Inquiry finds mortgage fraud at all levels

GREENVILLE — FBI supervisory special agent Jeffrey Bruning remembers driving up the coast of South Carolina two or three years ago and gaping at all the newly constructed buildings.

'I said, ‘Good Lord, who can afford all this stuff? Who are all these people?' ' he asked. 'And the answer was, a lot of them couldn't afford it. It was like a run on the bank. Everybody thought they couldn't lose.'

But many did.

When the housing bubble burst in South Carolina, state and federal investigators say, it left not only a trail of foreclosures but also unprecedented numbers of mortgage fraud cases.

'It's one of those things that hasn't gotten a lot of attention, but the numbers are staggering right now, and I think they are going nowhere but up,' said Reggie Lloyd, director of the State Law Enforcement Division and a former U.S. attorney for South Carolina.

Kevin McDonald, acting U.S. attorney for South Carolina, said many professions have been touched by the fraud, including bankers, appraisers, lawyers, builders, real state agents and mortgage brokers, as well as unsophisticated or greedy investors willing to falsify documents or participate in get-rich-quick schemes.

Sometimes home buyers are victims, he said, and other times they are willing participants.

'You can look to the economy,' McDonald said in explaining the wave of fraud. 'Individuals might be tempted by easy money to engage in fraudulent transactions. That coupled with a lack of enforcement makes it a crime we believe is on the increase and deserves more attention.'

One thing that makes South Carolina unique in mortgage fraud, McDonald said, is that the state has no law dealing specifically with the crime. That means many cases are referred to federal authorities.

Brandolyn Thomas Pinkston, administrator for the state Department of Consumer Affairs, which regulates mortgage brokers, said the agency ran a consumer hot line between June 2008 and August 2009 that recorded more than 500 complaints from individuals who said they were hurt by some type of mortgage-related scheme.

The agency stopped tracking the complaints due to budget cuts.

The state has long been known among federal authorities as fertile ground for mortgage fraud. In 2001, according to the Mortgage Asset Research Institute, the state led the nation in mortgage crime.

Since then, as state and federal authorities worked to attack the problem, the state's ranking dropped to the middle of the pack. In more recent years, the state has still been named by the FBI as one of the nation's 10 'hot spots' for mortgage fraud.

From 2004 to 2007, according to a state mortgage fraud report by Pinkston's office, federal prosecutors won convictions or plea agreements with 80 individuals in mortgage fraud crime in the state. Dozens more have followed since then.

Officials say mortgage fraud mushroomed after Sept. 11, 2001, when interest rates were cut, making home loans more affordable, and brokers began offering exotic loans. Some had adjustable interest rates or little or no money down. Mortgage business went from a gross of $400 billion in 1999 to an estimated $2 trillion to $4 trillion in 2006.

Along the way, authorities classified mortgage fraud into two general groups: fraud for housing and fraud for profit.

Fraud for housing involves buyers who falsify records, such as their income or credit history, to purchase a home. Fraud for profit involves more complex schemes involving multiple players to defraud lenders or others of loan proceeds.

Those schemes can include fictitious properties, fictitious buyers, 'flipping' properties by falsely appraising them at higher

values before selling them, misrepresenting investment property as owner-occupied property or using the personal identity of others without their knowledge or permission.

McDonald said another common scheme is labeled 'builder bailout.'

In such schemes, he said, builders of property who may have trouble selling will conspire with others to buy the property at an inflated price and then split the amount over the builder's cost. The loans in such schemes aren't repaid, he said.

Bruning said schemes often can victimize buyers who aren't aware of what is going on or who may rush into an investment.

'There are a lot of people who have no business getting into the investment game,' he said.

Anyone with mortgage fraud complaints can contact the Department of Consumer Affairs hot-line at 1-800-553-7723.