My how times change. Just a few short years ago the economy could do no wrong. People commented about the large movement in the housing market “caused” by the Baby Boomers. Baby Boomers were buying second homes, downsizing, and making room for the next wave of new home buyers – or so we thought. But hind sight is 20/20.
Perhaps less of that was true that what we thought. Looking back there were many artificial factors in play that were, in my opinion, a clear violation of what most people would say are sound business ethics. As a business ethics speaker, I know as I consult with companies frequently who want to know how to get out of some of the messes that have been created.
No where is this more evident than in the mortgage and banking industries. And let me be clear – WHERE THERE IS A BREACH OF BUSINESS ETHICS – THERE IS FRAUD. When companies turn their back on maintaining a strong ethical foundation for themselves and their employees, they run the very real risk of exposing themselves to fraud. And, no one that I know of wants to be on the back end of a very messy fraud investigation.
As an example, the Dallas Independent School District has been dragged through the mud with all that has taken place – FBI investigations for fraud and all. Now the DISD is not a bad organization, in fact, it does good work and should be proud of its place in the community. But, with lax controls and an environment that did not fully promote ethical behavior, it was clear that when temptation was presented the obvious outcome would be fraud.
Now the question is – what does the Dallas Independent School District have to do with mortgages and banking? NOTHING! Rather, it serves only as an easy example of how an otherwise good organization can be featured in a negative light – and that is because of the choices they made.
The larger question is – with the economy where it is today, which banking institutions will survive and which will implode under the weight of the poor choices made during what appeared to be more “healthy” times? There wil be bank failures as this “recession” and, yes I called it a recession picks up steam. We are no where close to the end with more unpleasant news to come.
Frankly, that is the question that the business community should be asking! It has been said over and over, only the strong will survive.
When there is an economic downturn there will be FRAUD. Make no mistake that is a given. There are three elements involved in most frauds: (1) need; (2) opportunity and (3) rationalization. When the economy goes south…there is NEED! That is the first step and if ever there has been a time when NEED is growing – it is NOW!
Here where the ethics equation comes into play. NEED alone does not create fraud – it is just one component. If the opportunity is eliminated then the fraud cannot happen. That’s where a commitment to ethics and fraud awareness come into play. As a business ethics speaker and fraud prevention consultant, I (and certainly I am not the only one) help businesses understand how to create a culture that supports “doing the right and ethical thing” – I call it MOTIVATIONAL ETHICS; and, looks carefully at methods to eliminate opportunity. If the business promotes ethics and reduces opportunity there will a strong chance that it will survive and become stronger – even during poor economic times.
MORTGAGE FRAUD TWISTS:
CNN did a great article on several new twists in the ever changing mortgage fraud arean. Bank and financial instititutions be aware. The mortgage industry is in a state of disarray and as such there is definitly a NEED (one of the components of fraud).
Here are the three that CNN reported:
(1) under-appraising property values:
These schemes involve short sales, which come up when a struggling homeowner is “underwater,” or owes more on his mortgage than the home is worth.
When done legitimately, the owner sells the home for the lower market value, and the lender agrees to accept just that amount and forgive the difference.
When illegitimate, fraudsters fake very low appraisals for the homes and use those appraisals to justify low short-sale prices – well below true market values.
If busy bankers don’t check the appraisal closely, they may agree to sales of homes that should be worth $200,000, for $150,000 or even less.
The buyers – in cahoots with the owner – then flip them for a big profit.
Over the past four months I have seen, through my consulting work, a tremendous increase in “short-sale” interest – and that is something that many financial institutions are ill prepared to deal with. It is new to them and an area ripe for fraud.
(2) Liar Loans:
“Liar loans are now fully documented – but with really good fraudulent documents,” according to the CNN article.
In one case investigated by Interthinx, a New York man buying an investment property in Georgia provided documents that showed double his actual salary.
Advanced information technology and photocopying equipment have gotten so accurate that very convincing papers, including income statements, savings accounts and tax returns can be produced on demand.
Scams that misrepresent income or employment are still the most common type of fraud.
(3) Buy and bail:
Example: You’re underwater on your mortgage and want a new, cheaper home down the block. You could just bail on the existing home, but no lender would give you a mortgage for the new one. So you tell the bank you plan to rent out the current home – even though you have no intention of doing so.
“This is a very difficult scam to pin down,” said Jennifer Butts, a spokeswoman for MARI, because the rental agreements that borrowers proffer may not be scrutinized by lenders.
The Federal Home Administration announced in late September that it hoped to head off many buy-and-bails by no longer insuring mortgages if the homeowners had existing loans – unless they could show enough income to pay off both loans simultaneously.
Now, just because a home is rented does not mean a scam is taking place. For example, my wife and I just sold a home in Dallas, TX and moved to Raleigh. It is a “buyers” market there, so rather than make a hasty decision, we elected to rent a home. Turns out that the landlord bought another home and was unable to easily sell the one we rented. This is an example of a legitimate transaction. However, the action by the FHA may add undue stress on an otherwise tight market – just in an effort to eliminate opportunity (the second part of the fraud equation).
WHERE FROM HERE?
(1) Honestly evaluate you and/or your company’s commitment to ethics. Everyone says they beleive but the real question is – what have you done to set the right tone? By that question, I don’t mean what have you done to comply with the law, but is there a tone of ethics in the company?
(2) Have you or the company done anything within the past year to raise ethics awareness or fraud awareness? Seminars, workshops, team meetings, on-line awareness programs – to name a few – are visible symbols of a company’s commitment to a foundation of solid business ethics.
(3) Has an evaluation been done to consider what opportunities for fraud may exist and more importantly – how to eliminate or reduce them?
Now is the time for businesses who want to survive to take action. Failure could be catastrophic as the “perfect storm” is rising for business fraud and ethics failures. One thing is true…YOU DON’T WANT TO BE IN THE HEADLINES ON CNN TOMORROW FOR AN ETHICS FAILURE!