Last week, President Obama signed an executive order that created a new Financial Fraud Enforcement Task Force. What is special about this task force is that it unites a number of federal agencies for a single purpose. The Department of Justice will lead the task force, and the Department of Housing and Urban Development, the Department of the Treasury and the Securities and Exchange Commission will be represented on its steering committee.
This will not be a Washington-exclusive endeavor. The task force is partnering with state and local law enforcement agencies in the investigation of financial crimes. Mortgage fraud and securities fraud will be on the task force's agenda. The new entity replaces a 2002 creation, the Corporate Task Force, which obviously didn't do the best job for most of this decade in regard to ferreting out fraudsters.
Everyone knows that fraud played a huge role in the deterioration of the mortgage banking industry, and we cannot shift the entire blame to Washington for what happened. Within the industry, the acute lack of due diligence, risk management and quality control during the bubble years made the bad situation worse.
And fraud is still very much with us. If you were reading this month's edition of Secondary Marketing Executive, you may recall that we reported that the Federal Bureau of Investigation (FBI) had more than 2,600 mortgage fraud cases pending at the end of July. Compare that to the entire 2008 fiscal year, when the FBI handled approximately 1,600 mortgage fraud cases. The FBI currently has 300 special agents, 15 task forces and 59 working groups investigating mortgage fraud.
But we're clearly not out of the fraud woods yet. Interthinx, based in Agoura Hills, Calif., recently gave us some sobering news with its third quarter 2009 Mortgage Fraud Risk Report. According to the company, its Mortgage Fraud Risk Index grew more than 11% from the second quarter to 145, with the Property Valuation Fraud Index jumping 25% quarter over quarter and 46% year over year. Furthermore, the Interthinx analysts are concerned that the continued fraud is being based in short sales, real estate owned inventories and refinancing by borrowers with seriously impaired equity.
And the sun won't come out tomorrow on this issue – or, for that matter, for the next three years. Interthinx predicts its fraud indices will stay in ascension, thanks to the continuing wave of resetting adjustable-rate mortgage loans that is expected to last through the first quarter of 2012.
The ongoing recession hasn't helped matters, of course. A great deal of the refinancing-related fraud is coming from people who don't want to lose their homes and will go to any extreme – including illegal behavior – to keep a roof over their heads.
Ultimately, though, I believe that fraud will go into a tailspin. The end of the recession will bring about an economic stability that will erase the desperation-driven fraud. Also, the industry learned a painfully harsh lesson during the current crisis, and the focus on risk mitigation and quality control has never been stronger. In fact, an argument can be made that the new mortgages being originated today represent the safest in the industry's long history.
Then, of course, there is the new task force. Add that to the mix, and I believe that the industry will finally get a handle on mortgage fraud. We may not see the results of these efforts immediately, but time is our ally, and the coming years will see the fraudsters picking up their sorry bags and taking their ill will elsewhere.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]
[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]
