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97–524 PDF 2004

MORTGAGE FRAUD AND ITS

IMPACT ON MORTGAGE LENDERS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

OCTOBER 7, 2004

Printed for the use of the Committee on Financial Services

Serial No. 108–116

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

JUDY BIGGERT, Illinois 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN B. SHADEGG, Arizona 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

SHELLEY MOORE CAPITO, West Virginia 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

TIM MURPHY, Pennsylvania 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JAY INSLEE, Washington 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

KEN LUCAS, Kentucky 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

MIKE ROSS, Arkansas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

RAHM EMANUEL, Illinois 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

CHRIS BELL, Texas 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

ROBERT W. NEY, Ohio, Chairman

MARK GREEN, Wisconsin, Vice Chairman 

RICHARD H. BAKER, Louisiana 

PETER T. KING, New York 

WALTER B. JONES, JR., North Carolina 

DOUG OSE, California 

PATRICK J. TOOMEY, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

MELISSA A. HART, Pennsylvania 

PATRICK J. TIBERI, Ohio 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

BARBARA LEE, California 

MICHAEL E. CAPUANO, Massachusetts 

BERNARD SANDERS, Vermont 

MELVIN L. WATT, North Carolina 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

(V)

C O N T E N T S 

Page 

Hearing held on: 

October 7, 2004 ................................................................................................. 1

Appendix: 

October 7, 2004 ................................................................................................. 45

WITNESSES 

THURSDAY, OCTOBER 7, 2004

Amiri, Brigitte, Staff Attorney, South Brooklyn Legal Services, Brooklyn, 

NY ......................................................................................................................... 30

Donohue, Hon. Kenneth M. Sr., Inspector General, Department of Housing 

and Urban Development ...................................................................................... 3

Matthews, William, Vice President and General Manager, Mortgage Asset 

Research Institute, Inc., Reston, VA .................................................................. 24

McCall, Marta T., Senior Vice President-Risk Management, American Mortgage Network, San Diego, CA, on behalf of the Mortgage Banker Association ........................................................................................................................ 26

Prieston, Arthur J., Chairman, The Prieston Group, San Rafael, CA ................ 28

Swecker, Chris, Assistant Director for Criminal Investigations, Federal Bureau of Investigation ............................................................................................ 5

Trujillo, Ecima, National Field Director, ACORN Housing Corporation, Los 

Angeles, CA .......................................................................................................... 33

Weicher, Hon. John C., Assistant Secretary, Housing/Federal Housing Commissioner, Department of Housing and Urban Development ........................... 9

APPENDIX 

Prepared statements: 

Ney, Hon. Robert W. ........................................................................................ 46

Clay, Hon. Wm. Lacy ....................................................................................... 48

Amiri, Brigitte .................................................................................................. 49

Donohue, Hon. Kenneth M. Sr. ....................................................................... 55

Matthews, William ........................................................................................... 63

McCall, Marta T. .............................................................................................. 72

Prieston, Arthur J. ........................................................................................... 79

Swecker, Chris .................................................................................................. 90

Trujillo, Ecima .................................................................................................. 102

Weicher, Hon. John C. ..................................................................................... 111

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Consumer Mortgage Coalition, prepared statement ............................................. 120

Fannie Mae, prepared statement ........................................................................... 126

Sysdome, prepared statement ................................................................................. 136

(1)

MORTGAGE FRAUD AND ITS 

IMPACT ON MORTGAGE LENDERS 

Thursday, October 7, 2004

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:03 a.m., in Room 

2128, Rayburn House Office Building, Hon. Robert W. Ney [chairman of the subcommittee] presiding. 

Present: Representatives Ney, Miller of California, Hart, Tiberi, 

Renzi, Waters, Velazquez, Carson, Lee, Watt, Scott, and Davis. 

Chairman NEY. Today, the Housing Subcommittee meets to discuss mortgage fraud and its effect on mortgage lenders. 

The subcommittee, along with Chairman Bachus’ Financial Institutions Subcommittee, conducted a number of hearings concerning 

abuse of lending practices, subprime lending and how to ensure 

credit availability for those who need it and want it. 

During these previous hearings, topics revolved around addressing fraudulent schemes and how it affects the individual consumer. 

However, consumers are not the only ones affected by abusive lending practices. Financial institutions and other lenders, also victims 

of mortgage fraud, lose millions of dollars each year through this 

type of problem and corruption. 

Some studies have shown that between 10 and 15 percent of all 

home loan applications include some home loan fraud or misrepresentation. Lenders can choose to absorb the loss and reduce earnings that harm stockholders or charge higher consumer fees to recoup those losses. 

Government-insured loans that fall victim to fraud end up being 

paid at the end of the day by the taxpayers. The examples of this 

fraudulent behavior include elaborate schemes, straw buyers, fake 

credit histories, inflated appraisals, fabricated pay stubs and falsified tax records. 

Of today’s witnesses—we are happy to have all the witnesses 

today—but one of today’s witnesses from the Federal Bureau of Investigation has stated that mortgage fraud has become, potentially, 

a national epidemic that could expose lenders to hundreds of millions of dollars in losses. And, of course, those losses go down the 

line and affect everybody. 

As a result, the Bureau has targeted a variety of fraud schemes 

through its Operation Continued Action, the largest nationwide opVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
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eration in FBI history, directed toward organized groups and individuals who are engaged in mortgage fraud. 

From its inception in August of 2004 through this month, Operation Continued Action investigators have identified more than 245 

subjects and 158 investigations in 37 States. More than 151 indictments have been filed to date. These charges have thus far led to 

more than 144 arrests, convictions and sentences and millions of 

dollars in forfeiture and restitution. 

The United States mortgage market is the deepest and most affordable in the world due to the evolution of unique funding structures for mortgages, and Americans pay less for mortgages than almost any other country. As a result, this country has the world’s 

highest home ownership rate. 

Today’s hearing is another important step, as we attempt to find 

common ground with comprehensive solutions to the problem of 

abuse of lending. I would also note, without objection, that the 

record will be open for 30 days for members to ask additional questions of the panel. 

And with that, I would yield to Mr. Scott. Thank you for joining 

us. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I want to 

thank you, Mr. Chairman, for holding this hearing on the subject 

of mortgage fraud and certainly want to extend a welcome to all 

the distinguished members of the panel. 

This hearing is important to me because as the Mortgage Asset 

Research Institute will discuss today, my State of Georgia has surpassed California and Florida as the State with the highest mortgage fraud scores. In his written testimony, the HUD Inspector 

General provided an example of mortgage fraud in DeKalb County 

in Georgia. This particular incident occurred just outside of my district, and represents just one of many anecdotal stories of mortgage 

fraud and predatory lending in the metro-Atlanta area. 

Most mortgage scams are caused by a small number of local 

fraudulent loan operators. However, the mortgage scams run by 

these small operators cause enormous pain for their victims. While 

mortgage fraud may be a huge problem, it pales in comparison to 

the devastation experienced by individual homeowners who are victims of predatory lending. I am concerned that there is no way to 

know the exact level of mortgage fraud. 

Several witnesses in their testimony identified the lack of information as being a problem for preventing mortgage fraud. I am 

very pleased that the FBI has increased its investigations into 

mortgage fraud, and I believe that Congress should give the FBI 

the necessary resources to expand their operations. 

With the FBI’s primary focus on homeland security, Congress 

must also strengthen existing laws to help State and local investigators share the workload of investigating mortgage fraud. 

In addition, Congress must continue to promote financial literacy 

efforts, which is a strong priority of this committee. 

I look forward to hearing from today’s witnesses on the ways to 

investigate, to prosecute and to stop mortgage fraud. And I want 

to certainly recognize William Matthews of the Mortgage Asset Research Institute, who is a witness today, and his company is a subVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
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sidiary of ChoicePoint, which is based in my district in Atlanta, 

Georgia. 

Thank you very much, Mr. Chairman. I yield back my time and 

look forward to a very informative hearing this morning from our 

distinguished panels. 

Chairman NEY. I want to thank the gentleman. 

Also, without objection, we have written testimony for the 

record—hearing no objection—from the National Association of 

Home Builders, Kevin Coop, and Consumer Mortgage Coalition. 

We have been joined by the gentleman from Ohio, and—he has 

left, the gentleman from Ohio. He will be back. 

With that, we begin the panel. 

Kenneth Donohue is the Inspector General of the United States 

Department of Housing and Urban Development. He has a distinguished 21-year career, serving as a Special Agent with U.S. Secret 

Service, and he later served as Chief of the Investigation Section 

of the Resolution Trust Corporation. He is a Certified Fraud Examiner and a Certified Protection Professional. 

Chris Swecker is the Assistant Director of the Criminal Division 

at the Federal Bureau of Investigation, having been named to this 

position by Director Mueller in July. Mr. Swecker joined the FBI 

as a Special Agent in 1982. He served in the FBI’s Legal Counsel 

Division in the Organized Crime and Narcotics Office. He was designated Special Agent in Charge of the Charlotte Division in 1999. 

John Weicher, Assistant Secretary for Housing, Fair Housing Division, at the Housing and Urban Development, a position he has 

now held since June of 2001. He has been here several times on 

the Hill. 

We welcome you back. 

Prior to the appointment at HUD, Mr. Weicher was Director of 

Urban Policy Studies at the Hudson Institute. He also served as a 

member of the Millennial Housing Commission. 

We want to welcome all the witnesses today. 

I would note our most famous previous FBI agent was Chairman 

Mike Oxley of Ohio, so I had to note that. 

With that, we will begin with you, Mr. Donohue. 

STATEMENT OF HON. KENNETH M. DONOHUE SR., INSPECTOR 

GENERAL, UNITED STATES DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

Mr. DONOHUE. Chairman Ney, and other members of the subcommittee, it is my pleasure to testify before you today on the 

HUD Inspector General’s perspective on mortgage fraud and its impact on financial institutions. Of all the homes purchased in the 

United States each year, 8 percent are financed with FHA mortgage insurance. Each year, FHA accounts for 30 percent of all insured mortgages. FHA has fallen off nearly 20 percent from the 

same period a year ago. FHA-insured mortgages may be more 

prone to mortgage fraud because FHA insures mostly first-time 

home buyers with limited credit history and little money down. 

A closer look at the make-up of the FHA portfolio would indicate 

that FHA’s insurance risk is increasing. A comparison of active insured FHA cases to FHA claims cases over the past 2 years shows 

an increasing claim rate. 

4

As you can see from our chart, our investigative workload has increased in more than 450 open criminal, single-family investigations, and our arrests in the single-family mortgage area have increased 800 percent in a 4-year period. We believe there is a direct 

relationship between our increased workload and the FHA’s increasing claims rate. 

The annual audit of the Federal Housing Administration financial statement has found the FHA in basically sound fiscal condition. FHA’s claim rate, however, continues to rise each year, and 

with fewer FHA mortgage applicants, there is less premium income 

to cover the claims. 

A future economic downturn and future interest rate increases 

would provide opportunities for those who would prey upon homeowners who cannot make their mortgage payments. We repeatedly 

have found unlawful and deceptive practices and outright fraud in 

mortgage lending that often exploit first-time and uninformed FHA 

borrowers. 

Of particular concern is illegal profiteering on the purchase and 

quick resale of homes called ‘‘property flipping.’’ the illegality arises 

because one or more parties to the transaction conspire to inflate 

the value of the home and pocket the excessive profits at loan closing. 

Another concern is ‘‘equity skimming.’’ A common form of equity 

skimming involves an investor who exploits a homeowner facing 

foreclosure and other financial stress. 

Mortgage fraud can go undetected, and not all fraud results in 

loss to the government. This makes it difficult to quantify the exact 

amount or even the estimated amount of mortgage fraud. 

Every month one in every nine FHA mortgages is reported as delinquent. That means that 600,000 FHA borrowers are a month behind in paying their mortgages. Some portion of these delinquencies may be due to mortgage fraud and new mortgages where 

the underwriter intentionally misrepresented the borrower’s ability 

to pay the mortgage. 

The following are two examples that combine OIG-FBI investigations of ‘‘property flipping’’ frauds and the results of a recent audit 

of mortgage fraud: 

Three conspirators preyed on unwitting FHA borrowers in Chicago’s south and west sides, saddling the new homeowners with 

overvalued properties and unmanageable mortgage debt. The fraud 

scheme was a typical flip. The investor would contract to purchase 

a property, recruit home buyers, and then partner with a crooked 

appraiser and attorney to complete the resale and closing at an inflated price. 

As you can see from the pictures on the easel, this example of 

one of the properties shows how significantly it declined in appearance and how it could potentially impact the surrounding neighborhood when one of these fraudulent transactions occurred. 

Earlier this year, a 158-count indictment was handed down in 

the Northern District of Georgia. From mid-1999 through March of 

2004, it was alleged the settlement attorney and coconspirators 

perpetrated a property flipping scam. The defendants purchased 

residential properties primarily in the Stone Mountain, Georgia, viVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
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cinity and resold them at artificially inflated prices, using the proceeds of the resale to pay for the initial purchase. 

In a recent audit of an FHA-approved lender, we found the lenders were fabricating or altering borrower credit and employment 

documents to make the loans approvable. In this audit we found 

pervasive documents falsifying in 48 of 65, 75 percent, of the FHA 

loans originated by a HUD-approved correspondent lender in the 

greater Phoenix metropolitan area. 

Mr. Chairman, I appreciate the subcommittee’s concern over the 

increased problem of mortgage fraud. The result of these types of 

financial crimes undermines the confidence in this Nation’s housing industry and frustrates honest American dreams of home ownership. In addition, the victims include the honest mortgage company employees that lose their jobs because they are victimized by 

unsavory business practices of other staff, the home buyers whose 

credit was destroyed when they had to default on a loan that they 

really could never afford in the first place, or the new FHA home 

buyer that is paying a higher than necessary mortgage premium to 

cover growing losses to the insurance fund. 

Thank you, sir. 

Chairman NEY. Thank you for your statement. 

[The prepared statement of Hon. Kenneth M. Donohue Sr. can be 

found on page 55 in the appendix.] 

Chairman NEY. Mr. Swecker. 

STATEMENT OF CHRIS SWECKER, ASSISTANT DIRECTOR, 

CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BUREAU OF 

INVESTIGATION 

Mr. SWECKER. Good morning, Mr. Chairman and members of the 

subcommittee. I want to thank you for the opportunity to testify 

before you today about the FBI’s efforts——

Chairman NEY. If you would just move the mike a little closer. 

