Mortgage fraud: causes, detection, and prevention

Mortgage Fraud

If a rash of armed bank robberies swept across America next year, and if in these robberies criminals absconded with $30 billion dollars, one may be certain that a public panic would ensue. The banking system would likely be changed forever. If thousands of armed thugs went rampaging across the nation forcing people out of their homes, into the streets, and then destroying the properties, leaving the occupants homeless -- well then one might be certain that fear would force our society to adapt its proceedings and its policies to fight this thuggish threat. Yet in many ways this is precisely the situation currently occurring with recent rise in mortgage fraud and abuse. Certainly, the criminals are armed with paperwork instead of shotguns, but the impact they are having is no less real. "Authorities have stated that fraud is involved in $60 billion in loans annually, resulting in $30 billion in losses."

Mortgage fraud is quickly leading to houses repeatedly "flipped" between conspiring buyers to reach artificially high prices and then fraudulently sold to the innocent for much more than it is worth -- leading both to repossessions and to artificially created comparables that may skew future appraisals. Such flipping serves to defraud banks and individual buyers.

However, not only is the mortgage industry being defrauded, but elements of the mortgage industry are also --often illegally-- defrauding thousands of disadvantaged lenders out of (combined) millions of dollars and destroying thousands of lives in the process. The effects of these frauds are particularly felt in the inner cities, where predatory lending practices are shattering many areas and leading to homes being repossessed from long-term owners and either left vacant or sold to slumlords. Many independent studies have shown that the majority of consumers targeted by predatory lenders are minorities or in a lower income bracket -- fraud seems to target those who can least afford to survive it. It appears that a startling number of the loans made to lower-income or credit disadvantaged borrowers (subprime lending) is not only unfair in terms of higher interest rates, but is also actively deceptive and intended to unethically leach away as much income and equity as possible from borrowers. The mortgage industry is not only having fraud practiced upon it, it is also itself riddled with abusive and fraudulent practices.

It is perhaps because fraud is so pandemic in the industry today that less is being done to combat fraud than one might expect. Mortgage companies frequently fail to report fraud, and when they do it is frequently put on hold by law enforcement. Individual consumers, meanwhile, may not realize that they have legal protection, or may think that there is no point in fighting the system and risking losing even more. Abuse committed by mortgage companies is even harder to prosecute than fraud committed upon them, as the former often walks the thin line between legal (if unethical) and illegal practices. Many grass-roots groups are trying to combat lending abuse, while many corporate organizations work to develop ways for mortgage companies to better protect themselves against fraudulent applications. In addition to these non-governmental solutions, federal, state, and local governments have all tried passing regulations to help prevent mortgage fraud and abuse. Despite these efforts, and in some cases ironically because of them, fraud and abuse continues to grow by the year, daily reaching new extremes, developing new tactics, and becoming increasingly destructive in the economic and social realms.

The Dead Pledge Heritage: Are Mortgages Inherently Susceptible to Dishonesty?

The degree of dishonesty and fraudulence associated with the modern mortgage industry indicates an important question that should be raised: is there some level at which the very nature the mortgage industry is fraudulent or invites fraud? Looking over the history of mortgages, one can see some indication that there is some historical link between exploitation and mortgages. This is somewhat indicated in the formation of the word itself. Mort- signifies death, and -gage is from the same root as "pledge."

Mortgages are, literally, death pledges. This phraseology is descended from the idea that "property rights were said to be 'dead' to the borrower until the due date. Worse yet, if he failed to settle up on the due date, he lost everything, or as English jurist Sir Edward Coke put in 1628, if a mortgagor failed to pay, 'then the Land which is put in pledge... is taken from him for ever, and so dead to him.' "

As this short little linguistic lesson suggests, mortgages in the old world were not unrelated to the exploitative systems of feudalism. In fact, many ancient worlds had agreements akin to mortgages. For example, in ancient Egypt most private landowners had mortgaged their land to the ruling class, and though they owned it officially, still paid for the right to remain there.

This stable Egyptian system gave rise to the longest-lasting civilization known to man, and created an enduring and powerful ruling class which, nonetheless, might be considered to have been somewhat exploitative of the peasantry.

