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Special Reports
Mortgage Fraud
ASF Hosts Fraud Chat
By Brad Finkelstein
NEW YORK--It is difficult for investors to make a monetary recovery from a fraudulent
mortgage loan, an attorney said at an American Securitization Forum seminar here.
At the session, called "Mortgage Fraud Prevention--Tools and Resources for
Secondary Market Participants," Karen Gelernt of Cadwalader, Wickersham & Taft LLP said unless there is
a party with deep pockets, investors will not be able to be made whole if they purchase a fraudulent loan. This
usually precludes going after the originator because they lack those deep pockets.
Usually the secondary market is able to resell the loan in "scratch and dent"
packages to firms with expertise to resolve the situation, but that is at a deep discount. A problem with using
the judicial system as a remedy is the investor has to prove intent, which is difficult.
"After-the-fact" legal enforcement provides some satisfaction, she said,
but the money is not there to make the investor whole.
Another issue, Ms. Gelernt said, is that the secondary market has been willing
to accept fewer pieces of paper to document the loan file. This makes it easier to perpetrate fraud, because it
makes it tougher to verify the loan actually exists.
Dennis Kiefer, a director in the forensic and dispute services practice of Deloitte
Financial Advisory Services LLP, provided a look at fraud data from Fannie Mae over a period several years.
In times when the mortgage industry was "buoyant," he said, appraisal-related
issues made up a higher percentage of Fannie Mae findings on the causes of misrepresentations in loan files compared
with borrower-related issues.
A good starting point to look for fraud, he said, is to look at loans with higher
loan-to-value ratios. Over 50% of the loans that had income misrepresentations also had an LTV over 90%, with 46%
having an LTV over 95%.
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