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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.
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    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 operation 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.
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    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 subsidiary of ChoicePoint, which is based in my district in Atlanta, Georgia.
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    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.
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    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.
    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.
    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.
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    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.
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    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, vicinity 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.
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    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 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.
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    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 mortgage-backed securities, which will result in higher interest rates and fees paid by borrowers, limiting the amount of investment funds available for mortgage loans.
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    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 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.
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    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 relationships 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.
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    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.
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    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.
    Thank you.
    Chairman NEY. Mr. Weicher.
    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.
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    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.
    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.
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    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?
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    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.
    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?
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    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.
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    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.
    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.
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    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 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.
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    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 run-down 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.
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    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.
    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——
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    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.
    Ms. HART. Mr. Chairman, I believe Mr. Miller has some time constraints, so I am going to cede to him.
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    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?
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    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, 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.
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    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 advised me that the case is still open and for that I am prevented from getting into specifics at this time.
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    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.
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    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 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.
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    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.
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    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.
    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.
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    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 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.
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    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.
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    Ms. VELAZQUEZ. Thank you.
    Mr. Weicher.
    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.
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    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 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.
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    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.
    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.
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    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.
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    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.
    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.
    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.
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    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.
    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.
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    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.
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    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 information 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.]
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    Mr. NEY. Ms. McCall.
    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 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.
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    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.
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    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.
    Mr. NEY. Thank you.
    [The prepared statement of Marta T. McCall can be found on page 72 in the appendix.]
    Mr. NEY. Mr. Prieston.
    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.
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    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.
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    Historically we know that a high propensity of fraud occurs in urban markets. The more notable markets at the current time include 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.
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    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 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.
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    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.
    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.
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    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 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 one-stop 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.
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    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 usually 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.
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    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.
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    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.
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    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 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.
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    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.
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    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.
    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.
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    [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.
    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.
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    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——
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    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. Consequently, 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.
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    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.
    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.
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    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.
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    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.
    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.
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    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.
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    Mr. MATTHEWS. I will follow up on that. Thank you.
    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.
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    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.
    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.
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    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.
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    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 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.
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    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.
    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 one-stop 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.
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    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.
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    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 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.
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    I want to thank you again for your patience.
    Thank you very much.
    [Whereupon, at 1:12 p.m., the subcommittee was adjourned.]