The ability to borrow against one's property (the pledge it to death if one failed to pay) was important to the economic development and history of Egypt as it would later be in Europe and America. It was this mortgaging aspect of Egyptian culture which the Mosaic Laws were reacting against when the Jewish scriptures forbade lending money at interest to fellow Jews, and moreover ordered that all property be returned to its hereditary owners every seven years. The ancient Hebrew sense that God did not approve of the death-pledge of mortgaging carried over to Catholic theory and later Puritan thought as well, both of which considered usury a sin.

Mortgaging of property existed despite the Christian rejection of usury, and has been credited with helping to fuel the westward expansion of the American frontier, as struggling farmers had one property after another foreclosed on by predatory banks.

One hopes that by now the relevance of this history to modern mortgage fraud is slowly becoming apparent. Mortgages have historically been linked to the chaining individuals to the soil, to the transfer of power from peasants to ruling classes, and to other exploitative practices. This has a certain relevance to today's predatory lending practices, and also may contain some insight on the solutions to mortgage fraud if fully explored. It may also serve to explain certain dynamics of the consumer-side of mortgage fraud. However, to really understand the way in which modern mortgage fraud functions, it is important to know the history and functionality of the common modern mortgage.

The New Big Deal: Modern Mortgages and the Road to Fraud

It wasn't until the New Deal fought to pull America out of depression that mortgages as they currently exist, with all their strengths and weaknesses, really came into being. This was when the Federal Housing Administration was established to guarantee 93% of new home owner mortgages, and the Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Deposit Insurance Corporation (FDIC) were created to insure savings and deposits. "With the federal government guaranteeing all, there was almost no risk [for lenders]." This created in environment in which, for the first time, loans were both federally regulated and encouraged. A predictable surge in homeownership followed.

Not incidentally, though, this Government move was at least partly in response to a significant issue in America with predatory lending. Prior to the founding of the FHA, the American mortgage industry had already gotten its start. "And, it wasn't banks...it was insurance companies. These daring insurance companies did it, not in the interest of making money through fees and interest charges, but in the hopes of gaining ownership of properties if the borrower failed to make the payments on it.... The repayment schedule was spread over three to five years and ended with a balloon payment. " It was the FHA that started the amortization of loans so that indebtedness could decrease over time. They also instituted practices of lending based on ability to repay the loan, judging the quality of the property involved before making the loan, and expanded loan terms so that they could be feasibly repaid (instituting seven, fifteen, and thirty year loans). The government pushed extensively in this years to create fair, non-predatory lending situations. "It was as if what well-known patriotic poster were pointing to say, like a gimlet-eyed realtor: 'Uncle Sam Wants You to Buy A Split-Level in the Suburbs.'" For the first time in Christian history, having significant debt (a mortgage) was equated not with sin but with the proper way of family living. Homeowners went from being a minority to a majority of households.

Yet despite this overwhelming push to improve the financial situation of borrowers, the end result of this massive shift into home ownership was now an unmitigated good. In the housing rush, "houses had often been bought at inflated prices, at astronomical rates of interest. For many people, homeownership was, to put it mildly, 'cost burdened,' with mortgage payments taking more than 40% of some households" income." To this phenomenal burden was added the additional costs of suburban ownership such as the necessity of owning a car for transportation to remote work locations, and the upkeep of suburban lifestyles. Within only a few decades, foreclosures began again, and the younger generation watched their parents dreams seem increasingly removed. Financing changed once again, as Fannie Mae began offering more flexible options such as adjustable-rate mortgages and the resurrection of the balloon payment. Meanwhile, the weight of mortgages served to settle the older generation into political and economic stagnation, something that many youth in the 1960s and 1970s protested against as a hidden cost of suburbia.

So one may be able to see a certain degree to which mortgages are inherently exploitative. A simple analysis of the amount borrowed as compared to the amount paid back over the life of the loan might point to the same conclusion. Some degree of the fraud perpetuated within the mortgage industry may have its roots in this seminal inequality -- whether from the individuals' sense that a certain amount of dishonesty is justified by the high price he (or she) will pay for their mortgage, or by the companies themselves being willing to look the other way regarding certain fraudulent acts which might in the end increase net profits if they don't end in foreclosure. Nonetheless, there is a significant difference between legitimate (if exploitative) loans which are undertaken with the full and informed consent of all parties and loan fraud that occurs when one or more parties involved is lied to about the essential facts of the situation or the ramifications of the loan. Lending may be parasitic in all cases, and predatory in many, but it is particularly and uniquely predatorial when it is based in fraud and misrepresentation.

