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Public Safety Strategies for Addressing Mortgage Fraud and the Foreclosure Crisis Author About This Report Acknowledgements

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Public Safety Strategies for Addressing Mortgage Fraud and the Foreclosure Crisis Author About This Report Acknowledgements Best Practices Public Safety Strategies for Addressing Mortgage Fraud and the Foreclosure Crisis author about this report acknowledgements Robert V. Wolf This report was supported by the Bureau of A number of people provided essential assistance. Director of Communications Justice Assistance under grant number Foremost among them are the participants in the two Center for Court Innovation 2009-DC-BX-K018 awarded to the Center days of conversations on foreclosure, vacant proper- for Court Innovation. The Bureau of Justice ties, and mortgage fraud organized by the Bureau of May 2010 Assistance is a component of the U.S. Justice Assistance. The participants not only shared Department of Justice’s Office of Justice their good ideas but provided feedback on early drafts. Programs, which also includes the Bureau Also crucial to the development of this report are of Justice Statistics, the National Institute of James H. Burch II, Pamela Cammarata, Ben Gorban, Justice, the Office of Juvenile Justice and Preeti Puri Menon, Kim Norris, Cornelia Sorensen Delinquency Prevention, and the Office for Sigworth, and Paul Steiner of the Bureau of Justice Victims of Crime. Points of view or opinions Assistance; Greg Berman, Julius Lang, and in this document do not represent the offi- Christopher Watler of the Center for Court cial positions or policies of the U.S. Innovation; and Caroline Cooper and Tenzing Lahdon Department of Justice. of American University. A FULL RESPONSE TO AN EMPTY HOUSE| 1 A FULL RESPONSE TO AN EMPTY HOUSE: PUBLIC SAFETY STRATEGIES FOR ADDRESSING MORTGAGE FRAUD AND THE FORECLOSURE CRISIS INTRODUCTIONThe news from the real estate sector has been grim for months: both foreclosures and mortgage fraud are at all-time highs.1 Because these intertwined problems have reached crisis proportions they are threatening the Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut stability of entire neighborhoods, making the search for effective responses a priority not only for bankers and laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullam- real estate brokers but also local governments, police departments, prosecutors’ offices, and community corper suscipit lobortis nisl ut aliquip ex ea commodo consequat. Duis autem vel eum iriure dolor in hendrerit groups. in vulputate velit esse molestie consequat, vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit praesent luptatum zzril delenit augue duis dolore te feugait nulla facilisi. The problem on the ground for the hardest hit communities is that foreclosures and mortgage fraud are fuel- Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod exerci tation ing a dramatic rise in the number of vacant and abandoned properties. These properties can generate a host of ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat. interrelated problems: crime, homelessness, and strains on municipal services, as well as safety hazards and lower property values. DuisIn autem many veljurisdictions, eum iriure the dolor number in hendrerit and location in vulputate of foreclosed velit esse and molestie vacant properties consequat, is vel changing illum dolore so rapidly eu feu- thatgiat nullaofficials facilisis have troubleat vero eroscounting et accumsan them, let et alone iusto formulatingodio dignissim a meaningful qui blandit response. praesent luptatumThe city of zzril Cleveland, delenit for example,augue duis estimated dolore te in feugait early 2009nulla thatfacilisi. at least Nam 10,000 liber tempor (or one cum in 13) soluta of its nobis houses eleifend were vacant option while congue the nihil county treasurerimperdiet estimated doming id that quod the mazim number placerat was 15,000—50 facer possim percent assum. higher.2 RecognizingLorem ipsum that dolor recent sit amet, economic consectetuer trends have adipiscing fueled elit,mortgage sed diam fraud, nonummy foreclosures, nibh andeuismod neighborhood tincidunt insta-ut bility,laoreet the dolore Bureau magna of Justice aliquam Assistance erat volutpat. (BJA) Utin wisiJanuary enim 2009 ad minim brought veniam, together quis experts nostrud from exerci around tation the ullamcor- country toper examine suscipit solutions.lobortis nisl As utJames aliquip H. exBurch, ea commodo II, Acting consequat. Director of Duis the Bureauautem vel of Justiceeum iriure Assistance, dolor in explained hendrerit at in the outsetvulputate of thevelit two-day esse molestie meeting: consequat, “We don’t vel believe illum thatdolore the eu answers feugiat to nulla these facilisis