By Representative Ken Paxton
Published: 10-20-08
Tackling Mortgage Fraud in Texas
Mortgage fraud which is strongly linked to foreclosures and early payment mortgage defaults is a serious problem in Texas. In a 2007 report by Radian Guarantee Inc. Texas ranked third in the nation for instances of real estate mortgage loan fraud. Only Michigan and Georgia have more instances of mortgage fraud than Texas.
The problem is particularly acute in the Dallas area. Three hundred reports of suspected mortgage scams were received by the Dallas FBI in 2005 alone and more than 600 mortgage fraud cases are currently being investigated by the Dallas County District Attorney’s Office.
In March 2007 eight defendants including investors mortgage lenders a loan officer and an escrow officer were charged on 17 counts related to a mortgage fraud scheme operating in the Dallas area. In December a Dallas businessman and an escrow officer were convicted for a $7 million mortgage fraud scam. In September businessmen from McKinney and Frisco were convicted of a $3.3 million mortgage loan fraud.
The most common fraud generally involves a ring of buyers sellers and real estate insiders who use fraudulently-inflated property appraisals to apply for large residential mortgage loans. The amount of the mortgage loan that exceeds the true purchase cost of the property is then typically split between the perpetrators who default on repayments and allow the bank to foreclose on the property.
According to the Texas Department of Insurance fraudsters can also victimize homebuyers who are left with over-inflated mortgage payments once transactions have been completed. $40 million of mortgage fraud of this kind was behind indictments of eight individuals in the Houston area last year; the indictments related to mortgage fraud scams on over 300 properties.
Despite these indictments and convictions it was clear that legislative action was necessary to enhance the capability of law enforcement agencies to detect and prosecute mortgage fraud. Therefore last legislative session the Legislature passed House Bill 716 which was signed into law by Governor Perry to protect homebuyers against mortgage fraud.
This new law which I supported requires that every applicant for a mortgage is informed of the penalties for providing false or fraudulent information and also demands that all instances of suspected mortgage fraud are reported to the relevant authorities. Importantly the bill provides a clear definition of mortgage fraud and establishes tough penalties – up to 99 years imprisonment for anyone convicted. The legislation also increases the statute of limitations to seven years which will allow for more cases to be successfully prosecuted.
In order to ensure that the state can adopt an organized approach toward tackling this problem the bill establishes the residential mortgage fraud task force which gives the Attorney General responsibility for overseeing mortgage fraud reporting prevention and detection and for coordinating the anti-fraud work of the Texas Real Estate Commission and the Department of Insurance (TDI).
Despite widespread reports of mortgage fraud in Texas the exact number of reported cases each year is unknown. The residential mortgage fraud task force will provide an accurate assessment of the extent of the problem and will provide law enforcement officials and the relevant state agencies the information they need to address the problem.
These reforms are important. Fitch the global rating agency recently reported that as much as 70 percent of early payment default loans contain elements of fraud on the initial mortgage application. At the state level cracking down on fraud is one of the best ways to combat the current mortgage crisis.
There is still work to be done – like ensuring that district attorneys have the resources that they need to successfully prosecute the perpetrators of mortgage fraud – but HB 716 is a strong start to help ensure that Texans’ pursuit of the American dream doesn’t turn them into crime victims.