Mr. SWECKER.—in combating mortgage fraud. 

Although there is no specific statute that defines mortgage fraud, 

each mortgage fraud scheme contains some type of material 

misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan. The Mortgage Bankers Association projects 2.5 trillion in mortgage loans 

will be made this year. The FBI compiles data on mortgage fraud 

through Suspicious Activity Reports filed by financial institutions 

and HUD Office of the Inspector General reports. The FBI also receives complaints from the industry at large. 

A significant portion of the mortgage industry is void of any 

mandatory fraud reporting. In addition, mortgage fraud in the secondary market is often underreported. Therefore, the true level of 

mortgage fraud is largely unknown. The mortgage industry itself 

does not provide estimates on total industry fraud. The industry 

provides incomplete or inconsistent fraud data. Based on various 

industry reports and FBI analysis, mortgage fraud is pervasive and 

growing. 

The FBI investigates mortgage fraud in two distinct areas: Fraud 

for Housing and Fraud for Profit. Fraud for Profit is sometimes referred to as ‘‘Industry Insider Fraud’’ and the motive is to remove 

equity, falsely inflate the value of the property or issue loans based 

6

on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve 

collaboration or collusion by industry insiders. These schemes involve industry insiders to override the lender controls. 

Fraud for Housing represents illegal actions perpetrated solely 

by the borrower. The simply motive behind this fraud is to acquire 

and maintain ownership of a house under false pretenses. This 

type of fraud is typified by a borrower who makes misrepresentations regarding income or employment history to qualify for the 

loan. 

In the past 18 months, the FBI has been evaluating the effectiveness of its national mortgage fraud program. In June, 2004, I authorized the consolidation of the mortgage fraud program into the 

Financial Crimes Section of the FBI’s Criminal Division. Previously, mortgage fraud that impacted government programs, for 

example, HUD, was managed by another section. Mortgage fraud 

affecting financial institutions was managed by the Financial 

Crimes Section. This consolidation provides the FBI a more effective and efficient management over mortgage fraud investigations. 

Second, I encouraged an overall strategy to address mortgage 

fraud on a proactive basis, utilizing partnerships of Federal agencies, State and local law enforcement, regulatory bodies and private 

industry. 

Third, I assured adequate personnel resources were dedicated to 

emerging mortgage fraud problems in regions of the country encountering the greatest levels of fraud. 

And finally, the FBI adopted an overall strategy to focus on insiders harming the industry in order to disrupt and dismantle entire criminal enterprises. 

The FBI defines industry insiders as appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and processors, 

settlement/title insurance employees, mortgage brokers, loan originators and other mortgage professionals engaged in the mortgage 

industry. Through a mandatory reporting mechanism, industry insiders would be the front line in preventing mortgage fraud. Zero 

tolerance within the industry, combined with a mandatory system 

of reporting fraudulent activities to the FBI and HUD, would be a 

major step in addressing mortgage fraud. 

The potential impact of mortgage fraud on financial institutions 

in the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed 

to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market. Investors may lose faith and require higher returns from mortgagebacked securities, which will result in higher interest rates and 

fees paid by borrowers, limiting the amount of investment funds 

available for mortgage loans. 

Often mortgage loans sold in secondary markets are used by financial institutions as collateral for other investments. Repurchase 

agreements have been utilized by investors for protection against 

mortgage fraud. When loans sold in the secondary market default 

and have fraudulent or material misrepresentation, loans are repurchased by the lending financial institution based on a repurchase agreement. As a result, these loans become a nonperforming 

7

asset, and in extreme fraud cases, the mortgage-backed security is 

worthless. Mortgage fraud losses adversely affect loan loss reserves, profits, liquidity levels and capitalization ratios, ultimately 

affecting the soundness of the financial institution itself. 

Over the past 5 years, the FBI has implemented new and innovative methods to detect and combat mortgage fraud. One of these 

proactive approaches was the development of a property flipping 

analytical computer application, first developed in the Washington 

field office to effectively identify property flipping in the Baltimore 

and Washington areas. The original concept has evolved into a national FBI initiative which employs statistical correlations and 

other advanced computer technology to search for companies and 

persons with patterns of property flipping. 

As potential targets are analyzed and flagged, the information is 

provided to the respective FBI office for further investigation. Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially 

valued properties are then repurchased several times for a higher 

price by associates of the ‘‘flipper.’’ after three or four sham sales, 

the properties are foreclosed on by victim lenders. Often properties 

are ultimately repurchased for 50 to 100 percent of their original 

value. 

Other methods we have used include undercover operations and 

wiretaps. These investigative measures often result in collecting 

valuable evidence and provide an opportunity to apprehend criminals in the commission of their crimes and reduce losses to financial institutions. These proactive methods do not preclude historical 

investigations; however, they provide the FBI with additional tools 

to conduct large-scale investigations through operational efficiencies. 

As far as trends, there are many mortgage fraud schemes. The 

FBI is focusing its efforts on those perpetrated mostly by industry 

insiders. The FBI is engaged with the mortgage industry in identifying fraud trends and educating the public. Some of the current 

rising mortgage fraud trends include: equity skimming, property 

flipping, and mortgage identity-related theft. 

Equity skimming is a tried and true method of committing mortgage fraud and criminals continue to devise new schemes. Today’s 

common equity skimming schemes involve the use of corporate 

shell companies, corporate identity theft and the use or threat of 

bankruptcy or foreclosure to dupe homeowners and investors. 

Property flipping is nothing new. However, once again, law enforcement is faced with an educated criminal element that is using 

identity theft, straw borrowers and shell companies to conceal their 

methods and override lender controls. It should be noted that identity theft in many forms is a growing problem and is manifested 

in many ways, including mortgage documents. The mortgage industry has indicated that personal, corporate and professional identity 

theft in the mortgage industry is on the rise. Computer technology 

advances and the use of online resources have also assisted the 

criminal in committing mortgage fraud. 

The FBI and its law enforcement industry partners are working 

together to identify these trends and develop techniques to thwart 

illegal activities in this area. The FBI focuses on fostering relationVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
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ships and partnerships with the mortgage industry to promote 

mortgage fraud awareness. 

Over the past 2 years the FBI has spoken and participated in 

various mortgage industry conferences and seminars, including 

those sponsored by the Mortgage Bankers Association. This year, 

we will be speaking at and participating in the MBA’s 91st Annual 

Convention and Expo. The MBA estimates that 6,000 industry 

leaders will attend that conference. 

To raise awareness of this issue and provide easy accessibility to 

investigative personnel, we have provided contact information for 

all FBI mortgage fraud supervisors to relevant groups, including 

the MBA, Mortgage Asset Research Institute, Fannie Mae, Freddie 

Mac and others. 

Additionally, we are collaborating with industry to develop a 

more efficient mortgage fraud reporting mechanism for those not 

mandated to report such activity. This Suspicious Mortgage Activity Report or concept is under consideration by the Mortgage Bankers Association. 

The FBI supports providing a safe harbor for lending institutions, appraisers, brokers and other mortgage professionals similar 

to the provisions afforded to financial institutions providing ‘‘safe 

harbor’’ information. The ‘‘safe harbor’’ provision would provide 

necessary protections to the mortgage industry under a mandatory 

reporting mechanism. This will also better enable the FBI to provide reliable mortgage information based upon a representative 

population in the mortgage industry. 

A recent analysis of mortgage industry fraud surveys identified 

26 different States as having significant mortgage fraud problems. 

Although every survey identified Florida and Georgia as having 

significant mortgage fraud-related investigations, the survey also 

identified nine other States in the South and Southwest, seven 

States in the West and five States in the Midwest as having mortgage fraud problems. Once again, these studies illustrate the need 

for increased coordination among industry and law enforcement on 

mortgage fraud. 

In conclusion, the FBI is committed to increasing liaison and 

education efforts and partnering with Federal, State and local enforcement and private industry to combat mortgage fraud. We support new approaches to address mortgage fraud and its effects on 

the U.S. Financial system to include a mechanism to require the 

mortgage industry to report, fraudulent activity and the creation of 

‘‘safe harbor’’ provisions to protect the mortgage industry under a 

mandatory reporting mechanism. 

Mr. Chairman, the FBI looks forward to working with you and 

other members of this committee on solving this problem. I thank 

you for allowing me the opportunity to testify before you today, and 

I will be happy to entertain any questions. 

Chairman NEY. Thank you for your testimony. 

[The prepared statement of Chris Swecker can be found on page 

90 in the appendix.] 

Chairman NAY. Before we move on to Mr. Weicher, if there are 

any members who would like to submit their opening statements 

for the record, without objection, they will be submitted for the 

record. 

9

Thank you. 

Chairman NEY. Mr. Weicher. 

STATEMENT OF HON. JOHN C. WEICHER, ASSISTANT SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. WEICHER. Thank you, Chairman Ney, Ranking Member Waters and distinguished members of the subcommittee. And on behalf of Secretary Jackson and the Department, thank you for this 

opportunity to testify on mortgage fraud. 

Today, I would like to provide you with an overview of FHA’s initiatives to address this problem. 

Predatory practices can take many forms. Lenders that use these 

tactics often target our most vulnerable populations. Predatory 

loans harm borrowers by making it impossible or difficult for them 

to keep up with payments, and if they miss their payments, they 

risk losing their home, their credit standing and their initial investment. 

Predatory lending can rise to the level of criminal activity and 

constitute mortgage fraud, knowingly undertaken by individuals intent on profiting at the expense of others. Actions include deliberate manipulation of property valuations, falsification of borrower 

financial information, forgery of licenses, certifications and titles, 

and misrepresentation of property ownership and conditions. 

FHA monitors lenders for program compliance. During the last 

4 years, FHA has completed over 3,600 lender monitoring reviews. 

In about 200 of those reviews, we documented significant findings 

that may constitute fraud. By statute, FHA refers all potential 

fraud to HUD’s Office of Inspector General. Consequently, FHA 

made 1,345 referrals to the OIG to investigate findings of possible 

fraud during this period. 

Once we make a referral to the OIG, our role is simply to work 

with them, providing them with whatever information they may request, such as loan case binders. 

Besides working with the OIG, FHA combats mortgage fraud by 

working to prevent it. In this regard, FHA has made significant efforts through consumer education, regulatory reforms and enforcement actions. 

HUD believes that our first line of protection is an informed consumer. Housing counseling has proven to be an extremely localized 

important activity to educate consumers on how to avoid abusive 

lending practices. In the last 4 years, President Bush has doubled 

the budget for housing counseling and Congress has approved. In 

fiscal year 2004, HUD awarded $36 million in grants to counseling 

agencies. These grants will assist more than 700,000 people to either become homeowners or remain homeowners. 

FHA has also developed new program requirements, specifically 

targeting lending practices to protect all FHA borrowers. In this 

administration, we have published eight Final Rules, including an 

anti-flipping rule and two proposed rules, and we are currently 

drafting five more. I list these in my prepared statement. 

And FHA has put in place a series of procedural changes designed to deter mortgage fraud, also listed in my testimony, such 

as new guidance on Social Security number verification. 

10

In addition to establishing more stringent procedures for participating in FHA programs, we are taking aggressive action concerning business partners that demonstrate poor performance and 

abuse of lending practices. 

We now monitor appraisers based on the risk they pose to FHA. 

Under the approach we inherited from the previous administration, 

FHA spent $46 million over 3 years, but found only 97 appraisers 

to sanction. Under our new ‘‘Appraiser Watch’’ system, we have 

spent less than $1 million in the last 3 years and sanctioned over 

300 appraisers. 

FHA has created ‘‘Credit Watch,’’ which tracks quarterly the default rates for the 25,000 lenders that originate FHA loans, and enabled HUD to determine those offices where the default rate significantly exceeds the rate in the local area. 

Since ‘‘Credit Watch’’ started 5 years ago, FHA has terminated 

261 lender branches. The industry supports ‘‘Credit Watch.’’ we 

sanction the worst performers and create a level playing field for 

those who follow the rules. 

FHA also produces ‘‘Neighborhood Watch,’’ a Web-based software 

application which provides lenders with statistical views of their 

performance so they can compare themselves to others in their 

area. ‘‘Neighborhood Watch’’ is also used by community groups to 

monitor local lenders and by HUD’s OIG to identify possible lenders for audit or investigation. 

I hope this discussion of our efforts and accomplishments has 

made clear that the administration and the Department are aggressively policing FHA participants and imposing significant sanctions on business partners found to be engaged in abusive or deceptive behavior. We are firmly committed to protecting customers 

against mortgage fraud. 

Thank you for the opportunity to meet with you today. 

[The prepared statement of Hon. John C. Weicher can be found 

on page 111 in the appendix.] 

Chairman NEY. I want to thank all three of the gentlemen for 

their testimony. 

I wanted to ask a question of Mr. Swecker. Do you, with the FBI, 

just focus most of your time on this, or all of your time, on mortgage fraud? 

Mr. SWECKER. Within the Criminal Division? 

Chairman NEY. Yes. 

Mr. SWECKER. My responsibilities are all criminal—The entire 

criminal program—so it would include violent crime, white collar, 

the whole aspect of criminal violations. 

Chairman NEY. I want to ask a question on the flipping aspect. 

What happens if, you know, a person has, for whatever reason, 

bought a property at a lower level—maybe there was a divorce, or 

a person lost their job and they moved out of town or whatever—

and they bought it; and then they are going to be owner occupied, 

so they didn’t have to put as much money down. 

And then they turn around and find out they can sell it at a lot 

higher price. But they don’t have a fraudulent appraisal; it is not 

fraudulent, but you know, they buy for 60 and they sell for 90. 

Ms. WATERS. It is the American way. 

Chairman NEY. I am just wondering. 

11

Mr. SWECKER. That wouldn’t fall into the category of property 

flipping. 

Chairman NEY. But if they said they were going to be owner occupied, and all of a sudden somebody came around and said, look, 

I will give you 20,000 more for that property, would that then be 

fraud because they said it would be owner occupied, turn around 

and——

Mr. SWECKER. I think that depends on their intent at the time 

they make the representation on the application and to the loan 

originator. I think you would have a hard time proving a criminal 

intent there. 

Chairman NEY. How would you investigate intent? 

Mr. SWECKER. Well—you would look at all the facts and circumstances. You know, that type of single transaction is not where 

our investigative efforts would be focused. We are looking at more 

systemic-type schemes. 