problems at vero come eros … fromet accumsan Washington. et Weiusto believe odio dignissim the answers qui to blandit these problems,praesent luptatum the solutions, zzril delenitthe strategies augue duisthat candolore be effectivete feugait to nulla address facilisi. these Lorem issues,ipsum dolorcome sitfrom amet, local consectetuer communities adipiscing around theelit, country.” sed diam nonummy nibh euismod tincidunt ut laoreet dolore magnaOn thealiquam first day, erat representatives volutpat. from the following jurisdictions shared their experiences developing compre- hensive,Ut wisi collaborative enim ad minim responses: veniam, Indio, quis California, nostrud exerci a fast-growing tation ullamcorper suburb that suscipit underwent lobortis rapid nisl population ut aliquip ex ea growthcommodo followed consequat. by a just-as-rapidDuis autem collapsevel eum iniriure its housingdolor in market;hendrerit Dallas, in vulputate Texas, whichvelit esse experienced molestie bothconsequat, high vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit praesent lupta- 2 | CENTER FOR COURT INNOVATION rates of real estate speculation and sub-prime lending; and the urban centers of Indianapolis, Indiana, and Baltimore, Maryland, which have dealt with housing blight for decades. On the second day, experts from Miami-Dade County in Florida, Wayne County in Michigan, and Fulton County in Georgia focused on how to identify and respond to mortgage fraud. Additional participants, who joined the conversation on both days, included researchers, policymakers, and representatives from financial, legal, housing, and law enforcement advocacy groups. (For the names of partici- pants, see the list starting on page 30.) What emerged from the series of presentations and facilitated discussions, which were moderated by Christopher Watler of the Center for Court Innovation, was a detailed snapshot of mortgage fraud and foreclo- sures, including their causes, their impacts on neighborhoods, and jurisdictions’ responses. As a document of the conversation, this report is intended to serve as a guide to government and law enforcement officials across the U.S. seeking to address these challenges in their own communities. MORTGAGE FRAUD While it is difficult to identify exactly what percentage of vacant and abandoned properties can be blamed on mortgage fraud, one fact is clear: the incidence of mortgage fraud has reached epidemic proportions.3 The Mortgage Asset Research Institute calls mortgage fraud “one of the fastest growing financial crimes in the history of the United States.”4 In May 2009 the Treasury Department was referring more than 5,000 mort- gage fraud allegations every month to the Federal Bureau of Investigation (FBI), which reported that financial institutions filed 36 percent more “suspicious activity reports” about alleged mortgage fraud in 2008 than they did in 2007.5 Sen. Patrick Leahy, a co-sponsor of the Fraud Enforcement and Recovery Act, noted that in 2009 reports of mortgage fraud were up 682 percent over the past five years, and more than 2,800 percent over the past decade.6 The upswing in mortgage fraud has overwhelmed government resources, leaving “thousands of fraud allegations … unexamined each month,” Leahy said.7 The losses to financial institutions directly attributable to mortgage fraud in 2008 were $15 to $25 billion, according to industry estimates.8 And prosecutors consider mortgage fraud to be “among the most economically destructive crimes prosecuted by their offices,” according to the New York Times: while “bank robbers average less than $2,000 and face a 75 percent chance of being caught, a mortgage fraud ring walks away with hundreds of thousands of dollars per house, prosecutors say, and runs little risk of arrest.”9 The factors fueling mortgage fraud are many. They include the diversion of law enforcement resources from white collar crime to the fight against terrorism, the loosening of lending standards, and the increased use of the internet and other technologies that make the loan application process “faceless.”10 The issuance of sub-prime mortgages—essentially loans to riskier borrowers (such as those who have lower credit bureau risk scores)— expanded dramatically from the mid-1990s onward, accounting for about one percent of the mortgage market share in 1996 but nearly 23 percent 10 years later.11 Often sub-prime mortgages were offered through nontradi- A FULL RESPONSE TO AN EMPTY HOUSE | 3 tional products, including loans that required no down payment or income documentation as well as loans that deferred payment of principal and sometimes interest.12 Despite attractive initial terms, however, sub-prime loans resulted in higher charges to the consumer, ostensibly to compensate the lender for the increased chance of default.13
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