FBI says.

"Quite frankly, it is very easy money when someone walks away from a mortgage closing with a quarter of a million dollars' cash," said Chicago FBI white-collar crime supervisor Robert Kowalski.

One Cleveland scheme involving dozens of fraudulent mortgages caused an artificial rise in property values there, an FBI report said.

A sprawling North Carolina case implicated officials of Fannie Mae, the government-owned corporation backed by taxpayers.

Although Chicago's inner city has been pounded, cases have cropped up in suburbs too.

The U.S. Housing and Urban Development Department fueled some schemes by selling Chicago swindlers dozens of homes at discount prices and paying others hundreds of thousands of dollars in Section 8 rent subsidies to serve as landlords for poor people, the Tribune found.

Local and federal regulations failed to protect lenders and homeowners.

The home loan industry, which touts its self-policing, relied on inexperienced employees without proper controls or oversight. Prominent lenders approved mortgage applications from companies that didn't exist.

As new schemes surface, law enforcement has strengthened efforts. In May alone, officials won guilty verdicts against the leaders of 12 multimillion-dollar fraud rings.

Federal officials say homeownership is central to America's success because it gives people a stake in their community and allows them to build equity and escape poverty. Perhaps the crime's highest price is the intangible cost of seeing families knocked off the first rung of their climb to the middle class.

The swindlers, said Cook County financial crimes prosecutor John Mahoney, "prey on people [who are] using every last nickel to keep a roof over their heads."

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