Chairman NEY. Somebody comes in, has a fraudulent appraisal? 

Mr. SWECKER. Right. 

Chairman NEY. Tries to make it look like the place is worth a 

lot more? 

Mr. SWECKER. That isn’t the type of case we would spend a lot 

of——

Chairman NEY. It is more an organized effort by people to do this 

on a larger basis? 

Mr. SWECKER. Correct,correct. 

Chairman NEY. How do you think law enforcement can best, you 

know, combat—and I know this is not everybody in the industry; 

you know, I am fully aware of that. And sometimes—the purpose 

of this hearing today is, a lot of times, the industry are victims. 

You also have predatory lending, that is, upon a borrower; but in 

this case, it is fraud coming back up to the lender, which can affect 

a lot of people. 

But how do you think law enforcement can best combat it, working through structures of the institutions, the brokers, the bankers? 

Mr. SWECKER. A combination of things. I think education is number one. I think what we have tried to do over the last couple 

months here is to get some awareness, develop it within the industry, how prevalent the fraud is, combined with some aggressive enforcement action, so that we can get a deterrent out there and 

deter those would-be fraudsters. 

The third part of that is to develop or require some type of reporting system, much like the Bank Secrecy Act requires on other 

suspicious transactions. Currently, the banks are covered under 

that, but the mortgage brokers and others in the loan origination 

process are not required to report any type of suspicious activity. 

Chairman NEY. One question I have for any of the panelists, if 

the origination volumes decline, do you think then the fraud will 

drop automatically? Does it go hand in hand when there are more 

originations? If it declines, will this historically drop? 

Mr. SWECKER. I think it does go hand in hand, but I am sure 

that they will have opinions on this as well. But I think the volume 

itself has created some cover for the unscrupulous professionals 

that are insiders that are involved in these fraud schemes. 

12

So I think if volume did go down, yes, we might see a reduction 

in the fraud schemes. 

Chairman NEY. Any comments, Mr. Weicher or Mr. Donohue? 

Mr. WEICHER. I think Mr. Swecker is right about that. I think 

fraud will rise and fall with the market, not necessarily proportionally, and the bigger the market the more opportunity there is to 

perhaps get away with something, given the resources that are 

available to combat it. 

Mr. DONOHUE. Mr. Chairman, I wanted to revisit something you 

asked a moment ago, and that was the process by which these 

cases come to be, and the actions—we, the OIG is a bit unique in 

the fact that not only do we criminally investigate these cases and 

address the civil side, but we also work with the Department as far 

as the Department suspensions. 

I must commend the department, the aggressive nature; we have 

worked collaboratively to deal with these things. I do feel, however, 

these debarments, as egregious as some of them may be, may require a permanent debarment for the industry. 

Chairman NEY. A permanent——

Mr. DONOHUE. A permanent debarment. I think some of these 

matters—some are so egregious, my concern is that the folks that 

might have caused these problems get back into the industry again, 

and that is a concern that we have seen in the past. 

Chairman NEY. Well, my time has expired. 

The gentlelady from California, the ranking member. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

You know, I am very appreciative of the time and the attention 

that you give to the subcommittee and the work that you do in organizing hearings so that we can be better informed and make better public policy. 

Now I wish I could tell you, Mr. Chairman, that I focused—that 

this is one of my top priorities, but it is not. I am very interested 

in predatory lending and foreclosures, and I am very interested in 

innocent, hard-working people who get caught up in schemes that 

cause them to lose their homes. 

Now I am glad that you straighten out where you put your time 

and your attention, because I am not interested in a desperate 

would-be homeowner who inflates their income a bit. I think what 

they should be told, when they are making application, is that this 

is a crime and they shouldn’t do it. I am not interested in people 

who make mistakes because they are desperate, and I essentially 

hope you don’t put your time and attention there. And I want you 

to know that oftentimes lenders and brokers are involved in encouraging people to do things that may be a violation of law, and 

people innocently follow the advice of their mortgage bankers or 

brokers and they get in trouble. 

So I am not interested in spending a lot of time and attention 

on catching consumers who are stupid or desperate and make a 

mistake or sell their home and get caught up in something. 

Now if there are organized efforts and schemes where you have, 

again, the thieves, I guess, or a group organized; and they have a 

particular way that they are creating crimes—I mean, they are involved with fraud and ripping off, then that is something else. And 

I didn’t know that that was a big problem. I mean, I am worried 

13

about mortgage bankers and brokers who do second and third and 

fourth mortgages and who flip the loans and increase—and the 

consumer has no way of paying off those loans. They don’t even 

know who they sell the loans to. Now I consider that more than 

predatory lending. I consider that a kind of organized fraud, particularly when some of these mortgage companies have a reputation for doing that. 

So, I mean, if this committee hearing today, Mr. Chairman, is 

about fraud that has been committed by innocent people who fall 

into these schemes who are desperate and who make mistakes, I 

have got to go. But if it is something else, I will try to stick around. 

I don’t know what to ask you. What are you doing here? What 

do you have to tell us? 

Chairman NEY. We would like to have you either way, here, but, 

you know, we will see what he says. 

Ms. WATERS. I would like to stay, but——

Mr. SWECKER. I would like for you to stay. 

We don’t focus our resources on the individual, unwitting borrower who has been sort of caught up in a scheme. Our focus is 

on the industry insiders. I mentioned the two types of frauds, fraud 

for housing, fraud for profit. Most of our efforts are focused on the 

fraud-for-profit type of violation. 

We are looking for something that is more systemic than just an 

unwitting individual borrower who has been caught up in a situation. Maybe they went along with it because they were unsophisticated, but that is not our focus at all. We don’t have the resources 

to engage in that type of single transaction investigation. Our focus 

is clearly on the insiders and the schemes. 

Ms. WATERS. I want you to know that my staff also focused on 

flipping, and it is not the kind of flipping that I normally talk 

about. I talk about flipping by the lenders who flip the loans and 

increase the interest rates and all of that. They kind of focused on 

flipping in terms of buying properties, putting some paint on them 

and fixing them up and putting them back on the market. 

Mr. SWECKER. Right. 

Ms. WATERS. Now, again, you know, I am not sure that that is 

fraud as they have been describing it to me. You know, it is kind 

of the American way. You buy something cheap and you sell it for 

more and you make a property—and, as I understand it, that house 

that you fix up will not sell for more than the market will bear in 

the neighborhood where you are selling it. So if you buy a rundown piece of property in a neighborhood where the houses are 

selling for $200,000, and you pay, you know, $75,000 for it and you 

fix it up, and you sell it for $200,000, I don’t consider that fraud. 

You know, and I—you know, I discussed that with my staff. 

Is there something in that kind of flipping that I don’t know 

about that you consider fraud? 

Mr. SWECKER. What you describe is not fraud. I can’t speak for 

HUD, but I think I know what they would say and will say. We 

don’t focus on those individual quick transactions where somebody 

has worked hard, put some sweat equity in the house and made 

a profit. That is not where our resources are going to go. Our resources are going to go, as I said, on the industry insiders. If somebody has consented to be a straw buyer, that is a different story. 

14

Ms. WATERS. I don’t want to exceed my time, but if you could 

give me one example of what you do, what you are talking about. 

Who are you trying to catch? 

Mr. DONOHUE. Would you like me to—Chairwoman, a perfect example of this is when we see a pattern in the southwest part of 

the United States, when we see folks come in across the border and 

come in to buy, you know, come in to experience the good life. And 

what happens is they are often approached by suspected wrongdoers that go back up and suggest that they can get into a house, 

and they get into it for a great price. And they occupy these 

homes—and, of course, many of these people are already illegal immigrants into this country. They get into these units, the information is provided to them, often fraudulent information, fraudulent 

Social Security numbers and the rest, false information about earnings and the rest. And what happens, they get into these units—

and there is quite a number of these cases. 

Our focus, as the FBI has just spoken about, is not on those individuals occupying those units. The focus is on the people who are 

gaining the ill-gotten proceeds from that event. 

We often call upon those very arguments as witnesses for our 

cases involved. That is the focus. That is—it is a substantial 

amount of that. It goes on; and, quite frankly, some of these people 

occupy those homes and stay in those homes for some period of 

time and paying on those mortgages——

Ms. WATERS. How many of those kinds of cases have you prosecuted? 

Mr. SWECKER. All the cases, the examples that we have given, 

are cases involving insiders, where there has either been a fraudulent appraisal or there has been some type of fraud or fraudulent 

act on the part of insider. So in the circumstances you are describing, only if they had got a fraudulent appraisal would you see us 

go after somebody who was just trying to put some sweat equity 

into a house and make a profit on a piece of real estate. And that—

again, we are not focused on the borrower. We are focused on the 

insider engaged in criminal acts. 

Ms. WATERS. I know, but, unfortunately, I haven’t seen a lot of 

prosecutions. For years we have been fighting against mortgage 

brokers and maybe bankers or folks who falsify on behalf of these 

unsuspecting people, tell them what to write down. They are usually charging them too much money, too many fees, and they are 

the ones who get foreclosed on. But those guys never get prosecuted. I mean, I have worked some of these cases for 4 to 5 years 

in my district, and we have a consumer division in the District of 

Attorney’s Office, but they just can’t seem to catch these characters. 

So that is all I would be interested in, is how to get the guys who 

are putting people into homes with false information, overcharging 

them, too many fees, too high interest rates, everything, foreclose 

on them after they flipped the loans, sold the loans. We can’t even 

find them. So when you all have information about how you catch 

those, let me know. 

Thank you. 

Chairman NEY. I thank the gentlelady. 

The gentlelady from Pennsylvania. 

15

Ms. HART. Mr. Chairman, I believe Mr. Miller has some time 

constraints, so I am going to cede to him. 

Mr. MILLER OF CALIFORNIA. Yes, thank you. 

I have been involved in development for over 30 years, and the 

question was how many of these have you caught—and when I first 

went into business as a young contractor I did a lot of HUD work, 

and the difficulty we have we refer to the MAI appraisals as Made 

As Instructed. And it is very, very simple for an individual to buy 

a $210,000 home, have a connection with a broker or an appraiser, 

and an appraiser will come back with an appraisal for $235,000 

that might be inflated $25,000. 

But that inflation on your part is very, very, very hard to prove. 

Because an aggressive appraiser can justify most anything they 

want within 10 percent. If they are really creative, I have seen it 

to exceed 10 percent very easily; and for you to come back and say 

they committed fraud is very difficult. 

But that is the area that I have a huge concern with. Because 

the minute we start selling properties—as we are looking at this 

real cost of mortgage fraud—you are selling a piece of property that 

is worth $210,000, and it sold for 235. Somebody made 25 grand 

in costs plus—and fees. You take it back, and you have lost money 

on it, and then your cost of putting that piece of property back on 

the market becomes a very, very expensive process for the system. 

When something is expensive for the system, it costs everybody involved in the system. 

And there is a lot of ways of committing fraud. Putting paint 

back on a house, putting a latex over a lead-based paint is a felony, 

committing a fraud against somebody in the future. So, yes, even 

painting a home can be fraud and leaving somebody with a very 

expensive process in the future. 

I guess my biggest concern in what was said—and I guess, 

maybe I heard it wrong, but why would anybody be allowed to be 

involved in the process being considered an acceptable vendor, 

whether it be an appraiser, broker or builder—if they have been 

found to be guilty of fraud at some point in time, why would, at 

some point in time in the future, would they even be reconsidered 

to be involved in the process? Did I misunderstand what was said? 

Mr. DONOHUE. Well, I will respond in that one of the processes 

in which we—to step back, if we could, to the criminal case itself—

or to the civil case—we work with the FHA and a mortgage review 

board to look at the sanctions that could be moved against these 

folks involved as quickly as we possibly can. 

And I might say we do have an aggressive—the Department has 

been aggressive in addressing these matters. I just—my comment 

was that I think in some of these cases—which I feel to be egregious cases—is my feeling is that these folks that might have been 

involved should be removed, if not permanently from the industry 

then substantially so. 

Mr. MILLER OF CALIFORNIA. I think it should be permanently. 

You know, the problem I have with builders is when they start 

saying it is acceptable industry standards there is generally something wrong in what they have done. If they have to justify their 

quality of construction by this is the accepted industry standards, 

16

generally you have found out that that is probably a builder nobody 

wants any involvement with. 

And any type of fraud is bad. I mean, I am shocked that any of 

us up here would say, well, this kind of fraud doesn’t bother me, 

that kind of fraud doesn’t bother me. There can’t be degrees of 

fraud. Fraud is fraud. 

Now if you have an unwitting individual that did something, and 

they didn’t know they were doing it, they were not aware, that 

happens. But anyone who commits fraud, represents himself to be 

a brother who doesn’t have the wherewithal to make a payment 

just to get in the home is fraud. And when that house is foreclosed 

upon, somebody else is going to have to pick up the burden because 

they are paying the fees. So any fraud in the system impacts innocent people who want to be involved in the system. 

I remember when I was a young builder, I did HUD work in east 

L.A. I used to go out and bid these HUD prosecutions, and I would 

be awarded a contract. All of a sudden, my partner was called in 

by the director of the HUD in the region saying he wanted a third 

of our profits back in cash upon issuance of the contract. Now he 

didn’t call me in. He didn’t call anybody but my partner. We were 

young. I said, we are not going to give anybody a kickback. We are 

low bidder. You have to continue to give us the contracts. 

Yes, we continued to be a low bidder, but, for some reason, there 

was always something found wrong with the RFP. The award we 

should have received on the contract was put out to bid with somebody else, and we were off bidding another job, so—and I don’t 

think that is probably as predominant today as it has been at some 

times over the years. But there is all types of fraud, whether it be 

involved in our system or within the builder, appraiser or broker 

system. 

But any time we—and your job is very difficult. I don’t know 

how—unless it is something very, very egregious where you can go 

to court and prove fraud—it is very difficult with an appraiser, like 

I said, anywhere within a realm. And if there is any association between a broker builder and an appraiser, the system will be impacted in a negative fashion through fraud that is very difficult to 

prove. You might suspect individuals of having problems, but to 

prove it is very, very difficult. 

But I think this is an issue that erodes the system, and I think 

it is something that—if we are allowing people who have been 

found guilty of fraud to reenter the system and be acceptable, I 

think maybe we should look at that. 

But thank you for your efforts. I would encourage you. This is 

an area we need to effectively deal with. 

Thank you. I yield back. 

