by Tanta on 6/16/2007 09:20:00 AM

The New York Times has a marginally interesting article out this morning on mortgage fraud, "Web Help for Getting a Mortgage the Criminal Way." It's in the technology section, not the business section, apparently because the focus is on websites that quite brazenly advertise fraudulent services--fake bank statements, fake pay stubs, credit report "piggybacking"--and that makes it a technological problem.

Want to buy a home, but hampered by bad credit, an empty bank account or no job? No problem!

That may sound like an exaggeration of a late-night infomercial. But it is, in effect, the pitch that a number of Web sites are making to consumers, saying insolvent home shoppers can be made to look more attractive to lenders.

You know, it does rather sound like an infomercial. And one of those four-color flyers I have to pluck from under my windshield wipers periodically. Sure, my own spam burden is overwhelmingly black-market prescription drugs, Nigerian princes, and religious visionaries, but I get the odd home equity loan solicitation. Not one has yet offered to rent me a bank account, but it's probably best to get ahead of the trend.

Industry experts say these sites, which are relatively new, played a role in fueling the rampant mortgage fraud that has caused a huge spike in loan defaults in recent months because people bought homes they could not afford. . . .

Regulators and the mortgage industry are now vowing to crack down on aggressive lending practices that have led to a rising number of foreclosures. But that greater scrutiny, including lenders requiring more documentation than they have in the past, may actually increase demand for some of the services that these Web sites offer.

We went for a long period of time not requiring any documentation of income and not requiring any downpayment. This created quite the problem. Apparently some people are willing to claim that websites providing false documentation of income and assets had something significant to do with that. Now that the regulators are going to make us go back to verifiying stuff, the websites that offer a service that wasn't that necessary under the "stated" regime will now have some demand. Okay.

“We think these types of Web sites are increasing,” said Frank McKenna, chief fraud strategist at BasePoint Analytics, which helps banks and mortgage lenders identify fraudulent transactions.

Policing them is difficult, partly because it is unclear which laws, if any, the Web sites might be breaking (for their customers, though, the laws are clear — anybody who uses fake paycheck stubs or other false documents to misrepresent financial status to a bank or mortgage lender is committing fraud).

The people who operate these sites can also be hard to track down. At the first whiff of trouble, they can easily shut down and then quickly start a new Web site with a different name.

No statistics exist on the number of these Web sites and how many people use them, or whether any of the operators of such sites have been prosecuted.

An examination of loans made last year, including prime and subprime, in which some sort of fraud occurred, showed that incidents of false tax or financial statements had risen to 27 percent from 17 percent in 2002; fraudulent verifications of deposit had climbed to 22 percent from 15 percent four years ago; and false credit reports rose to 9 percent from 5 percent in 2002, according to a report issued this spring by the Mortgage Asset Research Institute based in Virginia.

If any documents were required, it was unclear whether the bogus documents were created by do-it-yourselfers or whether they turned to the products and services sold over the Internet.

Still, Joan E. Ferenczy, director of institutional investigations at Freddie Mac, said there had been a growing discussion in recent months among industry investigators about Web sites offering false identifications and income statements.

“Either it has been underground all along, or there has been a spike of activity there,” she said.

A representative of a company that will sell you web-based software that will help you find web-based fraud will tell you that "we think" this problem is on the rise. We have no statistics on that, of course. We aren't sure if most of these fraudulent loans even required any documents. If they did, we don't know whether folks were buying fake paystubs on the net or just creating the sort of perfect tax returns any hobbyist can do with a copy of TurboTax and a few hours of free time. According to Freddie Mac, it's either been there all along or it hasn't. There's a foolproof rhetorical strategy.

One service that appears to have grown exponentially in recent months, investigators say, are sites that offer to improve an individual’s credit score by adding them onto the credit cards of individuals with good credit scores and histories.

The practice, known as piggybacking, started innocently enough with individuals adding their spouses or children to their credit card accounts as authorized users.

This credit-card piggybacking thing has, of course, been all over the news lately. I only wish to say that I don't actually know many people in the mortgage industry who thought that this authorized-user business "started out innocent." Nobody I know has ever objected to parents who wish to help their children establish a credit history by co-signing loans or acting as joint applicants on a credit card. In those cases, the child is the primary user of the credit account, receives the bills, and is responsible for paying them; only if the primary account-holder fails to pay does the creditor go after the co-signer or joint applicant. There is, therefore, some presumption that if the account is paid as agreed, the child was managing to get that accomplished. This "authorized user" thing has never been anything other than worthless for establishing a child's credit standing; the authorized user can make purchases with a card, but does not get the bill and is not responsible for paying it. Authorized user accounts should never have been included in FICOs to start with; that's a Fair, Isaacs problem. And middle-class parents who want their children to inherit a credit history instead of establish one should be told to flake off. But is anyone examining the "original" corruption of the system of middle-class entitlement here? Nope. Evil websites make for better copy.

