Florida remained the No. 1 state for mortgage fraud last year, according to the FBI. At a meeting Tuesday in Miami, the federal Financial Crisis Inquiry Commission “concluded that the financial impact of the fraud was more severe than most have estimated, and prosecuting those responsible will be nearly impossible,” the Miami Herald reports.

It was the third of four hearings being carried out nationwide by the commission, which Congress assembled last year to investigate the causes of the global financial meltdown …

… Five hours of expert testimony painted a picture of a system wrought with regulatory inadequacies and financial incentives for unscrupulous behavior at nearly every level. The result, panelists said, was more than $1 trillion lost by banks, homeowners and, ultimately, the U.S. taxpayer between 2005 and 2007 alone. As many as 70 percent of mortgages now in foreclosure were the result of at least one element of fraud, said Ann Fulmer, vice president at Interthinx, a risk-mitigation firm that does extensive mortgage fraud research.

Much of that fraud may go unpunished, due in part to what Special Agent Ellen Wilcox of the Florida Department of Law Enforcement said was the No. 1 problem in prosecuting mortgage fraud: Florida’s statute of limitations. The average case takes more than a year – not to mention an enormous commitment of resources – to investigate, she said in her written testimony (.pdf).

“Most mortgage fraud will not be reported until the mortgage goes bad, but the ‘crime’ occurred when the money was lent,” she said. “If there was mortgage fraud in the granting of a mortgage loan in 2004, it can not longer be criminally charged.”

“In Florida, the statute of limitations for obtaining a mortgage by false representations is only three years; for an organized scheme to defraud it is four years,” she added.

What’s more, in many fraud cases, the bank that originated the loan is considered the victim under the law, and is therefore an essential witness, she said. But many of the lenders at the center of the financial crisis went out of business when things turned bad.

“If the lender is out of business, how does the state find that witness?” she asked.

Since testifying in a fraud case often requires witnesses to take uncompensated time off work, they often have little incentive to cooperate once investigators track them down, she added.

Another problem is the issue of proving “intent,” or determining who was actually committing the fraud, Wilcox said. In some cases, real estate brokers would have “investors” sign loan documents they hadn’t read that may have contained false information. When the homes failed to flip, and the bank served a foreclosure notice, was the “investor” – whose credit was on the line, and who may have understood that they were involved a fraudulent scheme – a victim, or among the guilty parties?

Wilcox suggested several measures for curbing fraud in the future and making it easier to track, among them requiring that borrowers review papers for accuracy before signing them (to help prevent them from “unknowingly” submitting false information), and requiring lenders to maintain records of the loan documents as they are passed among investors.

The commission’s final report is due in December.

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