Chairman NEY. Thank you. 

The gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Mr. Donohue, in your testimony, you talked about the 158-count 

indictment in the Northern District of Georgia concerning flipping. 

Could you give me an update on where we are on that case? 

Mr. DONOHUE. If you don’t mind, I am going to have my—I was 

going to have my head of investigation come up here, but he just 

17

advised me that the case is still open and for that I am prevented 

from getting into specifics at this time. 

Mr. SCOTT. Okay. Could you give an indication as to why Georgia 

has just catapulted to the front on this issue? What is peculiar? 

What are the circumstances in Georgia that have allowed it to get 

to the head of the class on this? 

Mr. SWECKER. You know, the figures that we have are based on 

an intelligence assessment that we have done which relied heavily 

on private industry, such as the Mortgage Asset Research Institute. 

I can’t tell you why Georgia is in there. It may be just volume 

of transactions—and as we mentioned earlier, within that volume, 

it provides cover for the unscrupulous brokers and appraisers and 

others that are willing to commit fraud. So it may just be a function of the volume. 

Mr. SCOTT. Mr. Swecker, is that right? Swecker? 

Mr. SWECKER. Yes. 

Mr. SCOTT. Concerning the FBI, you mention in your testimony 

that the mortgage fraud in the secondary market is often underreported, so the two-level mortgage fraud is largely unknown, that 

the mortgage industry itself does not provide estimates on the total 

industry fraud and that the industry provides incomplete and inconsistent data. And yet you say mortgage fraud is pervasive and 

growing and that, for the past 18 months, you all have been doing 

an internal valuation of the FBI in terms of your effectiveness. 

Could you tell me what you are finding out in terms of your effectiveness and specifically what level of funding is currently allocated 

to the FBI toward mortgage fraud? 

Mr. SWECKER. I am not sure about the level of funding. I would 

have to get back to you on that. 

But I can tell you I think our efforts have been very successful. 

We are trying to provide a very visible deterrent along with HUD 

and other investigative agencies. We are trying to get the word out 

there that these schemes are out there. If you get caught, you are 

going to go to jail, and we are hoping that we will have some deterrent effect. 

We have been very aggressive with undercover operations. This 

started about two to two and a half years ago—and at that time 

I was the agent in charge in North Carolina. We saw an immediate 

spike as the interest rates went down in mortgage fraud schemes. 

As I mentioned earlier, I think there is a lot of cover provided 

in just the volume, and it is a very competitive industry. The mortgage broker industry, loan originations are very lucrative. I think 

in all of that volume we have just seen some unscrupulous people 

set up brokerages that are devoted, in some cases, almost exclusively to fraudulent schemes, and then they disappear after the 

house of cards starts to come down. 

But the reason we came out with our press statement about 2 

weeks ago, we wanted to get some education out to the industry 

and public. We wanted to develop some awareness and provide 

some deterrent to see if we could get this problem—talk this problem down in a sense. 

We have created a mortgage fraud initiative nationwide, where 

we have all of our field offices looking for this type of fraud, not 

individual borrowers, unwitting folks who have been caught up in 

18

a scheme, but more the systemic fraud schemes where we have 

100, 200, 300 frauds being perpetrated by one company. 

Mr. SCOTT. What can we in Congress do to help the FBI expand 

these investigations? 

Mr. SWECKER. What I mentioned about reporting requirements, 

if we could extend the reporting requirements to the entire mortgage industry, not just the banking institutions themselves. There 

are a lot of other types of mortgage-related businesses. If they were 

required to report and if you were to give them the safe harbor provision, then we would be able to identify these schemes and address them. 

Mr. SCOTT. Thank you. 

I yield back the balance of my time, Mr. Chair. 

Chairman NEY. I thank the gentleman. 

The gentleman from Arizona. 

Mr. RENZI. Thank you, Mr. Chairman. 

I have a little favor to ask, Mr. Weicher, and I apologize. It is 

not so much fraud related. 

You made a statement that your organization did a hell of a job 

recently to reacting to an issue in Arizona. Myself and Congressman Shadegg sent your department a letter. We have got one of 

these down-state assistant providers in Arizona called Family 

Housing Resources. They were removed from the Web site, removed from a list of assistant providers. 

When you get back—I haven’t seen you in so long—if you get a 

chance could you go down in your Department and reach down and 

grab this issue and see if we can resolve and get these guys back 

in shape? We have got 2,100 Arizonans who benefited these—

award-winning people, nothing to do with fraud. 

But it is good to see you here, and I thank you for the work. 

Mr. WEICHER. I thank you, Mr. Renzi. We will be getting back 

to you on this, we expect, next week. We are aware of the issue. 

I will go back and have appropriate conversations, but we are expecting to be able to get it—to deal with it by next week. 

Chairman NEY. The gentlelady from Indiana. 

Ms. CARSON. Thank you very much, the three of you, for being 

here. 

I am Julia Carson from Indianapolis, Indiana. You had mentioned that you are doing some work out in the Midwest, and I 

would also think that would be Indianapolis. 

Indianapolis had one of the highest rates, if not the highest 

rates, of predatory lending and foreclosures in the whole Nation. I 

am sure you are aware of that. We have had extensive town hall 

meetings to try to pinpoint the problem. There is no one particular 

entity that seems to be the problem. You have got real estate 

agents, you have got mortgage brokers, you have appraisers who 

seemingly have been engaged in this whole fraud issue. Inflated 

appraisal prices, humongous foreclosure rates, predatory lending 

against everybody, not just senior citizens or those who are of a low 

income. 

They will use techniques to inflate the prices, get some of the 

money from the bank, pay off the home buyer, and then the home 

buyer is stuck with repaying that money plus others. 

19

I was wondering if somebody could tell me if it is appropriate, 

it may not be, what your opinion is on this free payment, home 

down payment for home buyers, and if you have had any experience with this group called Nehemiah. They seemed to have 

worked extensively in my district. If you cannot answer, I respect 

that, because that is a policy question. 

Mr. WEICHER. Ms. Carson, we permit down payment assistance 

in the FHA program, and Nehemiah is one of the nonprofit entities 

which provides down payment assistance. We have been reviewing, 

and the Office of Inspector General earlier working with us have 

been reviewing, the experience that we are having with the loans 

that have down payment assistance, and have been conducting an 

investigation and analysis really of our loan experience with down 

payment assistance. 

Ms. CARSON. Have you investigated Nehemiah specifically? 

Mr. WEICHER. I think ‘‘investigation’’ is the wrong word. I 

misspoke. We analyze our experience with the loans, what the default rates are, comparative default rates, with loans that do not 

have down payment assistance to see if there are changes that 

would be appropriate to make in the program. 

Ms. CARSON. I have long held the view, I am in the minority with 

this view, but that not everybody should be a homeowner. 

Number two, we created a help line that got over 800 calls initially. It is called 1-800-722-HELP, and that is when people are 

about to sign their name on a paper buying a home, nobody reads 

that fine print up and down the line, that tiny writing for the most 

part. If you have 2 or 3 weeks to read it, that is different. So we 

have volunteers funded by Fannie Mae where the credit bureaus 

are checking out applications before people sign their name to a 

long-term commitment in terms of buying houses, and it has 

worked extremely well. As a matter of fact, we have to see if we 

can get more staff to handle those inquiries prior to the time people 

sign their names. 

In this whole mortgage field, predatory lending, it is not isolated. 

It is not one group or the other. I guess you call it the buddy program, they are all involved in this mess together. I would hope you 

would do something that is high profile, that would discourage future events, but I don’t know how that would work. People rob 

banks every day. Robbing banks is high profile, but they still rob 

banks. Maybe with your creative collective minds you can come 

with up something, because consumers are being injured immensely by all of this. 

Mr. DONOHUE. Congresswoman Carson, I have been advised the 

OIG did an audit of Nehemiah for 2 years, and we can get you a 

copy of that. 

Ms. CARSON. I would appreciate that. 

Mr. SWECKER. I would like to quickly address this issue, the borrowers are often the victims. That is exactly the type of violation 

we are looking for is a scheme that affects multiple loans. What 

you are describing is an area where the FBI would apply some resources to investigate. We are aware of Nehemiah. There are several field offices that have received information about some of the 

things that they have been involved in. I could not discuss what 

20

we are doing with it because it is ongoing, but we are aware of the 

group. 

Mr. MILLER OF CALIFORNIA. Would the gentlewoman yield? 

I have been involved with quite a few nonprofits, and HUD stays 

on top of them. I am not speaking to Nehemiah, but I have known 

many others who have come in with questions and concerns on how 

HUD really has diligent oversight. HUD watches the resales. They 

watch those. If there is discrepancies, they watch those. 

Ms. CARSON. But you take a name like Nehemiah, anybody that 

goes to church is going to trust Nehemiah. You know what I am 

saying. 

Mr. MILLER OF CALIFORNIA. I have heard about some companies, 

they get involved with an appraiser, a broker and a builder. When 

that happens, that, to my previous comment, makes it very difficult; but how do you prove there has not been an inflation of 

$25,000 in an appraisal? That comes over to nonprofits also. 

Mr. NEY. Thank you. 

Ms. Velazquez. 

Ms. VELAZQUEZ. Mr. Swecker, one of the difficult things about 

tracking unscrupulous individuals engaging in mortgage fraud is 

they move from company to company and their histories on loans 

to new employers, and they begin to take advantage of families 

again. The creation of a national database has been raised as a 

way to curb fraud and protect unsuspecting families. Can you comment on this suggestion and the possible pros and cons of such a 

database? 

Mr. SWECKER. I think that plays into the reporting requirement. 

Ms. VELAZQUEZ. I am so cautious when it comes to the Federal 

Government and a database. 

Mr. SWECKER. That would be the best mechanism, or some type 

of fraud reporting center. We would love to have the information. 

We could do a lot with it. We use a lot of computer analysis right 

now with the existing SAR process, and we are getting a lot of case 

initiations off that. 

The debarment process is something that HUD and some of the 

regulatory agencies are involved in, and I would defer that question to Mr. Donohue. 

Mr. DONOHUE. It needs to be said that by a fact regulation, when 

the FBI comes upon an investigation involving FHA fraud, they advise us. We in turn, involving commercial fraud, advise them. It is 

a statement to the cooperation. 

Finally, organizations like the MBA and so on have been very active lately in passing on information to us with regard to wrongdoers. The communication link is there and getting better as we go 

along. 

We look at these debarments and suspensions activities rather 

well. There is an awful lot of discussion going on as to try and see 

if we can make sure these names are provided for. We at HUD are 

pretty pleased with getting heads up with regard to folks that go 

back in. I feel we cannot do enough in ensuring, as the Congresswoman said, staying on top of these things and making sure the 

same people do not come back in. 

Ms. VELAZQUEZ. Thank you. 

Mr. Weicher. 

21

Mr. WEICHER. We are in the process of developing a rule now for 

FHA programs establishing a loan officer registry which will increase our ability to monitor the performance of loan originators. 

It will help us track loan officers, unscrupulous loan officers, as 

they move from company to company. That is in the development 

stage. It is not yet a proposed rule, but we are working on it, and 

we think it will be useful. 

Ms. VELAZQUEZ. Mr. Weicher, the foreclosure rate of 11.68 percent on FHA loans exceeds the national foreclosure rate by 7.35 

percent. This figure is alarming, and HUD needs to do more to protect families from unscrupulous lenders abusing this program. We 

will hear later from Ms. Amiri from the Foreclosure Prevention 

Program of South Brooklyn Legal Services, who serves families in 

my district. There are several interesting suggestions in her testimony that I want to hear your thoughts on. 

First, can you comment on her recommendation that HUD 

should commission an independent appraisal or appraisal review 

for every transaction to ensure the accuracy of the market value of 

the property and to prevent fraudulent appraisal? 

Mr. WEICHER. Ms. Velazquez, I think if we were to commission 

a separate appraisal beyond the appraisal that is required as part 

of the loan application, we would be spending a great deal of time 

and funds. 

Ms. VELAZQUEZ. And we would be saving a lot of families’ homes, 

too. 

Mr. WEICHER. We have established a system whereby we track 

the performance of the appraisers who do business with us. We 

know the name of every appraiser on every loan. There are 25,000 

appraisers who have the authority to write appraisals on FHA 

loans. We track the performance of the loans on which they have 

done appraisals. We look at the early default rates on those loans, 

because if there is something wrong at the front end, if there is 

something wrong in terms of predatory lending or a corrupt appraisal, it is very likely to show up in the first year or two after 

the loan has been performed. We look at the performance of each 

appraiser over the first year or two on the business they are doing, 

and if their performance is out of line with the normal default rate 

in their area, we sanction them. We throw them out of the program. 

In the 3 years we have been doing this, we have removed over 

300 appraisers from FHA’s program. That is a little over 1 percent 

of all of the appraisers who do business with us, but we have the 

attention of the appraisal industry. I hear often from appraisers 

and from appraisal organizations about the way that Appraiser 

Watch is working. 

Ms. VELAZQUEZ. I can see that when you have 11 percent on 

FHA loans that exceeds the national rate. 

Mr. WEICHER. That is the 30-day delinquency rate. 

Ms. VELAZQUEZ. She also suggests that HUD should extend the 

prohibition on resale from 90 days to 6 months. What are your 

thoughts about that? 

Mr. WEICHER. This is the antiflipping rule that I mentioned 

whereby we will not insure a mortgage if the home has been sold 

22

twice within 90 days, and if the period between sales is between 

3 months and 9 months. 

Mr. NEY. I have to get the other two Members in before the vote. 

Mr. Watt. 

Mr. WATT. Thank you, Mr. Chairman. 

I thank the witnesses for being here. They probably think they 

walked into a combat zone. They came expecting to be patted on 

the back and applauded for what they are doing. Actually they do 

need to be applauded for what they are doing because this is an 

important part of what is going on in the industry. Unfortunately, 

you walked into a committee that recognizes the magnitude of the 

problem that you are dealing with, which is, in effect, efforts to defraud lenders pales in magnitude when you look at its volume compared to the extent of predatory lending. 

This is protecting lenders from people who are defrauding lenders primarily, which is what you are talking about. But on the 

other side is a category of predatory lending that is of enormous 

magnitude, and that is what this committee has focused a lot of its 

attention on. Part of that goes to, just to illustrate the point that 

I am making, the definition of industry insiders that is set out on 

page 3 of Mr. Swecker’s testimony. It does not include, except tangentially, I guess you could say, other mortgage professionals engaged in the mortgage industry. 

