No quick fix on mortgage fraud

Such deception already illegal

Published January 14, 2007 at midnight

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Attorney General John Suthers, teaming with a couple of legislators, is promoting a bill aimed at cracking down on the fraud that results in unjustified housing loans and subsequent foreclosures.

Among other things, the proposed bill would give the division of real estate the authority to deny, or revoke, the registration of mortgage brokers who have been found by a court to have engaged in deceptive practices.

It will also prohibit mortgage brokers, lenders, real estate agents and investors from paying or trying to coerce an appraiser into producing an inflated appraisal - the weapon of choice when perpetrating fraud. Appraisers themselves would be punished when found knowingly submitting a false appraisal.

We hope the bill does some good. After all, Colorado is said to have a disproportionate share of foreclosures.

Still, we can't help but feel that it's as much political grandstanding as substantive reform. As one critic says, going after appraisers is just "nibbling around the edges."

The fact is there are already plenty of laws, federal and state, aimed at fraud in the mortgage business. But prosecutors at both levels of government have been reluctant to take on the cases - despite repeated pleading.

At a seminar covered by the Rocky's John Rebchook last fall, lawyers, brokers and real estate agents complained the state isn't doing enough to crack down on mortgage fraud. James Spray of America's Mortgage said bringing fraud cases to the AG "is like complaining to a black hole."

Granted, the cases are difficult, and the AG's office complains it hasn't got the staff and funds to prosecute many fraud cases. Still, there has to be a will to go along with the way.

Former Sen. Bill Armstrong, who's been in the mortgage business, believes the new laws will do little good because they don't go to the root of the problem. "It's nothing but political hot air," he says.

The larger problem, he argues, is government-guaranteed housing loans.

"Our government encourages people to get into deals they can't afford," he says. In order to expand home ownership, the VA and the FHA put people into houses with little or no down payment.

It may be a legitimate public policy, he says, but if you accept it, you'll have to accept the high foreclosure rates as well.

"If it weren't for the government guarantees very few of these loans would get made," Armstrong argues.

The policy encourages plenty of scam artists who are eager to help foolish borrowers leap into the quicksand.

John Head, an attorney familiar with the industry, says enorcement is lax because the lending agencies quickly sell the loans and they end up on Wall Street as part of an investor's portfolio - an investor who has no idea default is likely. Once the loan is upstream the original lender doesn't care what happens. Head suggests the federal government should change its policies so that if there's a default on a loan, it gets charged back to the original lender.

Another problem: Truth-in-lending laws allow teaser ads that don't tell borrowers what they're getting into.

Let the legislature pass the additional anti-fraud laws. But Congress should also end the policies that encourage the scam artists.

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