Colorado's status as a mortgage fraud "hot spot" isn't cooling.

The FBI, which named Colorado as one of 10 states with the most mortgage fraud cases in 2004, this week listed the state among seven with the most mortgage fraud cases in its 2006 Financial Crimes Report.

Colorado is one of the few states that do not license mortgage brokers, although legislation to license them is pending.

The report, based on data for 2005, lists California, Florida, Georgia, Illinois, Michigan and Texas as other states with a high number of fraud cases.

An FBI spokeswoman in Denver said she had not seen the report and referred questions to a spokesman in Washington, D.C., who did not respond to phone or e-mail queries.

The FBI report said research indicates that 80 percent of mortgage fraud nationwide "involves collaboration or collusion by industry insiders."

This is known as "fraud for profit," as opposed to "fraud for housing," when consumers lie about things such as their income to buy a house when they are not financially qualified.

Chris Holbert, president of the Colorado Mortgage Lenders Association, pointed out that the other states on the FBI's list all license brokers.

"My observation is those other states had licensing, and it is quite difficult for us to see a correlation of how licensing prevented an increase in foreclosures in those states," Holbert said.

"I think it is somewhat shortsighted for people to think licensing will prevent foreclosures. We really owe it to the citizens of Colorado for our legislators to look more to enforcement, rather than to regulations."

But mortgage banker Jim Spray, a longtime advocate of licensing brokers, said that the FBI "brilliantly summarized" mortgage fraud. "It also correctly points out that Colorado is still among the top 10 in mortgage fraud," he said.

Nate Strauch, a spokesman for the Colorado attorney general's office, said that the state has been listed by the FBI as "one of the top 10 or top 15 states" for mortgage fraud for the past four or five years.

"So this doesn't really signal a significant sea change," he said.

Carolyn Sandberg, a broker with Home Real Estate in Westminster, said she ran into a case of what she considers mortgage fraud when an elderly couple she was representing were buying a house.

Their loan was going to rise almost immediately from slightly more than 6 percent to more than 9 percent.

"I stopped the deal three days before the closing" and put them in touch with a reputable mortgage lender, she said.

"The (original) lender went nuts," she said. "He was probably calling me 10 to 14 times a day."

The FBI report also highlighted a "significant" case last year, in which Gerald Small III, of Broomfield, was convicted of making fraudulent loans that used stolen identities from 47 people to obtain more than $21.5 million of mortgages during a two- year period.

"In order to support a lavish lifestyle, Small created fictitious loans to live off of the lines of credit he took out with large, federally insured financial institutions," according to the report.

Small and five others were convicted. Two private jets were recovered, as well as $20 million in cash and other assets. The federally insured financial institutions lost about $35 million in the schemes, according to the FBI.

Nationwide, the FBI in fiscal 2006 investigated 818 cases of mortgage fraud, resulting in 263 indictments and 204 convictions. The convictions led to $388.9 million in restitution, $1.4 million in recoveries and $231 million in fines.

Signs of trouble

In its federal crimes report for 2006, the FBI identified several areas of financial fraud, including mortgage fraud. Colorado - along with California, Florida, Georgia, Illinois, Michigan and Texas - is listed as one of the top states for this problem. Among the indications a lender could be trying to defraud you:

• Inflated appraisals

• Bonuses paid (outside or at settlement) for fee-based services

• Higher than customary fees

• Explained how or told buyers to falsify the mortgage application

• Requests to sign blank application or other forms

• Fake supporting loan documentation

• Purchase loans disguised as refinanceSource: Federal Bureau Of Investigation

Some schemes identified by the FBI

• Property flipping: Property is purchased, falsely appraised at a higher value and then quickly sold. What makes it illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers and title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.

• Silent second: The buyer of a property borrows the down payment from the seller through the issuance of a nondisclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

• Nominee loans/straw buyers: The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.

• Fictitious or stolen identity: A fictitious or stolen identity may be used on the loan application.

• Inflated appraisals: An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report states an inflated property value.

• Foreclosure schemes: The perpetrator identifies homeowners at risk of defaulting on loans or whose houses are in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.

• Equity skimming: An investor may use a straw buyer, false income documents and false credit reports to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed, which relinquishes all rights to the property and provides no guarantee to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.

• Air loans: This is a nonexistent property loan in which there is usually no collateral.Source: Federal Bureau Of Investigation

rebchookj@RockyMountainNews.com or 303-954-5207

Back to Top