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Heads Will Roll: Part One
"Whenever disaster may hit, you may rely on an immediate and total response of one kind of damage control -- the kind that indicates that actually, it's no one's responsibility."

Quick, guess what event inspired this quote. A massive public project turned boondoggle? Drug crime in upstate New York? Feds carting out yet more files from offices of politicians in New Jersey? Or does it refer to one of the many corruption scandals unfolding in lower New England, where a number of high profile urban pols face, or have already been convicted of, a strangely similar litany of charges; ones having to do with misuse of public "revitalization" funds, crony development deals and getting too cozy with organized crime? On the larger front, there's WorldCon & Co. A Pandora's box many hope to slam shut. And what about potential disasters? Such as fallout from mortgage fraud? At a mortgage fraud prevention seminar given last year by the Mortgage Bankers Association of America, law enforcement reps described problems tracking mortgage fraud - a crime the FBI has said is undeniably on the rise.

Keeping tabs on mortgage fraud is tough for a number of reasons. Suspicious Activity Reports (SAR) are only legally required of federally insured institutions. Most mortgage banking companies are among the uninsured. Under reporting of fraud, by both the insured and the uninsured is common, since even the Simon pure fear bad publicity and the prying eyes of bank examiners. Plus, no single regulatory agency exists to monitor mortgage fraud. An independent company, the Mortgage Asset Research Institute (MARI) based in Alexandria Virginia, collects data on mortgage fraud from donated, public and anecdotal sources. Including over 100 federal and state agencies. In September 2001, MARI identified states where mortgage fraud is rising the fastest as New York, New Jersey, Maryland, and Northern Virginia. Amongst counties, Florida's Broward and Dade score among the highest, as do Orange and Riverside in California. Urban hot spots include Atlanta, Chicago, Detroit, Washington and Cleveland, with Baltimore a veritable flip city*.

"Flipping" is one of the commonest forms of mortgage fraud. It refers to the practice of buying and turning over properties, often rapidly, with the price ballooning artificially along the way. Flipping frequently involves the resale of foreclosed properties taken over by the U.S. Department of Housing and Urban Development (HUD). Such is the case in Baltimore. But the practice also occurs with non HUD properties. Flipping involves a number of parties, across a complicated transaction. At times some participants are innocent dupes. At other times, most of those involved are aware the transaction is crooked.

Though flipping is only one type of real estate fraud, some typical techniques are contained within it. Some of which are laid out in an 116 count, federal grand jury indictment of Robert A. Amico, his sons and various associates in a case of alleged, extensive mortgage fraud in the Rochester area in upstate New York. Amico and fellow defendants are accused of defrauding banks of $58.5 million. Amico and associates, using over a dozen company names, built, sold and arranged financing, for some 230 homes in Rochester's suburbs. The sales price of over half was far above assessed value. Mortgage companies in California, Florida, Michigan, Pennsylvania and other states lent local buyers more than $31.5 million. In one suburb alone, 21 percent of tax delinquent properties were built by Amico.

The grand jury indictment of Amico describes a "conspiracy" in which defendants falsified mortgage applications, using bogus documentation. The falsified mortgage applications hid the fact that purchasers "should not have qualified financially for such considerable loans". Seemingly, purchasers were not so innocent: "To quickly attract the many purchasers needed to purchase the homes built by the Amico Entities, the purchasers were able to purchase the homes with no out-of-pocket expenses. Specifically, the purchasers were not required to pay a down payment, closing costs or attorney's fees. Further, many of the purchasers were offered large cash rebates to purchase the homes".

As to the considerable loans: "The defendants falsely represented to the lenders that the sales prices for the homes were in amounts which were much greater than the actual sales prices paid by the purchasers...documents were prepared which falsely represented that the purchasers would be paying Amico Entities a down payment of approximately 20 to 25 percent of the purported sales prices...a down payment however, was never paid by the purchaser..."

To support phoney sales prices the defendants "....deceived various property appraisers...by providing....a) blueprints which falsely inflated the square footage of the homes. b) purchase agreements which falsely stated that the purchasers had agreed to pay the inflated sales price for the homes, and/or c) information regarding comparable sales of other Amico homes in which the value of those properties had been inflated....The defendants also altered legitimate appraisals and created false appraisals using the names of...property appraisers who did not exist."

