Mortgage fraud helped propel Hawaii’s foreclosure rate to 11th highest in the nation this year, and it is still augmenting filings, according to investigators and real estate industry watchers.
Last year, lenders began the foreclosure process or completed it on a record 12,425 Hawaii properties, according to the latest data released this week from California-based research firm RealtyTrac. Some of these were related to fallout from the rampant mortgage fraud that took place from 2004 to 2007 during Hawaii’s housing boom, said FBI Special Agent Tom Simon of Honolulu’s field office.
While mortgage fraud has existed since loans became available, it exploded during this period, Simon said.
"In the past it was always up to the borrower to romance the lender into giving them a loan," he said. "This era turned the dynamic on its head. When lenders and sellers began to push buyers, it was a recipe for disaster on a fraud level and a national economic level."
The FBI’s Honolulu office has charged 37 people with various crimes related to mortgage fraud over the last three years, Simon said. More charges are expected to be filed in 2011 as a five-year statute of limitations for cases involving nonfederally insured financial institutions nears, he said.
"We’ve only gotten to the tip of the iceberg," he said.
The July 2010 edition of the CoreLogic Mortgage Fraud Trends Report estimates that 1 in 200 loan applications could contain misrepresentations that lead to default. The company arrived at this conclusion by analyzing data samples from 80 million loan applications made in 2005 to 2009. The report found that fraud risk and defaults are correlated.
The Office of the Comptroller of the Currency, which supervises national banks, also reports that its mortgage-related complaints are growing. The OCC collected 17,717 mortgage-related complaints through June 2010 as compared with 19,669 for the whole of 2009.
"Mortgages have increased as a proportion of all complaints," OCC spokesman Bryan Hubbard said.
Local fraud cases run the gamut, Simon said. Cases have been found where buyers or real estate industry workers made false statements on loan applications, he said. Some lied on loan applications or claimed nonexistent assets, Simon said.
Investigations are complex, he said.
"The issue is so commingled with people making poor decisions on good faith," Simon said. "How much is fraud, and how much is bad economic decision making?"
Fraud also involved those who claimed investment or vacation homes as primary residences, he said. And, in some cases, straw buyers were used so that properties could be flipped or equity skimmed, Simon said.
"The perception that the collateral value would grow made it easy to rationalize fraud," he said. "They felt that even in the worst-case scenario that the value of the home would protect everyone from losses."
However, Hawaii’s market rise didn’t last, and some of these bad loans ended in foreclosure, Simon said.
"A legitimate buyer is not going buy a home for more than it’s worth," he said.
Sadly, it’s not just the borrower or the lenders that pay when mortgage fraud is committed, he said.
Foreclosures are frequently eyesores, "with broken windows and grass up to the chin," Simon said.
"Foreclosed homes erode values, particularly on an island where they create the impression among the community that real estate has no value," he said.
The Salt Lake neighborhood in Honolulu has been particularly hard hit by fraud and flipping, he said.
Total costs of mortgage fraud are unknown; however, CoreLogic estimates that nationwide, $14 billion in fraudulent loans originated in 2009.
As more defaults turn into foreclosures, rescue scams will become the next wave of mortgage fraud, Simon said.