Gangs Find New Source of Revenue: Mortgage Fraud

The housing boom of recent years has turned mortgage fraud into a big business — so big that some of the nation's largest gangs are getting into the act.

It is hard to get precise numbers on just how much mortgage fraud there is. The FBI recorded more than $1 billion in mortgage fraud losses in fiscal 2005, but even that number is thought to be understated.

"Our lenders tell us that figure is very much on the low end of the scale," says Corey Carlyle, senior director of government affairs at the Mortgage Bankers Association. "I've seen figures as high as $4 billion, and again, that is just what it cost the industry in 2006."

And while street gangs only account for a portion of that, the fact that they have moved to mortgage fraud as a money-spinning enterprise worries law enforcement officials. They say it is part of a larger trend: gangs searching for ways to launder drug-dealing and gun-selling dollars.

Chicagoland, the city and the surrounding Cook County area, has been one of the areas hardest hit by the intersection of gangs and mortgage fraud.

Consider the Black Disciples gang: Some of its members were involved in a case of mortgage fraud a couple of years ago. The price tag for that case alone: $70 million.

Jim Wagner, who previously investigated white-collar crime cases for the FBI, is now the president of the Chicago Crime Commission.

"We had information from the FBI about Vice Lords [another Chicago-area gang] that there was perhaps $80 million in fraudulent mortgage activity," Wagner says. "So it has been a significant problem, at least in the greater Chicago metropolitan area, and I suspect it is occurring in other cities, as well."

It is unclear exactly how gangs migrated from street crimes to white-collar ones. Law enforcement officials suspect that tougher gun laws and sentencing guidelines may have played a role in the shift. When street gang members were sentenced to serve time in federal institutions on gun charges, they got an unexpected new criminal education from the inmates incarcerated there.

"All of a sudden they were talking to and meeting with a different class of criminal, some who had participated in financial fraud themselves," Wagner says.

The idea was to break up the gangs so they couldn't reconstitute themselves behind bars. The unexpected result was the addition of released gang members to the ranks of white-collar criminals.

Wagner says white-collar criminals made a good case: They told gang members that they could make more money and do less jail time if they focused on fraud instead of guns and drugs. And that small epiphany, coupled with a red-hot housing market and cheap money, created the perfect storm of conditions for mortgage fraud.

Joe Ways, another former FBI fraud expert, says many of the scams now start with gangs getting a mortgage on a property they already own.

From there they "get an inflated appraisal for it, resell it a couple of times over, and when they think they have run the course on that scheme on that particular property, they just walk away from it, and walk away from the mortgage," he says.

The scheme affects more than just lenders. Innocent buyers are hit, too. The crooked appraisals have a ripple effect: "Comps" — or comparable assessments — made on the value of other houses in the neighborhood yield inflated prices. That means innocent buyers end up overpaying for their houses and are saddled with an overvalued, hard-to-sell property.

And the gangs seem to be staying one step ahead. The Mortgage Bankers Association's Carlyle says the simpler schemes are getting more complicated and harder to track.

"There is no limitation to the ingenuity of fraudsters and criminals," Carlyle says. "I am hearing cases about appraisers' identities being taken so a very qualified appraiser may not know that they are approving appraisals being made in their name."

The Chicago Crime Commission's Wagner agrees that the problem is getting harder to battle. The gangs are covering all the angles.

"They have even created some of their own companies," Wagner says. "They are adept at creating paperwork and identifications and creating pay stubs and W2s and fictitious employers."

In other words, they can create all the paperwork needed to get a loan. And it is here where one might find the only bright spot in the recent credit squeeze that has made loans so hard to get: Wagner says gangs trying to push their mortgage fraud schemes are having trouble getting those loans, too.

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