Mortgage fraud has the power to distort markets and undermine neighborhoods. The suburban towns where Amico built, relied on the same dummied up blue prints when appraising the properties for tax purposes. Artificially inflated values result in tax delinquencies and foreclosures. In inner cities, flipped properties are often abandoned by those unable or unwilling to make the mega mortgage payments. Abandoned buildings frequently become eyesores and drug warrens. Or pass into the hands of absentee landlords to become strip mine rental properties and drug warrens. Some buildings are flipped again and again. Hitting bottom, then bobbing back up for a new round of grab the money and run.

Once a sale is in the pipeline, successful mortgage fraud hangs on certain pivotal points. Property appraisals are among those points. A careful, experienced real estate appraiser can nip certain frauds in the bud. Of course, not all appraisers are careful. Or honest. Pressure on appraisers to support inflated estimates of value (EOV) has become intense. Lenders and real estate agents are bearing down hard. At the October, 2001 national convention of the Association of Appraiser Regulator Officials (AARO) immediate past president, Sam E. Blackburn declared "The present system is simply not working" and "Lenders have added a new twist to the old law of supply and demand: if appraisers don't supply the numbers they need, they demand another appraiser". Appraisers have also grown uneasy that if a housing bubble bursts, they will be on the front line of legal retaliation. After the S&L meltdown of the early 90's, appraisers caught civil suit hell. And when the federal government steps in and prosecutes fraud against the public (as it does under the national Housing Fraud Initiative), appraisers can be named as defendants. Professional integrity guides many appraisers, but some only walk the line out of fear they'll be held accountable.

In contrast, anyone who's heard a bureaucrat say "the computer is down" knows how easy it is to pass the cyber buck. Yet Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSE) who together purchase, retain or guarantee more than 70% of the conforming mortgage market, have been promoting the Property Inspection Waiver program, which favors replacing appraisers with an automated system. In the interest of facilitating the loan process. Claiming that appraisals can be eliminated when adequate electronic valuation data is available. The key word is "adequate". Appraisers in the Amico case seem to have been, at best, careless. If they visited the properties, did they compare footage with the doctored blue prints? But such an inspection and footage comparison wouldn't even have been an option for an automated system. Let alone an assessment of neighborhood factors. It's also impossible for an automated system to have knowledge of local industry gossip; which is what it takes to spot certain frauds. Such as comparable values being based on properties built by one company using many names. Since Fannie and Freddie control so much of the mortgage market, you'd think they'd appreciate that appraisers, if not overly influenced by conflicts of interest**, can do much to safeguard investment and to make sure housing consumers are getting honest deals.

Another key point at which real estate fraud must pass go, is with the lender. Lenders are putting money on the line. Given this, why would lenders be pressuring appraisers to affirm inflated estimates of value? One reason may be that responsibility for the loans passes quickly out of their hands. As stated, Fannie Mae and Freddie Mac are twin godzillas controlling roughly 3/4 of the secondary mortgage market. Which means that Fannie and Freddie buy many of the loans originated by retail institutions, such as banks. Those loans are then either held, or bundled into packages of securities, called mortgage backed securities. Many are purchased by money market funds, to be sold to investors.

Fannie Mae and Freddie Mac, though technically independent, are government sponsored entities. As a result, they enjoy certain tax breaks and advantages in doing business. For instance, the government securities they issue are exempt from certain Securities and Exchange Commission (SEC) requirements. Fannie and Freddie also receive indirect taxpayer subsidies. $10.6 billion dollars in 2000 alone. They retain a $2.25 billion dollar line of credit from the U.S. Treasury Department. The implication is out there, should Fannie or Freddie falter, taxpayers will foot the bill. Thomas Stanton, Fellow at the Center for the Study of American Government at John Hopkins, who has written extensively about the potential for disaster posed by Fannie and Freddie, has warned that this implied backing creates a moral hazard. Namely, the temptation to take risks due to being shielded from exposure to full responsibility. A charge more often flung at teenage welfare moms. Leading one to ask-- have Fannie and Freddie fallen prey to temptation? Are they pregnant and unmarried?