How Loans Are Open for Fraud

Odd as this may sound, the mortgage process may be particularly vulnerable to fraud because it is so complicated. Each step of the process has its own weaknesses, and frauds which take advantage of each have been created. Understanding the steps of mortgage approval are necessary to understand the types of fraud. Most fraud has as its goal the granting of loans that would not otherwise be granted.

The only way to do this is to subvert one aspect of the approval process. This makes understanding the way in which eligibility for loans is decided vital to understanding the difficulties and possibilities regarding loan fraud and the legal prosecution of such fraud.

When decided whether or not to approve home buyers for specific mortgages, lenders typically look at three central factors: the borrower's ability to repay the loan in all conceivable situations, the borrower's perceived psychological willingness and dedication to repaying the loan, and the likelihood of financial loss should the bank be required to foreclose on the loan.

The borrower's ability to repay the loan is based on a number of calculations. One of the most obvious is employment and salary history. "Generally speaking, mortgage companies prefer for you [the buyer] to have been employed at the same place for at least two years, or at least be in the same line of work for a few years." In many cases, employment information is misstated on fraudulent loans. Most lenders attempt to make sure that employment information is correct by requesting letters of verification from one's employer and paystubs. Fraudulent responses may be to misreport employment information, provide forge letters of verification, and even the use of modern graphics software and high quality laser printing to forge pay stubs and W-2s. In addition to individuals voluntarily exaggerating (or inventing) employment history, it is apparently common for many unscrupulous mortgage brokers to encourage this sort of behavior in clients whose details might be inconvenient. In worst-case scenarios, brokers may even alter this information on their own, without the clients permission. Of course, loan-fraud that takes place for the profit of scammers is likely to use entirely false employment information.

Ability to repay calculations are also based on the amount of debt which a person has already financed. "In order to qualify for a mortgage, most lenders require that you [the borrower] have a debt-to-income ratio of 28/36... The debt they look at includes any longer term loans like car loans, student loans, credit cards, or any other loans that will take a while to pay off."

Some fraud cases have been built around hiding true indebtedness in various ways, either by taking out private loans unreported to credit bureaus to pay off other loans, or by taking out loans immediately before the mortgage process that will take months to appear on credit reports. This calculation may also take into account the amount of money one has as a source of the down payment or future repayment -- an amount that may be manipulated in various ways.

Apparent willingness to repay is another important aspect of the underwriting process. This calculation considers credit scores and how the home will be used, among other factors. While credit scores are difficult to fraudulently change, many frauds do take place utilizing the place of credit in mortgages. Scammers may claim, for example, that they want to use someone's good credit and their income to forge a real-estate partnership, and then use it for fraud.

Use of the home is an especially prevalent lie, as the lender has absolutely no way to be certain whether or not the buyer intends to live in the home or rent it out, and there do not appear to be legal constraints in place which forbid buyers from "changing their minds" about whether to live in a place or rent it out once it has been purchased.

The final area of concern is whether or not the property presents a good investment risk. In the worst-case scenario, if the bank needed to repossess the house, would the sale of the devalued and foreclosed property cover the bank's investment? Of course, FHA loans have a significant effect here, because they insure that the bank will recoup its losses, and in many cases that will encourage banks to lend where otherwise they wouldn't. All the same, there must be a sense that the property is both worth what is being paid for it and that the buyer will put enough equity into it immediately to make it a good risk. This means that down payment size and the home appraisal are significant.

Down payment size may be fraudulently inflated by unannounced financing on the house (such as seller financing or a second mortgage masquerading as a down payment). More common, however, is appraisal fraud. Almost every source regarding mortgage fraud lists crooked, inept, or misled appraisers as being on the front lines of mortgage fraud schemes. Appraisals are based on several factors: the objective quality and condition of the home, the market prices of comparable properties in the area, the desirability of the property in terms of neighborhood amenities, and the personal judgment of the appraiser. Any of these judgments can skew the appraisal. According to one reliable community report, appraisers in inner city areas in particular seem to be very inconsistent with their judgments. A property one appraiser judges to be worth upwards of eighty-thousand dollars another may judge to be worth less than forty thousand because of prejudice against given neighborhoods or decisions to chose different comparable properties.