So essentially what you all are doing is protecting lenders from 

unscrupulous people, which is an extremely important part of protecting the integrity of the system. But when you talk about seven 

plea agreements on page 6 of your testimony, Mr. Swecker, and we 

see probably seven predatory loans being made in an hour in that 

same Charlotte market that you have described, and what you 

walked into is not a reflection on the value of what you are doing, 

it is a reflection on the magnitude of our concern about what is 

going on on the lender side where people are being charged higher 

interest rates than they should be charged, where lenders are flipping the loans to get more origination fees and what have you. 

I don’t want you to go away from here discouraged, I am just trying to put this in perspective for you. There is a much, much greater in magnitude problem on the lender side than the one that you 

have identified here. I am trying to put that in perspective for you. 

Second, I want to just make clear that nobody goes away thinking that all Nehemiah organizations are terrible people. Nehemiah 

organizations are all over the United States, and I suspect the 

quality of what they are doing varies from locale to locale. The Nehemiah organization in my congressional district, for example, I 

think, has done some commendable work. And I don’t know what 

is going on in Indianapolis with Nehemiah, but I do not want folks 

to leave here thinking we have indicted the whole Nehemiah organization. 

I don’t really have any questions. I think the work you are doing 

is commendable. It is necessary. I would like to see an equivalent 

fraud unit focusing its attention on predatory loans, which are not 

by definition fraudulent loans. There is a whole different standard 

apparently. 

With that I yield back. 

Mr. NEY. Mr. Davis. 

23

Mr. DAVIS. Thank you, Mr. Chairman. 

Mr. Weicher, Mr. Miller made an interesting point earlier that 

wrongdoing is wrongdoing, and he did not like this distinction that 

some Members were drawing between fraud aimed at borrowers 

and fraud aimed at lenders. His point was wrongdoing is wrongdoing. Let me follow that to its logical conclusion. 

We have considered and are considering on the floor this week 

a bill that would name companies in this country that do business 

with terrorists or who do business or financing with organizations 

connected to terrorists. We also in this country have a practice of 

naming companies who trade with sanctioned nations like Libya or 

Iran or Iraq. We are going to publish a list, I believe, next week 

of companies who have traded with sanctioned nations. 

Under Mr. Miller’s premise that wrongdoing is wrongdoing, how 

do you feel about the idea of HUD publishing a list of companies 

that regularly engage in predatory lending? 

Mr. WEICHER. We do that now. We publish in the Federal Register the names of the entities who we sanction through the Mortgagee Review Board, which I chair at HUD, and which consists of 

six assistant secretaries and the director of the enforcement center. 

We review cases of predatory lending, of carelessness, of failure to 

follow our rules. 

Mr. DAVIS. Do you just name people that you sanction, or do you 

try to quantify people who regularly engage in the practice, because they are two different things? 

Mr. WEICHER. We name the people that we sanction. We name 

the penalty that is being imposed at the same time. Some of those 

are civil money penalties, and the dollars relate to the severity of 

the violations. And we suspend or debar for 3 years, 5 years, or indefinitely the most egregious offenders, and we publish that information as well. 

Mr. DAVIS. Mr. Swecker, I spent 4 years as an assistant U.S. Attorney in Alabama, and certainly admire the work that the Bureau 

does in this area. When I was with the U.S. Attorney’s Office, we 

regularly worked with our State attorney general and regularly 

worked with State agencies to combat all kinds of crime in the 

white collar and violent crime areas. Is it helpful to the FBI if 

State agencies and State attorneys general are themselves allowed 

to regulate and get involved in the area of mortgage fraud and 

predatory lending? 

Mr. SWECKER. Yes. 

Mr. DAVIS. As you know, one of the controversies that we regularly have in this body are the degree to which States are to be 

given an opportunity to regulate in this area, the degree to which 

States have an opportunity to be a laboratory and to police unfair 

predatory lending practices. Would you agree it is helpful to law 

enforcement if States have an opportunity to have a robust structure in this area to look for violations? 

Mr. SWECKER. Absolutely. 

Mr. DAVIS. Thank you. 

Mr. Chairman, since this is the last hearing of the year, as a new 

member, let me thank you for your leadership and for your example in the 108th Congress. 

24

Mr. NEY. Thank you. And I thank you for your constant attendance at the hearings. 

We will dismiss the first panel, and recess for the votes on the 

floor. We will convene the second panel after this break. 

[Recess.] 

Mr. NEY. I want to thank the panel for your indulgence. I was 

also waiting to see if another Member would show up. I will go 

ahead and begin hearing the opening statements. We appreciate 

you being with us today. 

On panel two we have Mr. William Matthews, vice president and 

general manager, Mortgage Asset Research Institute, Reston, Virginia; Ms. Marta T. McCall, senior vice president, risk management, American Mortgage Network, on behalf of the Mortgage 

Bankers Association; Mr. Arthur J. Prieston, chairman, The 

Prieston Group, San Rafael, California; Ms. Brigitte Amiri, staff attorney, South Brooklyn Legal Services, Brooklyn, New York; and 

Ms. Ecima Trujillo, national field director of ACORN Housing Corporation, Los Angeles, California. 

We will start with Mr. Matthews. 

STATEMENT OF WILLIAM MATTHEWS, VICE PRESIDENT AND 

GENERAL MANAGER, MORTGAGE ASSET RESEARCH INSTITUTE, INC., RESTON, VIRGINIA 

Mr. MATTHEWS. Chairman Ney and Ranking Member Waters 

and members of the subcommittee, I am pleased to be here today 

to talk about mortgage fraud. The Mortgage Asset Research Institute, also known as MARI, builds and maintains cooperative databases in the mortgage industry and is used by financial institutions 

to screen new business relationships. 

MARI was founded in 1990 and was acquired by ChoicePoint 

Services in June of 2003. One of MARI’s cooperative databases is 

called the Mortgage Industry Data Exchange, or MIDEX. This 

database was established on the premise that unethical and illegal 

activities in the residential mortgage industry could be significantly reduced through the responsible exchange of information on 

mortgage lenders, investors and insurers. 

The MIDEX database is cooperative in nature and contains different types of information. First of all, it has nonpublic incidents 

of alleged fraud or material misrepresentation and serious misconduct by mortgage industry professionals and companies. These 

incidents are contributed by members of the cooperative database 

and include over 400 lenders, mortgage insurance companies and 

mortgage investors. 

The second type of data we have is public sanctions and legal actions. These are collected from over 200 Federal and State regulators in the mortgage, securities, commercial banking, real estate 

and appraisal industries. 

The third type of data more positive in nature, is State and Federal licensure data on mortgage companies and professionals. 

Today, thousands of companies and professionals are searched 

each day through MARI’s MIDEX database by its subscribers to 

screen prospective and existing business relationships in order not 

to do business with unscrupulous individuals and companies. 

25

The topic today is mortgage fraud, and a basic definition of mortgage fraud is when a consumer or professional intentionally causes 

the financial entity to either fund, purchase or insure a mortgage 

loan when the entity would not have otherwise done so if it had 

possessed the correct information. 

We have heard by other testimony in the first panel that there 

are different types of fraud, and people defined it as fraud for property and fraud for profit. I would expand that to say there is consumer fraud, fraud for property. There are also two types of fraud 

for profit. One is commission fraud. This is where one or more industry professionals misrepresent information in a loan transaction 

in order to receive a commission. Commission fraud is a more common practice in the industry and is a concern to mortgage lenders. 

It can result in harm not only to consumers but to lenders as well. 

The third type of mortgage fraud is fraud for profit and consists 

of systematic collision by industry professionals to steal a significant amount of funds from mortgage companies. This type of fraud 

usually involves multiple properties and parties in various disciplines within the mortgage industry, such as: mortgage originators, appraisers, real estate agents, closing agents, builders and 

title companies. Fraud for profit usually results in significant, if 

not catastrophic, losses to financial entities. 

Let me give a quick example of mortgage fraud that we see in 

our MIDEX database. It typifies some of the problems that people 

are having in the industry. In 1997, the National Association of Securities Dealers (NASD) debarred and sanctioned an individual for 

taking investor funds of $10,000 and converting those to his own 

personal use. Since this individual could no longer be a stockbroker. He became a loan officer with a national lender. At the 

same time he set up his own mortgage company, unbeknownst to 

his employer. 

It turned out that the employer examined over 500 loans originated by this individual, 20 percent of which had inflated appraisals resulting in losses to the financial institution of approximately 

$2.5 million. In August 2002, this individual pled guilty to wire 

fraud and received a sentence of 5 years probation and no jail time. 

This incident illustrates the need for proper hiring procedures in 

the mortgage industry and a central repository to track professionals who are found guilty of fraud or unethical behavior in the 

industry. 

Our MIDEX database has a significant amount of information in 

it, and I would like to point out some of the trends that we are seeing of alleged fraud or material misrepresentation in the mortgage 

industry. These trends were derived from submissions from our 

subscribers. First of all, during the past 4 years there has been a 

shift in the States with the greatest problems. Georgia and Nevada 

have caught up and surpassed California and Florida as the States 

with the highest fraud scores. In the past, fraud rates from California and Florida have led the Nation by substantial margins. 

They continue to have high fraud scores, but Florida now ranks 

third, and California has slipped to eighth place behind Utah, 

South Carolina, Colorado and Illinois. 

The second trend is early payment default data information from 

a company out of San Francisco called Loan Performance. This inVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
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formation indicates that problems in several metropolitan areas are 

consistent with the overall results that MARI database subscribers 

have reported to us. Early payment default is defined as a loan 

that is 90 days or more delinquent within the first year of that 

loan. 

The third trend, the types of problems found in loan files such 

as false verifications of employment, inflated appraisals, land flips, 

et cetera, seems to have been relatively stable over the last 4 years. 

I appreciate the opportunity to testify on MARI’s behalf regarding the impact of mortgage fraud and its impact on the mortgage 

industry. Fraud is a significant problem, and the types of fraud are 

increasing, and the types of fraud that are occurring are becoming 

more severe. Fraud not only causes losses to financial institutions—it can devastate neighborhoods, and it can also result in 

higher prices to consumers. Thank you. 

Mr. NEY. Thank you, Mr. Matthews. 

[The prepared statement of William Matthews can be found on 

page 63 in the appendix.] 

Mr. NEY. Ms. McCall. 

STATEMENT OF MARTA T. McCALL, SENIOR VICE PRESIDENT, 

RISK MANAGEMENT, AMERICAN MORTGAGE NETWORK, SAN 

DIEGO, CALIFORNIA, ON BEHALF OF THE MORTGAGE BANKERS ASSOCIATION 

Ms. MCCALL. Good morning, Mr. Chairman and subcommittee 

members. As stated earlier, my name is Marta McCall, and I am 

the senior vice president for risk management at American Mortgage Network in San Diego, California, a wholesale lender that 

deals nationally. I am here today on behalf of the Mortgage Bankers Association, and I would like to thank you for inviting MBA to 

testify on the growing problem of fraud committed against mortgage lenders and the threat it poses to our real estate finance system. 

Addressing fraud is not easy, but MBA believes that the industry 

needs stronger enforcement, better communication, and increased 

innovation if it is to protect the system from the costly damage of 

mortgage fraud. Residential mortgage finance in the U.S. has developed from a relatively localized system with few participants to 

one with many specialized organizations working interdependently 

to make the efficient and low-cost delivery of home loans possible. 

Consumers have been the primary beneficiaries of this change as 

more mortgage products are reaching more home buyers than ever 

before. 

Mortgage bankers play a central role in this system allowing 

funds to flow from the capital markets to consumers. Lenders underwrite loans, then extend credit on terms and conditions appropriate for the level of risk involved. In this capacity mortgage bankers bear nearly all of the risk of mortgage fraud. Simply defined, 

mortgage fraud is the giving of false information that deceives a 

lender into extending credit beyond the limits of what would normally be extended if the true facts were known. 

Lenders, because they advance large sums, can lose significant 

amounts of money. Mortgage fraud costs the industry and consumers millions of dollars each year. While no reliable numbers are 

27

available to measure the extent of mortgage fraud, the trend data 

that is available is troubling. The FBI reports a fivefold increase 

in mortgage fraud investigations from 2001 through 2004. 

Fraud schemes are as varied as the imagination of those who 

commit them, oftentimes orchestrated by industry insiders who 

know how to exploit the system at the expense of lenders and, depending on the type of fraud, at the expense of taxpayers, consumers and communities. 

Lenders spend large amounts of money and resources attempting 

to detect and prevent mortgage fraud. Despite these efforts, they 

continue to find themselves victimized by fraud. I would like to advance three principles the MBA believes would improve lenders’ 

ability to manage the costs of fraud. 

First, investigation and prosecution of mortgage fraud by law enforcement agencies needs to increase. Mortgage lenders victimized 

by fraud are more than willing to provide information and assist 

in the investigation of the fraud they uncover, but these same lenders get frustrated when cases are not prosecuted. 

Secondly, communication between mortgage lenders and the 

State and Federal agencies that investigate and prosecute mortgage fraud needs to improve. The current system of mortgage fraud 

reporting is a one-way street. Mortgage lenders report fraud, but 

rarely receive feedback about their reports. I would however, like 

to note that the FBI is working closely with the MBA in discussing 

solutions to this problem. 

Finally, the mortgage industry needs to continue to develop better industry tools and improve lender communication to combat 

fraud. We need the help of policymakers in furthering these tools 

and communication. 

I would like to highlight three issues as examples of the problems lenders face in this regard. First, many States have licensing 

laws whose purpose in part is to track loan officers, brokers and 

appraisers. Unfortunately, there is a lack of uniformity among 

these State efforts, which can lead to loopholes that criminals can 

exploit by moving from one State to another. 

Secondly, communication between mortgage lenders is hampered 

by the fear of lawsuits if one company discloses to another the results of its investigations. Some form of safe harbor is critical for 

the type of communication necessary for lenders to protect themselves and consumers from fraud. 

Finally, unlike credit and economic risk, the responsibility for 

mortgage fraud is borne fully by mortgage lenders. Investors require the repurchase of loans when fraud is discovered, but lenders 

have no practical recourse to those who commit fraud as the offenders are either out of business, have little capital from which to compensate the lender, or cannot be located. 