Some say yes. And that in an effort to dodge the results, Fannie and Freddie have become even bigger risk takers, dropping more and more inhibitions, seeking to jettison anything that might restrict eligibility. Like appraisers. Also tossed overboard in New York State recently, was any need to be needy in order to qualify for Fannie Mae's community lending mortgage programs. Folks earning up to 165% of an areas median income, can now receive assistance. Sometimes with zero down payment! A realtor in upstate New York, touting the opportunity in a Sunday paper insert, characterized it as "free money". But to those unaware of the pressing need for affordable suburban McMansions (Fannie Mae Chairman Franklin Raines has used consumer demand for larger homes with more amenities, as one example of a market force making Fannie Mae necessary) or of difficulties the well off have purchasing investment properties in depressed areas with no shortage of empty buildings, shrinking populations and lower than average real estate prices, this sounds like a ridiculous perversion of the humane housing mission that Fannie and Freddie are supposed to fulfill. To some, it even sounds like a frantic effort to feed a bubble. One partially inflated by Fannie and Freddie themselves. With the socially destablizing side effects of enabling fraud and encouraging outsize debt.

A highly necessary, yet paradoxically low level link in the mortgage fraud chain is the purchaser. In some cases, those who become enmeshed are the absolutely vulnerable. Such as the mentally disabled, who have papers thrust before them and the "nice man" does the rest. Or people truly pressed for a decent place to live, dreaming of security but with little or no business acumen. Other buyers are totally bogus: employees of the seller, in the classic shill role. Others have hidden familial or business ties. And then there are "real" purchasers who hope they'll make a killing in the near future, when inflated values become actual values and climb still further. In the meantime, inflated property values mean bigger credit lines. Falsifying income statements, signing on to phoney purchase prices, etc. doesn't seem criminal-- just good business. Particularly when a kickback is involved or a neighborhood is rumored to be getting "hot". Along with this willingness to cheat goes belief in the magical power of incantation. Manifested in the conviction that inflated value become real value when drum boogied loud enough. A minor variation on a majorly evil political tune called "The Big Lie". One which has joined that old grifter standard "Free Money" at the top of the American Hit Parade. Perhaps as result of buying into the concept that truth is a strictly social construct.

In the bygone Soviet Bloc, some folks suffered from a feeling of claustrophobia brought on by living in a society based on lies. Not just the pressure to repeat them, but to believe and embrace them. Which leads back to the question: what event inspired the opening quote? Answer: Last Summer, floods devastated some of Europe's most beautiful old cities. One of them was Prague in the Czech Republic. When a subway collapsed, there was speculation that neglect resulting from political corruption, might have played a part in the collapse. In relation to this, a QT correspondent in Prague commented "Whenever disaster may hit, you may rely on an immediate and total response of one kind of damage control-- the kind that indicates that actually, it's no one's responsibility".

Thank God that here in the USA, we can pin the tail on the taxpayer.

Carola Von Hoffmannstahl-Solomonoff

"Nobody leads a charmed life"

Graham Greene

"What, me worry?"

Alfred E. Newman

*(However, in October of this year, the Baltimore City Flipping and Predatory Lending Task Force, a federally appointed group of government officials, real estate industry reps and housing activists, issued a report saying they've got the problem well in hand.)

** Conflicts of interest in property appraisals can be at least partially addressed by legislation. Whether at the state or federal level is a whole other debate. For instance, the question of universal licensing of appraisers at a federal level has arisen, because not all states require appraisers to be licensed.

Heads Will Roll: Part 2, will cover some recent incidences of "Mafia Capitalism" in Eastern Europe, plus developments in online journalism both there and stateside.

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Copyright (c) 2002 by Carola Von Hoffmannstahl-Solomonoff. This material may be freely distributed subject to the terms and conditions set forth in the Open Publication License. This license relieves the author of any liability or implication of warranty, grants others permission to use the Content in whole or in part, and insures that the original author will be properly credited when Content is used. It also grants others permission to modify and redistribute the Content if they clearly mark what changes have been made, when they were made, and who made them. Finally, the license insures that if someone else bases a work on this Content, that the resultant work will be made available under the Open Publication License as well.

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