Because of natural variations in appraiser judgment, not to mention the wide of values that can exist on a single street, it is very easy for an appraiser to skew appraisals without anyone noticing. Appraisers may skew data out of a sort of good-old-boy-network sentiment, in which they are assured of future work because they always come back with appraisals that suit the purposes of those that hire them. Such appraisers may even think that they are doing everyone a favor: helping the loan officers get commission, assuring that the buyer gets the house they have bid on, and that the seller gets his asking price.

These cases may never be noticed or caught. However, many other appraisers may be thoroughly crooked and take part in schemes where prices are wildly inflated for the purpose of gaining fraudulent loans from which the appraiser may get a cut. These are the cases where the most damage is done to everyone involved.

In all of these cases, a great deal of individual judgment comes into play on the part of the underwriters as to whether or not the loan presents a good risk. The "best judgment" of loan underwriters is one area where illegal discrimination or fraudulent activity can take place. Underwriters have, on occasion, been involved in loan schemes where they were influenced to make unwise decisions on loans (generally those with fraudulent information that they merely agreed to overlook, but potentially legitimate but unwise applications as well). "Authorities,... have noted a growth in the number of criminal gangs who use romantic relationships... [with] processors to work their scams. When their targets are uncooperative, they will often resort to threats of force."

Such organized criminals might get loans pushed through underwriting, or use underwriters and other processors to gain access to personal information that could be used in future loan frauds involving stolen identities. Of course, most fraud doesn't take place at the level of the underwriter. Most fraud occurs before the file ever hits the underwriter's desk, creating fraudulent information that scammers hope will convince the underwriter to approve the loan.

As can be clearly seen here, every step of the loan approval process is fraught with opportunities for deception and fraud against the mortgage lender. Abuse against consumers generally takes place at a different stage, though it may include defrauding both borrowers and lenders. Fraudulent forms of predatory lending generally take place in the marketing of loans, in the way in which the process is presented, and in the signing of papers. It is at these stages that unethical lenders may mislead borrowers, fail to present relevant information, or even tell outright lies or practice outright theft. It is in screening the application that lenders face their greatest risk of being defrauded, it is in the process of selecting the loan that consumers are at the most risk.

How Fraud Works In the Real (Financial) World

There are a number of qualitatively different sorts of fraud taking place in the mortgage industry. Perhaps the most innocent is that of individuals lying on their applications in hopes of getting a better rate or avoiding rejection. Slightly less innocent is fraud by mortgage professionals trying to get loans for their clients even if that means fudging a few figures. On the other side of the equation (fighting against borrowers instead of for them), there are the predatory lenders who may lie to both borrowers and banks in an attempt to make money off loans. All of these, however, are relatively unorganized, working more or less within the system and just crossing the boundaries a little. Because of this, they can be hard to identify and prosecute. More obvious are those who work blatant scams: confidence men who take advantage of people's good credit and real-estate-investment dreams, property speculators who flip properties through scam buyers, identity thieves, and other professional fraudsters.

Individuals lying about eligibility is probably the most natural form of fraud. As one source points out, "Due to the amount of information required, many people assume that overestimating or underestimating the facts is acceptable. The problem is that such deception, whether large or small, is fraud and thus illegal." At the applicant level, the costs to the lender are generally small. Such loans may default more often, but they are not created with the intention of defaulting, and applicants probably expect to be able to sustain the loan. "He's Joe six-pack who stretches the truth in order to get into a house... He's less professional and easier to catch."

According to one interview with someone actively involved in the mortgage industry, often times the more major lies told on applications are not the original idea of the applicant but are inspired and guided by mortgage brokers. Other articles agree: "often involves the participation of an insider such as a mortgage loan officer, a closing agent, a closing attorney, or appraiser... he's the loan officer who won't get paid until he closes a loan or the real estate agent who is paid on commission...[who]'ll rationalize his behavior until he is blue in the face, generating documents that make borrowers look credit worthy."

This kind of loan fraud springs somewhat naturally from the nature of the mortgage industry. In the modern economy people of average means are not capable of buying their own homes without a mortgage, and for many people buying a home is absolutely necessary for their quality of life. So the benefits of minor "white" lies on an application that allow them to have a mortgage may seem to drastically outweigh the slim chances of being caught or prosecuted. In order to reduce this kind of fraud, the industry would need to either decrease the degree to which such fraud was necessary to allow people from all walks of life to get mortgages, or more realistically to increase the likelihood that such frauds would be caught and prosecuted. Either one has significant problems, and it is likely that such fraud is bound to continue. Those involved in loan processes who are paid on commission are also naturally (though unfortunately) inclined to fraud because their salaries depend on making the sale whether or not it is best for the lender or other parties involved.

