Once upon a time, in a world all-too-common, the mortgage business didn't give a hoot about loans received under fraudulent circumstances as long as they were performing as expected.

But that's no longer the case, according to Jenny Brawley, a senior fraud investigator at Freddie Mac.

Now, investors like Freddie Mac are "data mining" mortgages, "looking for patterns of fraud" in an attempt to "get to them before they go delinquent."

And, perhaps better yet, Brawley said at the National Association of Mortgage Brokers' legislative and regulatory conference in Washington last week, prosecutors are no longer waiting for losses to occur before going after swindlers who cheat lenders and investors out of billions of dollars annually.

Unfortunately, even though crime busters are becoming involved earlier in the game, the incidences of fraud remain on the upswing, according to William Brewster, manager of Fannie Mae's big underwriting center in Dallas.

While much has been made of the growth in identification theft -- complaints about ID theft to the Federal Trade Commission are up three-fold -- mortgage fraud has increased five-fold in the last decade, Brewster told the conference.

"We're seeing a steady increase in the volume of loans with misrepresentations," he said.

In many of the cases investigated by Freddie Mac, which has a staff of six investigators, the miscreant is a lone individual, according to Brawley.

Even when collusion is involved -- and even when borrowers unwittingly sign on to the scheme -- the misdeed is "orchestrated" by the seller, the fraud expert told the conference.

"We call it ‘one-stop-shopping,' and we see it a lot," she said. "It doesn't take much to dig down a couple of layers to discover it's one person controlling the transaction. Typically, it's the seller who's opened his own mortgage company and title company."

Even when the conspiracy involves loan brokers, appraisers and others in the lending process, she emphasized, it's usually one person -- perhaps a builder or remodeler -- who runs the show, according to the Freddie Mac executive.

Borrowers generally are "legitimate individuals" who want to buy or invest in a home and are "sucked into the scheme," she added. Even when "straw buyers" are part of the equation, they are often "well meaning relatives" who have been told that everything is on the up-and-up.

Fannie Mae's Brewster said that while "small pockets of sophisticated perpetrators" are at work throughout the country, his company has noticed a higher rate of fraud in cities in the Southeast and Midwest -- places like Atlanta, Charlotte, Memphis, Detroit, Chicago and Indianapolis -- where a large amount of rehabilitation is taking place.

Typically, the offenses the company discovers involve "property flips" in older, deteriorated neighborhoods where it is not unusual to see a renovated 50-year-old house standing beside another 50-year-old property that has not been remodeled, said Brewster, whose office reviews loans on a random basis nationwide as a matter of course.

While there is nothing wrong per se with flipping -- buying a rundown house, fixing it up and reselling it over the course of a few months -- a lot of bad guys do something illegal within an otherwise legal framework.

Published: March 31, 2004

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.