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Trial by Press Release Another Example of Poor Journalism

Part 1 of 2

Lend America and Mike Ashley have been charged with massive fraud by HUD. But the trail starts almost 20 years ago.

Just a bit of background here. Fraud risk in the mortgage industry surged more than 11 percent from Q209 to Q309, according to a mortgage fraud risk index compiled by Agoura Hills, Calif.-based mortgage software developer Interthinx. More from Interthinx indicates that property valuation fraud is up 25 percent from the previous quarter and 46 percent from a year ago. This indicates a shift schemes involving REO (that's real estate owned by a bank), short sales and refinancing involving equity in markets where the value of the property has fallen.

The index comprises several common types of mortgage fraud.

The Property Valuation Fraud Risk Index is up 25 percent from the previous quarter and up 46 percent from the year-ago quarter, indicating a shift toward fraudulent schemes involving short sales, real estate-owned inventories and refinancing by borrowers with equity impaired by falling property values.

The Occupancy Fraud Risk Index, on the other hand, dropped 30 percent from the year-ago quarter as financial pressure and a depressed real estate market for investment and rental properties cut down on opportunities for schemes involving speculative investments, according to Interthinx.

The Employment/Income Fraud Risk Index fell by 2 percent from Q209 and by 35 percent from the year-ago quarter, a decline Interthinx attributed to lenders' increased use of Internal Revenue Service (IRS) data to verify income. Affordability is also on the rise, meaning the need for misrepresentation of income to qualify for purchases is diminishing.

The geographic instance of mortgage fraud risk spread since the previous quarter, with many metropolitan statistical areas (MSAs) moving into a higher risk category. The Stockton, Calif. MSA experienced the highest mortgage fraud risk index in the quarter, rising 68.1 percent over the level seen there a year earlier.

Now to current events. Why isn't Mike Ashley in jail? That is a very good question.

This is from Housing Wire and Austin Kilgore: The [1] civil lawsuit filed against Lend America parent company Ideal Mortgage Bankers takes aim at 40 Federal Housing Administration (FHA)-backed mortgages the Department of Housing and Urban Development (HUD) and the Justice Department claim were fraudulently approved by the New York-based lender.

But HousingWire's review of the 155-page suit reveals allegations of a pattern of mortgage fraud that's spanned more than 20 years across a number of mortgage firms.

The mastermind behind the fraud, HUD and the Justice Dept. claim, is Mike Ashley. Ashley is perhaps best known as a team owner and championship-winning racecar driver in the National Hot Rod Association (NHRA). According to the race team's Web site, Lend America provides financial support to the racing business through a sponsorship agreement.

The DOJ claims Ashley fostered an environment that encouraged Lend America sales staff to originate FHA loans, even when borrowers were not eligible. In his meetings with sales staff, the suit claims, Ashley told them there were "no minimum credit score requirements" for FHA loans and that it was okay if a borrower made late payments on previous mortgages.

Sales staff could make 10 times the commission on FHA loans than on standard mortgages and almost four times the commission than a subprime mortgage. (I find this statement very hard to believe. There is a maximum of 3 percent origination fee on an FHA loan. The max on sub prime was 6 percent) The suit claims Ashley set a sales goal of one loan origination per week and told loan officers "loans should not be closed in two weeks or a month, but in eight hours." There is no way to close a loan in 8 hours. It simply can't be done.

In addition, Ashley told sales staff those who did not originate large numbers of FHA-insured mortgages would be terminated from employment at Lend America and that he would fire the lower producing members of his sales staff. I have worked as a commission salesperson and I've had many sales managers use similar motivational methods.

Look for more information on mortgages Everett in part 2 of this blog.