These are just three examples of the issue that MBA is grappling 

with in helping the industry develop the tools needed to protect 

lenders, taxpayers, consumers and communities from the potentially devastating effects of mortgage fraud. 

Thank you for the opportunity to testify here today. The mortgage industry looks forward to working with Congress, Federal and 

State agencies in furthering collective efforts to combat mortgage 

fraud. 

28

Mr. NEY. Thank you. 

[The prepared statement of Marta T. McCall can be found on 

page 72 in the appendix.] 

Mr. NEY. Mr. Prieston. 

STATEMENT OF ARTHUR J. PRIESTON, CHAIRMAN, THE 

PRIESTON GROUP, SAN RAFAEL, CALIFORNIA 

Mr. PRIESTON. Good morning, Chairman Ney, Congresswoman 

Waters, and members of the committee. My name is Arthur 

Prieston. I am chairman of The Prieston Group, partner of the 

Mortgage Banking Group of the law firm of Lanahan & Reilly in 

California. I have been involved in the mortgage industry my entire professional life, first as an attorney specializing in mortgage 

fraud civil prosecution, and now as a provider of an integrated 

suite of mortgage fraud protection, mitigation and indemnification 

services in the industry. 

Our companies protect hundreds of lenders around the country 

with mortgage prefunding quality control and due diligence; fraud 

detection and prevention training; and ongoing education in quality 

lending and best business practices. Through our insurance division, TPG protects against fraud with our lender representation 

and warranty insurance coverage. 

Through our law firm affiliation, we mitigate losses associated 

with mortgage fraud. We have the most experienced mortgage 

banking staff in the country, and they specialize in loss mitigation, 

fraud investigation and recovery analysis. 

In the past 2 years the combined resources of The Prieston Group are protecting over $50 billion in residential loans, and have 

resolved and/or paid in excess of $40 million in losses due to mortgage fraud on behalf of our clients, making TPG the largest mortgage fraud service provider in the Nation. We are in the trenches. 

The pervasiveness of mortgage fraud and its increasing impact on 

our industry is a direct consequence of the extraordinary speed of 

growth and demand on the real estate financing delivery system 

that is both complex and faceless. 

At the same time, the remedies available to address these attacks on lenders and borrowers by sophisticated mortgage 

fraudsters are antiquated and ineffectual. Complex mortgage fraud 

schemes, the most damaging, are necessarily dependent on third 

parties to the transaction. It is these parties, such as appraisers 

and settlement agents, among others, who can, if held accountable, 

prevent mortgage fraud, but in many cases have no liability for 

losses due to mortgage fraud. 

The extent of mortgage fraud—and we have talked about statistics throughout some of the testimony heard today, discussing 

numbers such as 10 percent of all loan applications is commonly 

quoted and accepted as fact, but the truth of the matter is the industry has been unable to unequivocally substantiate that statistic. 

The extent of fraud varies depending on geographic location, origination channel of the loan, the lender’s commitment to quality 

originations, and the accountability of all participants in the transaction. 

Historically we know that a high propensity of fraud occurs in 

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29

clude Chicago, Cleveland, Atlanta, Salt Lake City, Brooklyn and 

Detroit, to name just a few. 

Mortgage fraud is not only here to stay, its incidence is becoming 

more widespread. Within the experience of The Prieston Group, our 

insurance and legal claims have risen over 40 percent in the last 

year. We believe this is attributable to an increased awareness of 

successful methods and techniques to commit fraud. Left unabated, 

we believe mortgage fraud will continue to grow, and despite comments earlier that it may decrease as the market decreases, we do 

not believe that to be the fact. 

Victims of mortgage fraud—and we understand that the title of 

today’s committee meeting is based upon the effect on lenders—is 

primarily on the borrower. Mortgage fraud affects all those who are 

involved directly and indirectly with the loan transaction. Borrowers, of course, in many instances are the primary victims. In 

many for-profit schemes, borrowers are duped into providing financial data, identity, or in many circumstances falsely advised as to 

the insignificance of fraud, and lenders are not affected so long as 

payments are made. We know that is not true. Lenders are affected 

significantly and sometimes resulting in closure of the business. 

Our firm has represented over 100 small businesses or family-operated businesses employing tens of thousands of people who have 

been driven to the brink of business failure as a result of having 

to repurchase fraudulent loans. 

We discussed earlier predatory lending versus mortgage fraud 

and whether or not it is one and the same. We believe predatory 

lending is a significant problem in the country and needs to be resolved. Mortgage fraud in its current industry context does not include predatory lending per se, but rather relates more specifically 

to the types of fraud perpetrated on lenders and borrowers alike. 

Predatory lending legislation is intended to address the scam artists who rip off unsuspecting borrowers with abusively high-cost 

loans. In many instances, such loans fall into the subprime credit 

classification for no reason other than the interest rate associated 

with that loan. Notwithstanding the definitional confusion associated with predatory lending and the types of lending practices it 

is intended to prevent, mortgage fraud affects all loans alike, both 

prime and subprime, and borrowers alike regardless of their credit. 

Can predatory lending practices be considered acts of mortgage 

fraud? Absolutely, but most statutes do not directly address, prevent or provide remedies for the types of fraud, such as flipping, 

occupancy, application and appraisal, that are the most prevalent. 

Most lenders maintain rigorous standards for preventing fraud 

through automated detection systems, hands-on reverification of financial data, and rereviewing of property values. They pursue 

claims against all participants in the fraud, both criminal and civil. 

Although we support recent actions by the FBI and the Department of Justice to promote the prosecution and deterrence of mortgage fraud perpetration, there is no better tool to prevent such actions than by hitting all of those contributing to the transaction 

where it hurts the most, in their wallets and in their pocketbooks. 

Many of these fraudulent residential mortgage loan transactions, 

but for the participation of third parties such as appraisers and 

settlement agents, the fraud would never have succeeded. They are 

30

the gatekeepers. However, as a result of current laws in various 

States, these particular parties are immune from liability. 

In a typical fact pattern, the original appraisal is ordered by the 

mortgage broker. Upon completion of the appraisal, it is submitted 

to the lender by the mortgage broker, and submission of the appraisal report to the lender is standard. However, if, in fact, that 

appraiser has been negligent, grossly negligent, or fraudulently 

misrepresented the appraisal, the lender cannot bring their action 

in many States against that appraiser to recover. California and 

Texas and a few other States have adopted the Restatement 2nd 

of law in order to do so. 

Finally, settlement agents. In many instances, settlement agents 

are acutely aware of when a flip transaction is about to occur. This 

is the result of their knowledge of contemporaneous transactions, 

coupled with their knowledge of a contract of sale indicating extraordinary increases. They are aware of sources of down payments, that the alleged borrower does not exist. Settlement agents 

are the linchpin to the fraud transaction. However, to date there 

are no flip statutes in the conventional lending industry firmly requiring the agent to disclose their knowledge or suspicion of the 

flip to the lender. 

In conclusion, I hope members of the committee understand 

mortgage fraud is a serious problem in the economic lives of all 

Americans. Mortgage fraud is so devastating because it is so insidious. People often do not know when it has victimized them until 

it is too late. The fact is mortgage fraud carries a financial penalty 

that reverberates throughout our economy. We all end up paying 

the price for mortgage fraud one way or the other, either directly 

or through higher fees or insurance costs or other hidden taxes. 

Mortgage fraud is most assuredly not a victimless crime, and I support the actions of the committee that has recognized mortgage 

fraud for the dangerous blight that is, and hope that we do everything we can through legislation, enforcement and prevention to 

eradicate it. 

On behalf of myself and The Prieston Group and the mortgage 

banking industry, I thank you for your time and attention. 

Mr. NEY. Thank you. 

[The prepared statement of Arthur J. Prieston can be found on 

page 79 in the appendix.] 

Mr. NEY. Ms. Amiri. 

STATEMENT OF BRIGITTE AMIRI, STAFF ATTORNEY, SOUTH 

BROOKLYN LEGAL SERVICES, BROOKLYN, NEW YORK 

Ms. AMIRI. Mr. Chairman and members of the subcommittee, 

thank you very much providing me with an opportunity to testify 

today regarding mortgage fraud and predatory lending. 

I am a staff attorney at South Brooklyn Legal Services, and I am 

a member of the National Association of Consumer Advocates. I 

represent low-income homeowners who have become the victim of 

predatory lending and have fallen into foreclosure or are on the 

verge of foreclosure. 

We are inundated with hundreds of homeowners each year who 

seek our assistance because they are on the verge of losing their 

homes. We receive referrals from all over New York City, from 

31

churches, communities groups, the courts, elected officials and government agencies. In recent years we have been overwhelmed with 

requests for assistance from families who have been the victims of 

property flipping. Most of these homeowners are young working 

families, often single mothers who are raising children alone, and 

are African American, Latino or West Indian. 

Because property flipping has a devastating impact on low- to 

moderate-income, first-time home buyers and low-income communities throughout the country, it is these families and the communities in which they live that are the true victims of the mortgage 

fraud, which is the subject of the hearing today. I have had conversations with attorneys all over the country, and they have all 

told me the same thing: Property flipping is devastating to families 

and their neighborhoods from rural Oklahoma to urban areas such 

as Chicago. We must address this problem as a national problem. 

The property flipping scams we see almost always involve a onestop shop. They target first-time home buyers who are 

unsuspecting and promise them they will take care of all aspects 

of the home-buying process. 

The scheme is enormously profitable. The business model is simple. We have discussed property flipping before, but basically the 

one-stop shop purchases the house cheaply, makes cosmetic repairs, works with a lender and appraiser to fraudulently overappraise the house, and then induces an inexperienced and unsophisticated home buyer to purchase the property. Families who 

have fallen prey to these companies will inevitably describe how 

much they trusted the salespeople who were employed by these 

one-stop shops, who repeatedly assured them they were in good 

hands, but at the same time were using high-pressure sales tactics. 

Families are often enticed by advertising slogans such as, ‘‘Why 

rent when you can own,’’ because they have spent their entire lives 

living in rented apartments, and they seek the American dream of 

homeownership. 

The fraudulent overappraisal is the key to the scheme. The 

flipped properties are often overappraised by tens of thousands, if 

not hundreds of thousands, of dollars by appraisers colluding with 

the one-stop shop and the originating lenders. 

One-stop shops generally work with one or a few originating 

lenders that cooperate in the scheme, and the scheme is successful 

because the originating lenders are willing to make the loans based 

upon the bogus appraisals, but then turn around quickly and sell 

them into the secondary market. 

The home-buying process is complicated, but the one-stop shop 

makes it sound easy by promising to take care of all of the details. 

By providing all of the real estate professionals for the transaction 

and by gaining the trust of the families, the one-stop shop completely isolates the families and prevents them from seeking outside assistance or help. The families are often kept in the dark because they often do not see the documents relating to the purchase 

and financing of the home until the actual closing. And at the closing table, they are pressured into signing these documents they do 

not understand. The attorney that is brought to the closing does 

not explain anything to them because the attorney actually works 

for the one-stop shop. Any protestations by the homeowner are usuVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
32

ally met with assurances from the one-stop shop that they can afford the loan by the rental income, or threats that the buyer will 

lose her down payment if she walks away. 

The monthly mortgage payments are often unaffordable because 

the properties do not produce the rental income and also because 

the lender or one-stop shop falsified income on the mortgage application to make the deal go through. 

The property flipping cases that we saw several years ago when 

this scheme became prevalent exclusively involved loans that were 

insured by HUD’s FHA program, and in these cases, the originating lenders and the lenders that purchased the loans on the secondary mortgage market did not risk financial loss because they 

were guaranteed a full return on the loan through the FHA insurance. Indeed, either the family would stay current, or they would 

default, and the house would be sold at foreclosure, and the lender 

would recoup all of its losses. 

But my office recently started seeing a number of property flipping cases involving conventional mortgages where the originating 

lender worked in concert with the one-stop shop to inflate the value 

of the property, and then immediately sold the mortgage into the 

secondary market to obtain a full return, or even a premium, on 

the loan. 

Most loans today are immediately sold into the secondary market. In the property flipping cases that we have seen, this means 

that the originating lender will not even hold onto the loan for even 

a day before it is sold into the secondary market and it escapes financial risk and sometimes liability. 

If the secondary mortgage market, lenders and companies that 

buy these loans, conducted proper due diligence, spotted the red 

flags and refused to purchase these loans, the originating lenders 

would not have the ability to make these loans. 

Just briefly I would like to tell you about Ms. W, who represents 

the type of clients we represent. She is African American, 68 years 

old, a retired school aide living on Social Security. She sought to 

purchase her first home after being priced out of her long-term 

apartment. After seeing an advertisement for a one-stop shop, she 

made an appointment to look at homes. She gave the one-stop shop 

$20,000, her entire lifesavings, as a down payment. What she did 

not know was the property she was purchasing had been flipped. 

It had been bought by the one-stop shop only 3 months previously 

and marked up $169,000. She was also unaware that it was intentionally and fraudulently overappraised by almost $150,000. She 

also did not know that the attorney that the one-stop shop arranged to represent her actually worked for the one-stop shop. 

When she showed signs of wanting to back out of the deal, they 

threatened to keep her down payment. 

The loans were unaffordable. The mortgage payments far exceeded her income, and when she moved in, she started to realize the 

problems with the transaction. One thing that she realized was 

that the property was not a legal two-family, which meant that the 

rental unit upstairs was illegal, and she could not collect the rent 

income. 

33

I would like to jump to some of the suggestions that we would 

like to make to try to prevent these types of schemes from occurring. 

First, for FHA-insured loans, HUD should commission an independent appraisal, appraisal review, or some sort of quality control 

before the loan is made. I understand this will take a lot of resources, but even if it started by focusing on the hot zones that 

HUD has already designated as predatory lending areas, that 

would be a good start. 

Second, HUD should extend the current antiflipping regulations, 

which currently prohibit FHA insurance for homes bought and sold 

within 90 days, to prohibit insurance for homes bought and sold 

within 6 months. 

Third, in 2003 HUD proposed and passed a regulation that 

would hold originating lenders liable and accountable for appraisals, but they should go one step further with that as well. 

Fourth, lenders and companies that purchase conventional and 

FHA-insured loans should conduct appraisal reviews and search for 

red flags prior to purchasing the loans. They should keep track of 

the lenders that make bad loans, underperforming loans, and illegal loans, and stop purchasing them from those companies. 

Thank you again for this opportunity and your invitation to provide testimony today. 

Mr. NEY. Thank you. 