This could theoretically be combatted by changing the commissions-based structure of the mortgage system, or perhaps more feasibly by punishing those brokers whose loans most frequently defaulted.

Small pro-borrower fraud may be natural, and it is generally considered by the parties involved to be harmless at worst and beneficial at best. One might be tempted to applaud brokers who fight tooth and nail for their most desperate clients, even if it means bending a few rules. However, such a simplistic approach would fail to take into account the real costs of small scale fraud. There is a reason why underwriting generalities are in place: they help to assure that potential buyers are capable of supporting their obligations even in unexpected situations and life changes. Much can happen over the course of a thirty year mortgage, and it is probably wise not to invest beyond one's means. Borrowers who trick lenders into giving them more than they can handle are far more likely to default on their loans. Going into foreclosure can destroy an individual's credit and life -- most borrowers would do better to wait to purchase their home rather than to risk going into default within a few years. By the same token, banks stand to lose considerable money if homes default because the borrower cannot afford to make payments. Neighborhoods also suffer as the number of foreclosed properties increases.

Additionally, it would be a mistake to suggest that even a significant minority of brokers who encourage their clients to borrow beyond their means are inspired to do so for noble or selfless reasons. Brokers are paid a percentage of their client's final loan amount, and may have a vested interest in seeing them borrow more even at poorer deals. The eagerness to "help" clients borrow to much may lead very quickly and disturbingly into the practice of pressuring or even misleading clients into borrowing way too much, and saddling them with loans that are burdensome, overly expensive, and generally destructive to their well being. This is known as the predatory lending b ecause in it lenders ignore the needs and requests of their clients and merely use their clients' wishes to help guide them in their sales pitch, without gearing the final product to their needs.

Predatory lending is an umbrella term to describe a range of activities, all centered around taking advantage of consumers. Predators may use one or all of these common tactics to take advantage of unsuspecting borrowers. In most cases the targets of such lending are already homeowners, so that they have equity they stand to lose, and they are commonly disadvantaged in some way that tends to place them in the lender's power. Predators usually go after the sub-prime market, partly because "a refinance transaction involves fewer parties than a purchase transaction. The more parties involved, the more difficult the artifice is to sell or cover up," and partly because such borrowers have probably be turned down repeatedly and are more desperate to listen to a slick sales script. As others have pointed out, such predatory lending tends to concentrate around inner city areas where poor homeowners are just barely hold on, and uses that poverty to their advantage, leeching the last value away.

Common tactics used by predators include failing to fully disclose mortgage facts, purposefully obscuring or even lying about salient loan details (such as the future interest rate or payments), bait and switch tactics, fee packing, misinterpreting ability and/or willingness to pay and encouraging (or even forcing) borrowing beyond one's means, creating huge hidden fees or fake debts that will pay of into his pocket, and encouraging or creating fraudulent data on applications.

In addition to these many generally illegal tactics, predators may (legally) charge exaggeratedly high fees which may not become known till the end of the process.

With some exceptions, these tactics are illegal in many areas, but they have such close legal equivalents that prosecution may be next to impossible. Reading over predatorial lending reports such as those released by the National Training and Information Center and ACORN, one may be shocked to see that most of the major national banks and mortgage brokerages are actively involved in the worst of predatory lending practices including blatant lying and bait-and-switch tactics that pressure clients into high-rate mortgages at the last minute if they do not wish to lose their investment in previous fees or fail to have a loan they were counting on.

It appears that most predatory lending depends on obfuscation of loan details, in addition to other tactics. For example, lenders frequently do not mention "discount points" which are financed into loans. There appear to be consistent reports of borrowers lured in with promises of a "no-cost or low-cost loan." who are then switched without any announcement to a high-cost loan. "It is not uncommon to find borrowers paying $10,000 to $15,000 in fees when they believed they would be paying little or no fee.." Federal regulations require that estimates of costs and Truth-in-Lending disclosures be mailed before confirmation of the loan, but there is no requirement that receipt of the disclosures is received. "The company shows the disclosures in its files and claims to have placed them in the mail. This failure to make disclosures is believed to occur even at consummation of the transaction where the borrower never sees the disclosure...." Interviews with one loan originator's office staff report that people in the office would sometimes sign disclosures for costumers, and that frequently costumers were told such things as, "That's just a file saying what I've already told you. I don't have a copy of it yet, but it's not important. Just sign there to say you got it -- if you don't, the loan won't be able to go through and you might lose your locked in rate."

