Mortgage Fraud – From NY to Texas to Tennessee – Business Ethics Speaker Chuck Gallagher Reviews the Week

It’s all over…every where you turn, mortgage fraud and other fraudulent schemes seem to be uncovered. Let’s look at a few of the cases that caught my attention in this week in review.


In a Manhattan federal court six individuals were charged with a “home foreclosure rescue” scheme which defrauded homeowners of their homes and lenders of millions of dollars in bad loans.

“The defendants charged today perpetrated a multimillion dollar fraud in which they profited by preying on the most vulnerable of homeowners,” said United States Attorney Michael J. Garcia. “While promising rescue from foreclosure, they instead stole their victims’ homes and millions of dollars in loans secured by their victims’ properties.”

“This case is yet another example of the pervasive fraud we have found in the mortgage industry,” said Attorney General Andrew Cuomo. “My office investigated the scheme charged in this case in response to complaints from individuals who had been victimized and lost their homes. I applaud U.S. Attorney Garcia and his prosecution team for their excellent work and look forward to more productive partnerships with the Southern District of New York.”

“The rise in mortgage defaults associated with sub-prime mortgage lending has created a target-rich environment for so-called foreclosure rescue schemes,” said FBI Assistant Director-in-Charge Mark J. Mershon. “We will continue to root out the predatory practices of those who would victimize distressed homeowners and unwitting lenders for a fast and easy (and illegal) buck.”

Same week, we find in Houston, TX – 37 individuals charged with mortgage fraud.

According to the Associated Press:

The charges, contained in indictments unsealed Thursday, follow a yearslong investigation by the Harris County District Attorney’s Office and the U.S. Secret Service. Police said 12 of the suspects have been jailed.

The scheme involved players including buyers, mortgage brokers and construction company owners. It’s similar to other scams uncovered in Harris County recently, said Lester Blizzard, assistant district attorney.

Then in Tennessee a woman pleads guilty to a fraud scheme where she provided fraudulent data to obtain a mortgage loan. Her guilty plea relates to bankruptcy fraud, money laundering, fraudulent use of a social security number, and identity theft.

According to the mortgage fraud blog:

At the plea hearing House admitted to providing false and fictitious statements and information to obtain mortgage loan financing to purchase 523 Tribal Land Cove, Collierville, Tennessee in 2001. The fraudulent items included a false social security number, fictitious employment income, and omitted a bankruptcy declaration. House admitted to filing a bankruptcy petition in 2003, to maintain possession of the Tribal Land Cove property and to conceal the scheme. House also admitted to providing false and fictitious statements and information to obtain mortgage loans to finance the purchase of 664 Ridge Springs, Collierville, Tennessee in 2005; and, to engaging in financial transactions with the proceeds obtained through that scheme.

The three components of most any fraud are: (1) need; (2) opportunity and (3) rationalization. As a business ethics speaker I know first hand the components and the consequences of an ethics violation.

In all three of the cased listed above there are several common threads. First, at least in two of the cases, greed and misdirection allowed “straw purchasers” to facilitate the fraud. These people, who have now had their credit ruined, likely sought better than average returns and fell prey to bogus fraudulent presentations. The “unsuspecting” participant (victim) felt they had a need and this “investment” provided an opportunity. Higher than average returns justified the risk (their rationalization).

Opportunity comes in many forms. It appears that, in the rush for increased business, lenders were less than vigilant about documentation. Perhaps internal controls weren’t there or perhaps they weren’t wanted – as often internal controls are perceived as anti-sales and anti-growth. Yet, lack of proper controls create the environment for “opportunity” and thereby aid in the advancement of the fraud.

From coast to coast as I speak to groups on business ethics, I find that simple procedures and processes could have prevented most frauds or at least not allowed them to go undetected.

As we are seemingly in the throws of a housing slow down or “recession” many say – it was predictable. Regardless of industry, when things are operating at a frenzied pace and money (lending in this case) seems easy – maybe even too good to be true – one can expect problems. Mortgage fraud isn’t new, but in the environment we have just passed through, I think we’ll see more of this for some time to come.

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