[The prepared statement of Brigitte Amiri can be found on page 

49 in the appendix.] 

Mr. NEY. Ms. Trujillo. 

STATEMENT OF ECIMA TRUJILLO, NATIONAL FIELD DIRECTOR, ACORN HOUSING CORPORATION, LOS ANGELES, CALIFORNIA 

Ms. TRUJILLO. Chairman Ney, Congresswoman Waters, and 

members of both subcommittees, thank you for the opportunity to 

address you on the important issue of mortgage fraud. My name 

is Lez Trujillo, and I am the national field director of the ACORN 

Housing Corporation. 

ACORN Housing builds and rehabilitates homes, and it is one of 

the largest providers of housing counseling services in the country. 

ACORN Housing works closely with our sister organization, 

ACORN, the Association of Community Organizations for Reform 

Now. 

Mortgage fraud is a national problem. In recent weeks much of 

the attention has been about how lenders are hurt by this form of 

fraud, but it is more important to look at the people who have been 

taken advantage of all over the country. While it hurts the bottom 

line of financial institutions when they are taken advantage of, it 

devastates the lives of citizens when they are victimized by these 

scams. 

Let me begin by describing a case in Baltimore. In 1998, Matilda 

Watson, a participant in the welfare-to-work program, bought a 

house with American Skycorp. The loan officer falsified information 

on her application to get the loan approved, including nonexistent 

child support payments. Matilda thought $54,000 sounded high for 

the house in that neighborhood, but her realtor insisted that an 

34

FHA lender would not approve a loan if the house was not worth 

it. When she later asked about home inspection, she was assured 

the lender would make sure the house was in good shape. 

As soon as Matilda closed on the loan, she found out the house 

was falling apart. The furnace stopped working, the upstairs 

plumbing leaked into the kitchen, and the lighting was faulty. 

Most tragically for Matilda and her family, the Department of 

Social Services deemed the house unfit for her children to live in, 

and they removed her children from the home. American Skycorp 

abused the FHA program to obtain loans on homes with inflated 

values and amid promises of future repairs. 

African-Americans received 77 percent of the company’s loans. 

The Maryland Attorney General’s Office noted, where the consumers default, and the property is foreclosed upon, the practice 

hurts the neighborhood in which the consumer lives. 

When ACORN brought these problems to light, they were sued 

by $10 million by Skycorp for defamation of character. The suit 

was quietly dropped when the Federal Government successfully 

prosecuted the company for the same practices ACORN had accused them of. 

Another scam we have come across is the purchase of contract 

for deed, which has been called nothing less than modern-day 

share shopping. Houston ACORN discovered that the developer, 

Jack Markman and his associates, have targeted up to 800 families 

in the city in this scam. All of the home buyers we talked to 

monolingual Spanish-speaking immigrants, and they signed contracts in English, which they did not understand. 

The main problem with the contract is that residents would have 

to wait 20 to 30 years before they could become owners of the 

house. In many cases, there are no legal descriptions or maps with 

the contract. Most of these loans have high interest rates and unjustified tax and insurance payments. 

The insurance appears to have a $5,000 deductible. The insurance company offices are based out of the Turks and Caicos Islands, and they do not have a license to operate in Texas. One 

home buyer’s house burned down not long ago, and she was never 

able to get money from the policy. After intimidating families to 

move out, Markman has sold these houses time and time again, 

making large profits each time. 

Since early 2003, over 140 families have joined ACORN in taking 

a variety of options to address their concerns. The home buyers 

want marketable title to their homes, and to ask for local and State 

protection. There is an incentive to be reckless in a market driven 

by value and securitization—because too many participants from 

lenders to brokers to appraisers make money up front—and there 

is an incentive to take action to harm borrowers. This is especially 

apparent in the super hot market where business is done with lawyers and all the protections. 

Because so much money is made up front in the form of points 

and fees, and in the form of yields and premiums to brokers, there 

is less reason to insure that the loans perform, there is also less 

access to legal resource because of the prevalence of mandatory arbitration costs. 

35

Unfortunately, it is not just fly-by-night operators who have been 

involved in these scams. Even a larger lender like Wells Fargo was 

recently accused of pressuring appraisers to justify large loans. We 

have found that this practice has targeted the most-vulnerable consumers, including low income people, the elderly, and immigrants. 

These vulnerable home buyers are more likely to be in the 

subprime market, and are in effect, punished twice. They pay more 

for the risk, and then if things go wrong, they face the consequences. 

We need both national protections against predatory practices in 

a State and local action. The States need to be able to respond 

quickly to the problem. Federal action cannot preempt their ability 

to protect their citizens. This is why we oppose the OCC’s preemption of the State laws. We also need housing counseling to insure 

that borrowers can spot bad lenders, and that borrowers are connected with reputable market participants. 

Finally, we need a strong community investment act that provides incentives for responsible financial institutions to lend under 

server communities and lower ratings for those that participate in 

predatory practices. The FDIC should not weaken this law. 

Mortgage fraud is a complicated and troubling issue. While it 

causes heartache for banks and other lenders as they look at their 

bottom line, it causes far worse anguish for many of the families 

we represent. Their experiences must be a part of the debate on 

how to end mortgage fraud. 

Thank you for the opportunity to address you today. I am happy 

to answer any questions you may have. 

Chairman NEY. Thank you very much. 

[The prepared statement of Ecima Trujillo can be found on page 

102 in the appendix.] 

Chairman NEY. I wanted to ask Ms. Amiri about the One Stop. 

If you don’t have—I understand about problems maybe with One 

Stop and who is running it. If you don’t have the One Stop, how 

do you get guidance or counseling to people if you don’t have a One 

Stop? 

Ms. AMIRI. How would you give guidance and counseling to a 

first-time home buyer? 

Chairman NEY. Yes. 

Ms. AMIRI. When we do first-time home buying training sessions 

as well, we tell them what to look out for—always to get their own 

attorney, get their own building inspection and get a sense of the 

conditions of the property prior to——

Chairman NEY. But you provide legal services, don’t you? 

Ms. AMIRI. We do. We do. 

Chairman NEY. You provide them free? 

Ms. AMIRI. To low income and moderate homeowners. But we 

also train other community advocates. We speak to first-time home 

buying counseling sessions to warn people about what not to get 

into—because obviously it is easier if they don’t get into a bad loan 

in the first place rather than come to us after they have already 

gotten into it. 

So we would warn them in lots of different ways about how not 

to get into a bad loan as a first-time home buyer. 

Chairman NEY. Thank you. 

36

Mr. Matthews, would a national registry work best if it covered 

all loan originators, who would be—if we had a national registry, 

who would be in that? 

Mr. MATTHEWS. I think that one of the issues today is that there 

is not as much accountability in the mortgage industry as there 

should be. And if you look at the history of the industry, it has 

gone from this—a very personalized industry affiliated with saving 

and loan companies to a much more depersonalized industry with 

mortgage brokers. 

I think the answer to your question is that it would definitely be 

appropriate for loan originators—whether it be a broker or retail 

loan officer to be in a national registry. And that way you can track 

not only the company’s performance, but the individual’s performance as he or she goes from company to company, or migrates from 

State to State. 

Chairman NEY. Because I knew there was a case, I was on a 

roundtable one time where somebody had done something—just 

moved to another State. I think, you know, if you look at the overall picture, I have had a lot of mortgage brokers and bankers come 

to us and say—and they did in the State of Ohio when I was in 

the legislature and say we want to tighten this up—you know, we 

want to take the fraudulent side out of it—you know, police their 

own type of situation, which I think has been good—because the 

vast majority of them are decent people. 

But there has got the to be a way to find the ones that aren’t 

and not have them escape State to State. And that is maybe why 

I thought a national registry—pretty comprehensive it would have 

to be though. You can’t just have that group in or that group in—

and I think you have to have that pretty comprehensive, I would 

assume. 

Mr. MATTHEWS. Absolutely. Just recently, Ohio passed laws to 

expand the regulation to loan originators. And if you look at the 

securities industry, what they went through in the 1970s, the State 

security agencies banded together to create a central repository to 

track the registration and performance of stockbrokers, and so that 

would be something that I think would be appropriate for the mortgage industry as well. 

Chairman NEY. Whoever would like to answer this. On the first 

panel, I asked if it made a difference whether the volume of loans, 

the originations, decreased as it relates to a corresponding decrease 

in mortgage fraud cases. In other words, does this only go up exponentially when the loan volume increases, the fraud increases, or 

can you have a loan volume decrease and the fraud still continues 

steady? If anybody would——

Mr. MATTHEWS. I think there are some countercyclical aspects of 

the mortgage industry. As loan volumes decrease, mortgage fraud 

will not necessarily correspondingly decrease. A lot of times it will 

increase. And part of the problem is that the industry is commission-based. 

So if I am in a boom time with significant refinances because of 

low interest rates, I am making a significant income as a loan 

broker or a loan originator. As rates rise, and my ability to originate loans goes down, my income will go down as well. ConVerDate 0ct 09 2002 11:35 Jan 07, 2005 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 G:\DOCS\97524.TXT FIN1 PsN: MICAH
37

sequently, loan originations will often push through problem loans 

in a slow market in order to get a commission. 

Chairman NEY. The last question I have if anybody wants to answer. Each one of you, I think, has touched upon or mentioned appraisals in the system are, or at least a few of you have. Wouldn’t 

it behoove a loan originator to have some type of random check on 

appraisals, to have, you know——

Ms. MCCALL. I would like to address that. 

Chairman NEY.—idea for my colleagues. I better mention that, 

but we were talking about it. Wouldn’t a random check be good? 

Ms. MCCALL. Yes. 

Chairman NEY. To make sure your appraisers are giving you the 

right info. 

Ms. MCCALL. You are exactly right. We do that. There are several things that we do. First of all, many lenders will approve appraisers. 

Chairman NEY. Does the industry as a whole do it? 

Ms. MCCALL. As an industry as a whole, you will either approve 

appraisers or you will use a list of excluded appraisers. There are 

a couple of lists out there that are readily available. Unfortunately 

they are not comprehensive, such as the Freddie Mac list or the 

FHA debarred list. 

Chairman NEY. But beyond that—because I went one time, and 

they said here is a list, and I said I definitely don’t want that guy, 

because I knew him, and I definitely didn’t want him, but he was 

on the list. 

Ms. MCCALL. So there are a couple of other things. 

Chairman NEY. But I am saying, even if they are on the list, do 

you go out and—okay, here is your approved list. I know you have 

got that. But do you ever go out and double-check an appraisal randomly? 

Like here is Susie Smith on the approved list to be an appraiser. 

She says this house is worth this. Is that ever randomly checked? 

Ms. MCCALL. Yes, it is both done randomly, and it is done on an 

adverse basis. We do it pre-funding and post-funding. There are QC 

requirements that necessitate lenders—all lenders—to necessitate 

QC which includes a component of verifying on your 10 percent 

sample or statistical sample actually go out and randomly choose 

appraisals to reverify. 

We also do it in the pre-funding basis in two areas, one when the 

underwriter actually gets the transaction and looks at the appraisal. Many of the underwriters have received training to look at 

the appraisals and question the right things. And in those cases, 

we can use several tools. There are automated tools. We can send 

appraisers out to the property to inspect to tell us, yes, we really 

do think that value is good. And then the third kind of thing that 

we would do on a prefunding basis would also be—from a 

prefunding QC perspective—which is not typically part of the origination process, but does occur before the loan funds. Obviously that 

protects us, and it protects the consumer from buying a home that 

is overvalued. 

Chairman NEY. Thank you. 

The gentlelady from California. 

38

Ms. WATERS. Mr. Chairman, I would like to thank all of our panelists for participating today and a special thanks to Ms. Trujillo 

with ACORN all the way from California, and of course legal services, and those of you who are working really in the vineyards with 

all of the problems that our consumers have and particularly our 

low-income seniors. 

You know, I just went through one of these home-buying experiences. It is very difficult, I am sure, for many of our low income 

and middle class working people to negotiate their way through the 

purchase of a home, and nobody is helping them. 

First of all, I was surprised that someone would put a stack of 

papers in front of me and say just sign. Nobody explains what they 

are. Nobody explains the fees. You have to ask one by one, what 

is this fee, what is this for. And then you discover there is something called a county transfer fee. And you call the county, and 

they say, we don’t have anything to do with that. And then if you 

are lucky, you know, they say, well, we will take it off. 

Then I discover that, you know, the real estate people, brokers 

times, the mortgage—well, the real estate salespeople are sometimes getting kickbacks on everything. Kickback on the hazard insurance policy. You know, people are pushing you, get it from this 

one, get it from that one. Well, what is all of this about? People 

are getting a commission, they call it. I call it a kickback. They get 

a commission on the hazard insurance—and, guess what, the appraisals are being marked up. And, guess what, the real estate 

salespeople and others are getting a commission on the appraisals. 

I want to know, why is an appraisal for this place 1,500 by this 

person, another person told me they can give it for 750 and another 

lender says, oh, we will give it to you for free. 

So, I guess what I am saying is, while we are talking about 

fraud, and we are talking about the harm to the lender, and we are 

trying to talk about harm to the consumer, that is not everybody 

in this business, I want to tell you. 

The first harm, I am going to tell you, is that most people don’t 

know what they are doing and they can’t negotiate a purchase because it has gotten really implicated and nobody really explains. 

Even if you do sometimes a first-time home buyer course, and you 

try and cover everything that they will encounter—first of all, 

many times, they are not talking to anybody face to face. You know 

they don’t like to talk to you face to face any more. 

What they like to do is you called the lender, and they put you 

on the telephone to an underwriter or somebody, and they fax or 

e-mail you some papers, and they tell you to sign them and send 

them back and you fax and sign and send them back, and fax and 

sign and send back, and here is this first-time home buyer or somebody by themselves trying to do all of this. 

I guess there is no requirement in law that the buyer must be 

walked through the contract, every aspect of it, step by step, and 

there is no requirement of that in law. I am telling you, nobody offers you anything. So despite the fact we are talking about fraud 

to the lender and fraud—this whole industry needs a real review, 

Mr. Chairman, a real review. And the average consumer needs a 

way by which to have someone review a contract before they enter 

into it and sign it, because there are so many decisions to be made. 

39

You have—I wish everybody could negotiate their interest rates, 

I mean, but it goes, everything now from 4.7 to 7. And don’t tell 

me it is on a different kind of loan, fixed-rate mortgage, 30 years. 