Such pressure, and outright lies, can sneak thousands of dollars onto a loan.

How, one might ask, could a person sign all the paperwork for a loan without noticing that it was for thousands more than they expected? This is actually surprisingly simple, and it tragically involves the misuse of Federal standards designed to protect the consumer. The borrower is generally misled about the loan-cost and fees, and then misled as well about the monthly payments. After these deceptions are already in place, they are told about the Truth in Lending Disclosure that they have likely never received -- or which may be presented with relevant details obscured by a hand or a Post-It Note. Consumer Research Magazine describes it with an example that seems too word-perfect to be replaced. As they explain it, an imaginary borrower "has determined that he wants a loan of a specific amount, say $80,000. The mortgage company proceeds to show the borrower an 'Amount Financed' of $80,000 from the Truth in Lending Disclosure, while transacting a loan for $100,000 with the borrower." sophisticated buyer would know that the amount financed is the amount of their home which is being covered, and that the actual loan amount (including fees) may be higher than that. An unsophisticated buyer, though, could be led to assume otherwise, as in the following dialogue:

DFI has reviewed sales scripts that employ dialogue such as:

Borrower: "What is my loan amount?"

Sales Rep: "Your amount financed is $80,000."

Borrower: "So my loan amount will be $80,000?"

Sales Rep: "Make no mistake about it... your amount financed is $80,000 as you can see from this federal disclosure form." narrator:] The sales rep has not made a false statement, yet has led the borrower to believe that the loan amount is far less than he has signed for. The deception is held in what the sales rep did not say to the borrower.

Further deceptions may be forthcoming. Many borrowers are tricked into adjustable rate mortgages instead of fixed rates, whether by tricky language in the documents and the verbal assurance of loan officers that this is a fixed rate, or by being pressured not to read their documentation, or through fraud involving forged signatures. "The borrower is not alerted to the ARM by the interest rate associated with the ARM, because it will often be at a start rate approximating that which is currently being offered on fixed-rate mortgages," borrowers may also be deceived by false promises that the ARM will convert to a fixed rate after a year. Such deception can pass on to even the most qualified and dedicated borrowers rates and loan amounts which are outside their means to repay, and force them into foreclosure. Yet while lying about rates is illegal, as is failing to make disclosures, simple misleading speech, or last minute changes that are not entirely explicated, may be unfortunately legal.

Further predatory practices make such lenders even more dangerous. Bait-and-switch tactics may be combined with such obfuscation, or used alone. In a classic bait and switch, one very good rate lures customers in, and is then changed at the last minute once they are committed. A number of things may make a borrower feel committed to a mortgage and unable to escape even before signing. ACORN mentions numerous examples where borrowers planning on refinancing were encouraged to stop paying their old loans before the new cleared, forcing them to sign quickly so as to save their credit. Borrowers are also frequently bullied or pushed into signing through a variety of techniques. Additionally, many in the subprime market are operating are strict budgets or time frames and once they have gone through a significant portion of the loan they may be financially, emotionally, or practically tied to it. Financially they may not be able to afford a new appraisal in a month or two when they have found a new lender -- other fees such as application fees and credit approval fees may make them feel a financial investment.

Emotionally they may be weary of the hassle and eager to close, and fearful that no other place can get them a better deal -- if they have come to like their broker, they may feel disloyal or believe him when he says that he found them the best possible loan and that they'll be wasting time and money going anywhere else. Financially, they may have overwhelming external debt that must be taken care of immediately, medical or college bills, and other obligations that cannot wait the month or two it would take to bring a different mortgage to closing. First time home buyers would face the additional concern of an expiring home contract should the financing fall through, and possibly be facing an eviction deadline, loss of earnest money, or other serious issues. In short, bait-and-switch may practically, if not legally, trap people with unexpected rates, points, and fees which would have been unacceptable when first looking for a loan.

Additionally, rates charged in the end are generally far higher than the conventional market would sanction. Borrowers with perfect credit are routinely charged three to six percentage points higher than market rates when they go through the subprime lenders who target low-income areas. This is compounded when banks offer yield spread premiums which reward brokers with significant kickbacks when they shunt borrowers over into higher interest rate brackets. "Lenders annually pay brokers $15 billion to increase borrower's interest rates -- the same amount that borrowers pay in origination charges." Such kickbacks further demonstrate the systemic nature of this problem.

