California is the No. 1 state for mortgage fraud, according to the FBI's annual mortgage fraud report for 2008.
And the Sacramento metropolitan area has the dubious distinction of being the No. 9 foreclosure market in the country, fueling the fraud problem.
The FBI's Sacramento office is in the top five of field offices nationwide in dealing with mortgage fraud activity.
As Bee reporter Chelsea Phua noted in her Monday article on this subject ("Sacramento-area prosecutors focus on mortgage fraud crime"), law enforcement agencies have seen a significant increase in complaints.
Prosecution after the fact is one avenue, but policymakers also should pursue prevention.
One scheme is "foreclosure rescue," offering to save homeowners from losing their home for a hefty fee – usually $1,000 to $4,000, paid up front. Yet all homeowners should know that they can get help for free, either through their lender or from nonprofit mortgage counseling agencies certified by the federal Department of Housing and Urban Development.
Two bills making their way through the Legislature address this issue. AB 764 by Assemblyman Pedro Nava, D-Santa Barbara, and SB 94 by Sen. Ron Calderon, D-Montebello, are likely to pass. Then it's up to Gov. Arnold Schwarzenegger to pick one. Both are adequate, but AB 764 is stronger, banning the collection of fees until a homeowner actually gets a loan modification.
Another scheme exploits certain home equity loans that target older homeowners, known as "reverse mortgages." As the U.S. controller of the currency has noted, these loans are similar to the risky subprime mortgages that led to the current economic mess.
For example, these loans have higher-than-usual origination fees, closing costs and servicing fees, plus insurance premiums (worth about 2 percent of the loan) in case the value of the property falls below the amount owed on the loan. Many lenders try to condition loan approval on the homeowner's buying an annuity or life insurance – a major scam.
Two bills in the Legislature, AB 329 by Assemblyman Mike Feuer, D-Los Angeles, and SB 660 by Sen. Lois Wolk, D-Davis, tackle these practices – and the governor should sign one of them.
Then there is a coming wave of exotic loans still working their way through the financial system. So-called "Alt-A" and "Option ARM" loans that came with low teaser rates began to reset in April, will peak in late 2009 and continue to reset through 2011. With resets come increases in monthly payments and increasing defaults.
As the FBI report notes, these loans provide yet another "favorable environment" for expanded mortgage fraud activity.
In Sacramento, the U.S. Attorney's Office has established a task force to address mortgage scams, working with law enforcement agencies and local district attorneys' offices.
But enforcement alone cannot stop these practices. Basic consumer protections to prevent abuses still are needed.
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