I mean the interest rates, you know, differences are this wide. I 

don’t know how people know that they can negotiate it or, you 

know, what to ask for it, but this is a very difficult business now. 

It is very complicated and people are left alone to fend for themselves. I am not so worried about the lender, I mean, as I am the 

consumer in all of this. 

Lenders may get ripped off, but they have got enough money and 

enough lawyers and enough expertise to protect themselves and to 

go into court and to do a lot of things. But the poor consumers don’t 

have much of anything. I appreciate whatever it is the government 

is doing for lenders and for consumers, but it is not enough for the 

consumer, I tell you. It is just not enough. 

And, again, I don’t know how—you indicated that you advised 

people to go out and get a lawyer. Well, that adds to the cost. I 

mean, most working people and poor people just can’t pay lawyers 

fees, you know, I don’t know what lawyers charge to be involved. 

I think here in Washington D.C., you are required to have a lawyer, but in most places you are not. 

So, while we are looking at this, and this is good that it raises 

a subject. I think, Mr. Chairman, that one of the things we might 

want to consider is a complete review of the home buying mortgage 

process and figure out how we can eliminate some of the confusion, 

the obstacles, and require, you know, more information to the consumers at the time of the signing of the contract, that people don’t 

just get thrown a bunch of papers that they have to sign and told 

to walk through them, each line by line. 

I guess, and let me just say, it may be a good idea to have a 

database. But, Mr. Matthews, did your company have a database 

in Florida? 

Mr. MATTHEWS. A database in——

Ms. WATERS. A database in Florida for felons who were——

Mr. MATTHEWS. We do have a database, it is nationwide. It includes derogatory data such as sanctions taken by regulators. 

Ms. WATERS. No, this is on a different subject now. Aren’t you 

the guys who developed the database for the identification of felons 

in Florida who were supposedly prevented from voting because the 

law does not allow them to vote? Was it your company? 

ChoicePoint? Was it ChoicePoint? 

Mr. MATTHEWS. I am with Mortgage Asset Research Institute. 

We are a subsidiary of ChoicePoint. I am not familiar with the 

database that you are talking about. I am not sure if ChoicePoint 

developed that or not. That is not in my field of expertise. 

Ms. WATERS. Well, you better check your parent company, because I think your parent company developed a bad database, and 

that database was racked with problems and inconsistencies and 

names, I am not blaming you for it, but if CheckPoint is your parent company, maybe you ought to know what that is all about. So 

that when somebody hears that name, you know, the ears go up 

and they think, oh, no, we don’t want you to develop a database. 

Check it out and see what they can tell you about that. 

Mr. MATTHEWS. I will follow up on that. Thank you. 

40

Ms. WATERS. Yes. Thank you. 

That is all, Mr. Chairman. 

I yield back. 

Chairman NEY. Thank you. 

The gentlelady from California. 

Ms. LEE. Thank you, Mr. Chairman, I want to thank you and the 

ranking member for this very important hearing today. I was in a 

markup, so forgive me if what I ask is redundant. 

First, let me just say it seems like the more we support and push 

for the American dream to become real for ordinary Americans, the 

more scams we are faced with by legitimate professionals. It seems 

like the more—we want to include more people in homeownership, 

an opportunity is grabbed by the pros the figure out how to scam 

them. And I have got to say that, because I have many, many constituents who continue to go through this. 

Today, I just have a couple of questions on—I am trying to get 

a handle on the definitions between flipping, speculation and 

chunking. I mean, what—what are the lines drawn and what is the 

difference between flipping and speculation and then speculation 

and chunking, or are all of those definitions kind of—connote the 

same practice? Who can answer that? I am not sure who to direct 

the question to. 

Mr. PRIESTON. Thanks, I will take it, it looks like——

Ms. LEE. Okay. 

Mr. PRIESTON.—by default. Primarily the issue of flipping, I 

think is the one—the speculation is not so much a mortgage-fraud 

related term as a general term as it relates to real estate and properties, misleading the actual, you know, appraised value, inflating 

values on the sale of raw land as well as land to be developed. It 

could very well be that this is a fixer-upper, and with a good appraisal that relates to an increased value of the property if certain 

amounts of money were put into it. You could speculate on that 

property—and essentially with that fraudulent appraisal, recoup 

benefits in a fraudulent manner. That is essentially speculation. 

The flipping, however, is a little bit more complex. It relates to 

the idea where you purchase a property, many times these are 

HUD properties that require levels of renovation. You purchase a 

property, I would say a value of $15,000. You then sell that property for $150,000. And the way to do that is essentially to have 

dual escrows. You have to have an inflated appraisal. You have to 

have a duped borrower or, in fact, a straw borrower on the other 

side of the transaction, that the properties are bought and sold simultaneously, and the lenders are unaware this is happening because recordings only go back so far and it takes a bit of time before these multiple transactions actually hit. And then as a result, 

a gain of $135,000 is made instantaneously. 

And in my presentation of my testimony, one of the issues I 

brought up was the fact that a settlement agent is a gatekeeper. 

It is a gatekeeper in that they are privy to all the transactions that 

are going on. Yet, they do not have liability, unless of course they 

are guilty of some level of malfeasance. They don’t have a liability 

to communicate what is happening in front of everybody else’s eyes 

in that room. 

41

Ms. LEE. So flipping does not have criminal penalties at this 

time. 

Mr. PRIESTON. It can. It can have criminal penalties. It does give 

rise to criminal penalties in certain circumstances. And some 

agents—as Agent Swecker said earlier today—and some of the 

larger scams—and some of the larger scams such as in Brooklyn, 

there have been criminal penalties imposed upon settlement 

agents. 

But in the—let us say—less sexier claims where you have, say, 

$2 or $3 million in losses with 30 borrowers involved, the settlement acts have gone free. And the lenders who have the resources 

to act on behalf of the borrower and on behalf of themselves can’t 

necessarily prosecute that settlement agent in varying States 

throughout our country. Because, again, there isn’t that duty that 

arises. 

Chunking basically comes from this idea that you can, you know, 

churn a loan in and out. Brokers like to take their commissions 

rather quickly. They can move a person, a property rather quickly. 

They can make a loan, and then 60 to 90 days later, put them in 

another loan. And they take a piece along the way - and it is kind 

of moving them from one property to the next rather quickly, 

thinking that now they have taken advantage of yet another or 

more beneficial rate—lying to that borrower, misrepresenting to 

that borrower—that, in fact, it is a more beneficial program when 

it is not——

Ms. LEE. Are there criminal penalties? 

Mr. PRIESTON. And under the statues that this committee has 

helped promulgate under a rather confusing web of criminal penalties such as mail fraud and wire fraud and false instruments, 

yes. But, again, we are here to talk about maybe kind of cleaning 

that up little bit. 

Ms. LEE. Sure. Let me ask Ms. Amiri, with regard to the inflated 

appraisals and independent appraisal review. Are there—I mean, 

there are no national standards now. What do States have or do 

we have that is just a minimal kind of requirement for appraisers, 

because it sounds like there are none. It is kind of a free-for-all. 

Ms. AMIRI. Well, I can talk about individually with New York. 

The New York Department of State oversees appraisers and sets 

certain guidelines for their professional licensing. There is also a 

national organization, USPAP, which I can’t remember the name, 

what the acronym stands for, but they also set best standards, best 

guidelines, best practices for appraisers on a nationwide basis. 

And in New York, for example, the guidelines of this appraiser 

association have set on a national basis—have just been codified 

into our State regulations. So there are—the New York State Department of State should be the ones who would be going after 

these appraisers and disciplining them. 

So, I only am aware of what is going on in New York, and I can’t 

talk about it nationally. 

Mr. PRIESTON. Just to add to that, again, there is no better way 

to put a stop to deterrence and deterrence on a civil level where 

we can act fast and move quickly with a great deal more resources. 

If we have the legislation in place, we can act on behalf of the 

42

State as well as on behalf of the borrowers. Again, we do have 

those issues relative to——

Ms. LEE. So would this be State legislation or national? 

Mr. PRIESTON. Well, it is a national issue as well as State level. 

It depends upon the type of transaction. You have FHA-type loans, 

which, of course, you have Federal preemption involved—but then, 

of course, you have State level, case law. And there was case law 

in New York which created a necessity for privity of relationship 

between the appraiser and the lender. Otherwise, the lender can’t 

sue the appraiser. 

Ms. MCCALL. I did have one other comment on that. And talking 

about the different State laws, what happens is there is this kind 

of national requirement for all appraisers in preparing appraisers. 

They need to construct them in a certain way. They need to make 

certain representations. And so that is very standard nationwide. 

However, State to State, the rules for becoming an appraiser, the 

experience that is required, the number of the bond—whether you 

need one or not—is different from State to State. And so it does 

make it difficult as a national lender to understand exactly what 

the experience level of your appraiser is. There are also different 

and varying degrees appraiser levels. 

Ms. LEE. Yes, I have wondered. In California, for example—and 

I am from Oakland, the Bay area. I see—and I have often wondered if part of the high cost of housing and the median cost of the 

house—of course, in my district is now, what, $500,000. Could that 

be part of that be because of these inflated appraisals? I mean, 

after 6 months, another appraisal. I mean, I have seen houses go 

from 200,000 to 350 in 6 months from 350 to 500, and then all the 

other houses in that area go to 550 then in 6 months there, is one 

sold for 600. You know, so I know the appraisal process is part of 

this totally outrageous, the lack of affordable housing. 

Mr. PRIESTON. I am from the Bay area as well. 

Ms. LEE. See——

Mr. PRIESTON. I can totally relate to what you are talking about. 

And the affordability issues of housing and how volatile that market is slowly becoming because of those extraordinary increases in 

value. We saw that during the dot.com era on the peninsula. 

The good news is the Bay area is one of the low areas as it relates to fraud and mortgage fraud. There is a good reason for that. 

It is because in the Bay area you have something called title companies that you have to go to—and you don’t have settlement 

agents that are separate and distinct—or closing attorneys that are 

separate and distinct—that is why you don’t have flipping occurring there. 

It is a very important distinction. When we go into those title insurance companies, guess what, the title insurance company is 

going to be liable if in the event there is a flip that is going to 

occur. So you don’t see those transactions there. And that is why, 

comparatively speaking on the indexes and in our company where 

we receive claims around the country, it is the lowest area. 

Ms. LEE. But you see speculation though, you see the houses purchased for 200,000 and in 3 months they go on the market for 

500,000. 

43

Mr. PRIESTON. That may be something more due to an overheated market as opposed to fraud. 

Ms. AMIRI. If I could add to that what we are seeing in Brooklyn 

is actually what you described in certain neighborhoods. The onestop shops are now—have a large market share. And so what they 

are doing is they are using their sales to legitimize these astronomical prices in neighborhoods in Brooklyn that you would never 

imagine houses would be going for. So if you look at an appraisal 

from one of these one-stop shops, they are using comparable sales 

as a measurement of what they are going to sell your house for. 

Ms. LEE. And appraisals are so key though in developing the 

comparable sale criteria? 

Ms. AMIRI. Right. 

Mr. PRIESTON. You are absolutely right. I mean, let us move the 

Bay area out of the question and bring it back to Brooklyn, where 

we all know about the sensitivities and the pain that many, many 

homeowners have undergone and borrowers that never should have 

owned four- to six-unit buildings in that area. 

Let us keep in mind that what Ms. Amiri said just now is exactly 

right. That what is happening is one is begetting the other. They 

start out with one fraudulent appraisal, and now you have 10. Now 

you have 10. And what they do is they keep the payments going 

for enough time so the loan remains current and alive, and therefore the value of the property stays consistent. 

Once you have one or two condominium complexes in Houston, 

hundreds of those just like that, for that very reason, in that same 

manner, you get two or three, you use the same $30,000 as a payment, you get an appraisal, you get one or get two, now, you get 

legitimate appraisers while looking at those comps and seeing that 

those are legitimate transactions. 

Now, it has been simply masked completely and almost 

undetectable if it goes on long enough. And the key here is letting 

it go on long enough. If those payments are made month after 

month with the proceeds of the first loans, then you can mask it 

for a year. And now you are beyond those early payment default 

detection programs that the industry knows about and can spot 

right away. And the whole thing implodes from about 18 months 

to 2 years from the original funding dates. 

Ms. TRUJILLO. I also have something to add to that. What we see 

is that appraisals—and some of these older value appraisals are 

shifting a little bit, not only from mortgage brokers, but also to 

prime lenders, to regular lenders. And that appraisers are forced 

to meet the number. I mean, we, I, have worked in Oakland for 7 

years before moving to L.A., and every single appraisal meets the 

price, especially for the purchase. 

Now, the only thing that we see is loan flipping, where appraisals meet the new price of the house, essentially high-priced areas, 

where families are refinanced four to five times within the same 

year. Magically, the appraised value always keeps increasing at a 

crazy rate. 

Ms. LEE. Yes. 

Ms. TRUJILLO. It is something that we are looking at in general. 

Many of these cases involve fair housing violations, because they 

targeted specific demographics. And that is how we have been able 

44

to catch most of the actors and, also, you know, luckily, if a lender 

breaks any hope or risk of violation, that is also where we can get, 

dissect the whole case and figure out what happened. It is very regular, or, you know, normal now for appraisals to always meet the 

price. 

Ms. LEE. Thank you. 

Thank you very much, Mr. Chairman. I mean, this is mind boggling because as we try to make sure that the American dream is 

real for everyone in America, what—what we are seeing is that 

people are getting messed over, and their lives are being shattered. 

And the institutions that are supposed to support them really 

aren’t. And, I mean, I hope we do have a further hearing on this, 

because somehow we have got to get a hand on this. Because otherwise no one will be able to buy a home in America. 

Thank you very much. 

Chairman NEY. Thank you. I want to thank the witnesses and 

members for being here today. 

Also without objection, there is a statement that Fannie Mae 

wants to put in the record, hearing no objection. 

[The following information can be found on page 126 in the appendix.] 

Chairman NEY. Also I would, without objection, the staff will be 

able to make conforming or technical changes to the language, and 

also some members may have additional questions for the panel. 

They may want to submit them in writing. Without objection, we 

will keep the hearing open for 30 days for members to submit and 

receive answers. 

I want to thank you again for your patience. 

Thank you very much. 

[Whereupon, at 1:12 p.m., the subcommittee was adjourned.] 

(45)

A P P E N D I X

October 7, 2004

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