We get another example:

One Web site that prompted mortgage regulators in Nevada to issue an alert to consumers and the mortgage industry two years ago offered to set up a bank account that could be “rented out” and verified to creditors or lenders at a cost of about 5 percent of the value of the assets. The people renting the assets did not actually have access to them.

While that site has disappeared, fraud experts say others have moved in to replace it.

“We’re seeing now a lot of checking accounts where funds are going in and out,” said Mr. McKenna of BasePoint. “Borrowers begin the month with $4 in the account and end the month with much, much more.”

No, for real? Are we seeing a lot of fake checking accounts with highly suspicious deposits, or just a bunch of real checking accounts with highly suspicious deposits? Are we all aware that there have been checking accounts with highly suspicious deposits since the invention of the checking account? That the reason why, in them bad old days, we used to require three consecutive most recent months' worth of bank statements from borrowers was to catch stuff like that? Or that while it might require a nefarious website for someone to scrape up the money to appear, temporarily, in those accounts, it has a tendency to be pretty damned obvious when you see the statement with the $4 starting balance and the $50,000 ending balance? That the cost of this particular fraud does become prohibitive when lenders merely ask to see three statements instead of one? That a moderately-awake underwriter trainee can usually compare bank statement deposits to, say, pay stubs, and catch most fake bank statements pretty quickly? That a moderately-awake closing agent can merely require that the check brought to closing be issued from the account verified on the application to put a stop to a great deal of this? That you can do things like this without buying fancy web-based fraud-detection software?

For $55, for example, the company that operates VerifyEmployment .net will ostensibly hire a person as an independent contractor, providing a paycheck stub showing an “advance,” with the corporate name and address. Another $25 will assure telephone verification of employment when a lender calls to check.

Last year, a Florida-based company that operated a Web site called NoveltyPaycheckStubs.com agreed to stop using the name of the payroll company ADP after it was sued in federal court by ADP for trademark infringement.

“It is plain that defendants are peddling counterfeit ADP earnings statements for others to use to engage in fraudulent financial transactions,” ADP claimed in its lawsuit.

NoveltyPaycheckStubs.com has since disappeared, but people looking for fake IDs or payroll stubs can still find them at FakePaycheckStubs.com.

I know, I know. You're going to tell me that it is insane for a lender to use a paystub to verify the employment of an independent contractor. Why yes, it is. For some decades we have been requiring those folks to come up with tax returns. And in a somewhat more recent (approximately five-year-old) technological development, we've been able to make them sign that neat little IRS Form 4506-T that can return the transcript of the actual tax return filed within 24 hours. And a simple request for a bank statement that shows the amount of that paystub deposited somewhere will usually stop this one in its tracks. That is, the ones you don't catch by the simple expedient of making that phone verification of employment only with a phone number you can independently find in the phone book, not just off the paystub. But we stopped doing sensible things like that. And therefore fly-by-night websites are to blame.

Of course technology advances. It is much easier to forge a W-2 with a high-quality color printer and a decent piece of desktop publishing software than it used to be with a 9-pin dot matrix and Lotus 123. That the mortgage industry should have decided to utterly relax its customary and time-tested methods of verification, documentation, and elementary vigilance right at the time that the internet made it easier for buyers of forgery to meet up with sellers of it does, you know, seem a bit odd.

To blame the perfectly predictable and in fact predicted blowup in recent mortgage vintages on some small-time internet crooks, even tentatively, does, you know, seem a bit convenient. I hasten to add, ritually, that of course fraud is fraud and that it's no less illegal just because lenders appeared to be up on their hind legs begging for it. The Nigerian scam is illegal, and should be. But how much sympathy do most of us have for people who fall for it? Well, some, perhaps, if those who fall for it are innocent, gullible, not highly-sophisticated souls who just got their first Yahoo! email account.

You know something's being pulled over on you when the mortgage industry is willing, implicitly, to allow itself to look like a bunch of innocent, gullible, not highly-sophisticated souls who just got their first Yahoo! email account. This reminds me of those famous CEOs who earn their obscene millions of dollars a year in compensation by apparently having no idea how their business works or what goes on in it on an average day. Or at least that's what they've asked a few courts of law to believe.

So, yes, I am violating my "No Enron Comparisons" rule here, but I think I have a good reason for it. It is appropriate to ask how the $10 trillion mortgage industry can be so unsophisticated as to be completely helpless in the face of some pissant internet crook with a fake ADP logo jpg. Either we're the grownups in this situation or we aren't. There will always be a small amount of really good, really sophisticated fraud that will be hard to detect. Any industry who wishes to get you to believe that it is the hapless victim of this kind of crudity on a major scale is willing to look pretty stupid. You would want to ask why.