Listing all of the abusive tactics of predatory lending would take several dozen pages, as the many quality reports on the subject show. Suffice to say that predatory lenders also lie about the existence of prepayment penalties, repeatedly fool customers with loan-flipping tactics accepting high loan origination fees in return for minimal changes in interest rates, and actively and misleading promote their services to low-income neighborhoods. Though lying itself is illegal, misrepresentation is highly profitable and systemically practiced with little (if any) government intervention. More serious attention is paid to mortgage brokers who do fraudulently report income or other data in order to achieve these predatory loans -- such fraud is rampant.

Currently the laws existing to protect the banking industry from brokers misreporting consumer information are far more comprehensive than the laws protecting consumers from brokers who are subtly misrepresenting loan information.

Not only are mortgage and real-estate professionals the leaders in defrauding and abusing consumers, they are often responsible for the most serious defrauding of banks and lending institutes as well. There are three basic sorts of mortgage frauds which are commonly run "for profit" and all are generally masterminded by mortgage professionals. "Flipping" is "where someone knowledgeable about real estate buys a rundown property, makes cosmetic repairs, gets a crooked appraiser to exaggerate its value and then sells it to an unsophisticated buyer at an inflated price." This obviously requires criminal professional appraisers, and often price-inflating realtors as well:

Flippers often call themselves "developers." The more authentic among them buy houses in poor neighborhoods, dirt cheap, replace the windows and put on vinyl siding, then quickly sell them to unsuspecting first-time homebuyers at huge mark-ups. The less authentic among them simply buy and hold the property for a few months, weeks, days, or even hours, before reselling them at double or even triple what they paid. The most criminal among them sell and resell the property to each other several times before selling it to a buyer who never takes possession of it before defaulting on the mortgage, in order to engineer a completely phony high-price sale."

Everyone profits but the poor buyer, and the bank when he or she defaults because the house falls apart. Then "there's equity skimming, in which sellers conspire with mortgage brokers, real estate agents, escrow officers, and notaries to sell properties to straw buyers at inflated prices. " When the overblown loan is approved, the proceeds are divided. The seller gets his price. And the scammers pocket the rest, sometimes more than $100,000." When the buyer defaults on a loan, the seller already has profited from the price inflation."

This benefits everyone involved but the bank or federal program left holding the foreclosed property -- and the poor straw buyer who is left devastated.

The next category is fraudulent loan originations in which unqualified buyers are given fake documents not so that they can own their own home, but so that the agents and brokers involved can profit from the commissions -- a similar scheme involves using fake or stolen identities in order to apply for home improvement loans or other cash out options. This may be one of the faster growing areas of loan fraud, though it is still just a small subset of overall mortgage fraud. "Everyone acknowledges that identity theft is on the rise regarding mortgages and home equity loans....Each year, approximately 100,000 identities are stolen and their criminal use results in billions of dollars in direct costs to financial institutions."

The vast complexity of mortgage fraud and mortgage origination abuse poses a daunting problem to regulators and activists. Figuring out how to regulate predatory lenders without cutting down on credit opportunities for low-income individuals is a significant quandary. Being able to stop fraudulent loan professionals is even more difficult, especially when it comes to home appraisals which are so overwhelmingly subjective even without taking fraud into account. The next section addresses these concerns in an overview of the regulations existing --and those needed-- at the federal, state, and local levels.

Regulations: Attempts, Concerns, and Failures number of agencies exist at the federal level to combat fraud. The various housing agencies such as HUD and FHA are of course involved in regulating mortgages which are insured through their programs.

The FBI investigates and prosecutes both identity fraud and other fraudulent exchanges such as mortgage applications and property flipping. Recently, the IRS has also become involved. Farther down the command chain, many states have rules concerning both predatory lending and other fraud. Some cities as well, such as Cleveland, have passed city-wide consumer protection laws. Unfortunately, certain aspects of fraud and abuse seem to be somewhat protected by the mortgage industry from outside interference, and they tend to fight virulently against anti-predatory-lending measures, and certain other measures that would make combating fraud and abuse easier. Additionally, many of the laws on the books are inadequately enforced, for "if you commit mortgage fraud and come away with millions of dollars, you'll get their attention. But many cases are not investigated."