Lenders are being warned there's a higher risk of mortgage fraud in Stanislaus County than anywhere else in the United States, and it's almost as bad in San Joaquin and Merced counties.
The risk of borrowers ripping off lenders is twice as high in the Northern San Joaquin Valley compared with the national average, according to mortgage application data analyzed by Interthinx.
"When you talk about mortgage fraud, you're talking about bank robbery without a gun," said Ann Fulmer, Interthinx vice president of industry relations. "It robs a community of its value and security."
Interthinx analyzes mortgage applications for more than 1,100 lenders, running data through its computers to spot potential fraud.
Apparently, fraud is rampant in Stanislaus, where foreclosures are high and median home prices have fallen about 66 percent since 2005.
"Fraud flourishes in unstable markets," Fulmer warned. She said there was lots of mortgage fraud when the region's home prices soared several years ago, and now new scams are being used
to push down prices. "Fraudsters are really adept entrepreneurs,"she said.
Computer analysis is getting more sophisticated, too, enabling Interthinx to spot suspicious trends.
"We are seeing a resurgence of schemes involving real estate agents," Fulmer said. "We're seeing people manipulate the price down."
Interthinx has started publishing the Mortgage Fraud Risk Report for lenders, and the latest issue puts Stanislaus atop the list.
"It gives lenders an idea where they really need to pay attention," Fulmer said, "which allows them to take defensive action."
Stanislaus' real estate insiders are well aware of this type of fraud.
"Everybody recognizes we're the epicenter for this stuff," said W.R. McKenzie, Stanislaus' deputy district attorney assigned to real estate crimes. "It's not good for anybody who lives here, because everybody's house value is lowered ( because of artificial valuations)."
Mortgage fraud comes in many flavors. Basically, mortgage fraud is any material misstatement, misrepresentation or omission used to obtain a real estate loan. Lenders are the victims.
That's different from predatory lending, in which borrowers are victimized by lenders or mortgage brokers who put them into overpriced loans.
The hottest form of mortgage fraud in the Northern San Joaquin Valley involves bogus property valuations.
Fulmer said a lot of the fraud involves the resale of foreclosed bank-owned homes and "short sales," in which homes facing foreclosure are sold for less than their outstanding mortgage.
About two-thirds of the Stanislaus homes sold in January had recently been foreclosed and many of the others were short sales.
Fulmer said there are "flopping" schemes going on involving short sales and bank-owned homes. These essentially trick banks and lenders into agreeing to sell homes for substantially less than what they're worth.
Here's one way that scheme works, according to Fulmer:
A bank repossesses a home, then hires a real estate agent to resell the property. That agent secretly creates a limited liability corporation that offers to buy the property for a very low price.
Meanwhile, other interested buyers also submit bids for the home, offering considerably more than the LLC's bid.
But the dishonest agent tells the seller (which in this case is the bank) only about the low bid from the LLC. It illegally keeps the other bids secret.
Figuring that the LLC's bid is the best deal available, the bank agrees to sell for the low price just to get the foreclosed home off its books.
Then the agent immediately resells the house on behalf of the LLC to one of the other bidders for the house.
Say the home's fair market value is $150,000. The agent and LLC persuade the bank to sell it for $100,000. Then the legitimate home buyer pays the agent and LLC $150,000, netting the agent and LLC a quick $50,000 at the bank's expense.
"We call that double escrow," said Craig Lewis, president of Prudential California Realty in Modesto. "It is happening. ... These listing agents are not disclosing all the offers to the seller."
Or at least that's the widespread suspicion.
Lots of bids, but ...
Most Stanislaus homes for sale attract multiple purchase offers, sometimes 20 or more. Real estate agents commonly complain they have more willing buyers than available homes. Many hopeful buyers complain they've bid on 10, 15 or even 20 homes, but never have had their bid accepted.
Despite the tight supply and high demand, home prices continue to decline. Stanislaus' median home price dropped to $131,750 in January, which was the lowest price since the spring of 2000. By comparison, the median price hit $396,000 in 2005.
"It sounds like there's some kind of problem going on," McKenzie said about the home prices. He said the county's 18.9 percent unemployment rate and tight family budgets also affect home values. "There's a lot of stuff working on prices other than crime."
But a lot of real estate crime never gets reported.
Interthinx tells its lenders when it suspects there's fraud in a mortgage application, but the company doesn't inform law enforcement.
Banks, who are the victims, rarely report fraud to Stanislaus County prosecutors.
Real estate agents who suspect their clients' home purchase offers never were presented to sellers rarely investigate or report their suspicions to the state Department of Real Estate or their board of Realtors.
"We can't call the seller (to see if our client's offer was received)," Lewis said. "It's a violation of our Realtor's code of ethics to call the seller directly."
Agents can file complaints about suspected fraudulent activity by their colleagues, but they almost never do, according to Chuck Bukhari, president of the Central Valley Association of Realtors.
"All the agents are complaining verbally (about other agents involved in short sales and bank-owned properties). Unfortunately, nobody is willing to report it in writing," Bukhari said. "I'm shocked as much as you are. Nobody is coming forward. As president, it bothers the heck out of me."
Bukhari said "there are a few names everybody's mentioning" when real estate agents discuss fraud among themselves. But rather than filing formal complaints, he said, honest agents simply "avoid these people."
That's not good enough, Fulmer said: "Somebody has got to have the courage to stand up and say: 'Stop!' "
Fulmer said communities that don't band together to fight fraud will be targeted over and over by real estate scams.
"If somebody doesn't tell us, we're never going to find out and the problem is going to continue," McKenzie said. "We can't just guess what's going on out there. ... It would be nice if someone gave us a name and specific property so we could look into it."
Bee staff writer J.N. Sbranti can be reached at email@example.com or 578-2196.