Lax oversight spurs foreclosures

Lax oversight spurs foreclosures

Mortgage brokers not licensed
Ron French / The Detroit News

As Michigan's foreclosure crisis was growing in the fall of 2006, state legislators jumped into action.

They took money away from the state office that investigates mortgage fraud.

To help alleviate a budget deficit, the Legislature raided $7 million from a fund set aside by law to pay the salaries of mortgage examiners. It would have been enough to increase the number of examiners six-fold.

Diverting money from the policing of mortgage companies is the latest example of the state's laissez-faire attitude toward the industry, a Detroit News investigation found.

Lax regulations, an undermanned examiners office and reluctant prosecutors turned Metro Detroit into a hub of fraud, where con men and those on the fringes of the law steered buyers into loans that increased the odds of foreclosure.

"There was a belief that unbridled competition would deal with this problem," said Rep. Steve Tobocman, D-Detroit, who has been frustrated in past years by the failure of the Legislature to address a lack of oversight of home loans. "There was a knee-jerk reaction to regulation. Now that the crisis has hit, there's more attention being paid."

Metro Detroit has one of the highest foreclosure rates in the nation, with more than 70,000 homes in some phase of foreclosure since January 2006, according to RealtyTrac data. Michigan's recession and nation-leading unemployment rate are typically blamed for the state's housing meltdown. Less known is the role of state government in a crisis where, in Metro Detroit alone, foreclosures were filed at a rate of 10 per hour in August.

"There's not enough regulatory presence in the marketplace," said Kirt Gundry, director of the state's Office of Financial and Insurance Services, the office charged with monitoring the mortgage industry.

"A lot of the brokers tell us there's no one out there to police them."

There are only 12 examiners to monitor 2,800 licensed mortgage companies. The state had six examiners until this year. Compare that with the 42 bank examiners Michigan employs to keep an eye on 136 banks.

Exams typically take four months or more, meaning it would take the state's reviewers 77 years to get to every mortgage company.

The lack of examiners forces the office to perform a kind of triage on mortgage fraud complaints, investigating only the most egregious cases. In those exams, investigators find fraud in 80 percent of the mortgage companies reviewed. With more examiners, they'd find even more, said Heidi White, lead mortgage examiner for the state.

"We have a number of cases that we would like to pursue, but we don't do it as timely as we'd like because of the lack of resources," White said.

Gundry believes the state could triple the number of mortgage examiners and still struggle to police the unwieldy industry. Even though the salaries of those examiners would be paid through fees from the mortgage industry, thus not costing taxpayers anything, legislators have not agreed to add staff.

Even though it's not coming out of the state budget, the positions are still considered full-time positions, meaning the department must jockey for jobs with other state offices.

No license? No problem
When Lolita Haley ran a barbershop on Livernois in Detroit, she needed a state license to trim bangs. But no license was necessary when she changed the sign outside her business from Lolita's Salon to Prime Financial Plus and began selling mortgages.

Haley earned a Realtor's license to sell real estate as part of her business, but she and the state's other estimated 30,000 loan officers don't need any training, licensing or monitoring to do business in Michigan.

Because the state does not license loan officers, no one knows who is selling mortgages. Michigan is one of 12 states that does not require background checks of those selling mortgages, allowing convicted scam artists to ply their trade with relative impunity. Those who want to be fair to customers seldom have training in the intricacies of home loan laws or government programs that often offer better interest rates to low-income buyers.

It was only after Nicole Jackson left the mortgage industry that she learned some of the home buyers she steered into risky, high-interest loans may have qualified for safer, lower-interest government loans.

"Maybe MSHDA (Michigan State Housing Development Authority, which offers home-loan programs) didn't have the budget to advertise," said Jackson of Detroit.

"I know they never came to my office to talk about their programs."

Those who defraud home buyers or lenders stand little chance of getting caught.

Even in the rare cases when mortgage companies are investigated, those examinations often lead to relatively minor victories, such as issuance of prohibitions against individuals operating as loan officers. Mortgage companies are by law not allowed to employ loan officers who have been issued prohibitions, but since there is no licensing of loan officers, it's difficult for the state to say whether the prohibited officers have been re-employed.

Loan companies only know if an employee is prohibited from being a loan officer if they looked at a list published on the Office of Financial and Insurance Services Web site.

In the past four years, 38 people have been prohibited from being loan officers, but there are glaring absences from the list. Bashar Farraj and Samer Fawaz pleaded guilty to a mortgage scam in federal court in Detroit and killed a fellow loan officer when the scheme was about to be revealed. Yet Farraj and Fawaz are not prohibited from selling mortgages after they serve their 20-year murder sentences.

Safi Sobh ran a mortgage fraud class, where he taught con men how to scam hundreds of thousands of dollars out of lenders. He's now serving 10 years in prison, but has yet to be prohibited from re-entering the business when he is released.

'No one is going to jail'
In other cases, state financial services examiners have uncovered evidence of massive fraud conducted by loan companies, only to find their investigation ignored by county prosecutors and the Michigan Attorney General's office.

Examiners shut down Financial One LLC after finding evidence that the company and its employees had stripped almost $1 million in equity from at least 39 homes in Detroit and Dearborn. Yet that case has yielded no criminal charges.

"There hasn't been an interest in pursuing smaller fraud crimes," White said. "The FBI, the Secret Service, they've been busy with terrorism (investigations)."

Cases are complex and time-consuming. Prosecutors must shoe-horn mortgage fraud cases into one of several different types of fraud crimes, because legislators have never made mortgage fraud a crime of its own.

Gundry, head of the state's mortgage monitoring agency, said he is frustrated by the lack of mortgage fraud prosecutions brought by the attorney general.

"We've been giving them cases on a silver platter," Gundry said.

The state's chief law enforcement officer pointed the finger back at Gundry, claiming OFIS has only referred one case to the attorney general's office for prosecution. "If it's a silver platter, it's pretty empty," AG spokesman Matt Frendewey said.

After a press conference Wednesday in Detroit announcing a forum on avoiding foreclosure, Attorney General Mike Cox told The News he asked OFIS in May to pay the cost of an attorney dedicated to investigating mortgage fraud and OFIS officials declined. "They figured this wasn't worth paying for," Cox said.

In a news release from Wednesday's press conference, Cox said he "continues to work on ways to help Michigan homeowners through this rough time and let them know that they are not alone in the fight to save their home."

Cox's office currently is prosecuting one mortgage fraud case, with other cases being investigated.

"There's a frustration level that no one is going to jail," Gundry said.

"That's one of the keys in fighting mortgage fraud -- for people to see there are consequences."

While mortgage companies aren't supposed to hire people who have been issued prohibitions, there's nothing to stop companies from hiring loan officers who have criminal records.

"As state employees, we can only do what the statutes say," Gundry said with a shrug.