Appraisers puffing up market values to accommodate oversized loans.
Mortgage brokers lying on applications to grease the wheels for their clients.
Realtors boosting sales contracts above the market price to extract cash from lenders for fees and commissions.
Loan fraud, big and small, accounted for 40 percent of all losses in the nation's lending industry last year, a Seattle home appraiser told more than 75 Central Oregon real estate agents, appraisers and mortgage brokers Wednesday.
The losses have been big enough, in some cases, to trigger waves of foreclosures in a few local markets, Richard Hagar said. The potential threat to the nation's mortgage lending structure has prompted state and federal governments to launch crackdowns nationwide.
The FBI has sicced more than 2,000 agents on the nation's financial institutions, including the mortgage lending industry with Operation Continued Action, one of the largest projects in its history, Hagar said.
Undercover federal and state agents have worked recently in the Central Oregon market, as they have in most markets nationwide, Hagar said. What they found is hard to say.
”You can have increasing home values for legitimate reasons, obviously,” Hagar said. ”But I can tell you that there is a layer of fraud lying on top of that. How much? I don't know. Pick a city. In Seattle, it's thick. In Columbus (Ohio), it's monstrous. Here? I don't know.”
Hagar, an appraisal company owner and real estate investor, teaches courses on fraud avoidance throughout the Northwest. A co-author of Washington state's Mortgage Brokers Practices Act, he has also appeared as an expert witness in fraud-related prosecutions and lawsuits.
The local chapter of the National Association of Mortgage Women brought him to Bend for a training session.
There is no perception that fraud is rampant in the Central Oregon real estate market, said chapter President A.J. Mazur, a lending officer with Security National Mortgage in Bend.
If anything, the tight-knit structure and relative isolation of Central Oregon's real estate lending market tends to freeze overtly shady operators out of business before they get started, Mazur said. Problems, when they arise, generally stem from ignorance of the law and a lack of training.
That's not unusual, Hagar said.
Starting in the early 1990s, the heavily regulated banking industry effectively began to outsource its retail loan-writing functions to independent, lightly regulated mortgage brokers and loan agents who, until recently, were unlicensed in most states and faced few training requirements.
That trend, Hagar said, created a market structure in which nearly every step in a typical mortgage transaction - at least, until the loan application reaches the ultimate lender - is handled by commissioned salespeople, who all stand to benefit from rising loan values and rising home prices.
Appraisers, who are supposed to protect lenders and buyers by independently gauging the market value of the homes that secure their loans, have not always been independent enough, Hagar said. In some cases, they're being cajoled, threatened or effectively bribed to set values where the sales force wants them to be, not where the market would dictate, he said.
Most states, including Oregon, have moved to license mortgage brokers and to require more training for lenders and appraisers, Hagar said, but the explosive expansion of the industry and its profits in recent years have resulted in a cascade of problems.
Reports of possible fraud nationwide shot from a little more than 4,200 in 2001 to nearly 22,000 in 2005, Hagar said.
Some has been overt - such things as buying false employment verifications for unqualified buyers or writing glowing appraisal reports on trashed properties to obtain inflated loans.
More commonly, Hagar said, investigators are beginning to crack down on the smaller transgressions that have begun to creep into some real estate and lending offices in their push to qualify buyers - such things as lying on a loan application about the buyer's intent to live in a house, or encouraging or cajoling an appraiser to come in with a predetermined, inflated value to convince a lender to produce extra cash on a loan amount.
Those types of violations don't produce major market effects as long as the general value of real estate is rising, Hagar noted, because even inflated loan values are quickly covered by the rising value of the underlying assets.
But some banks have collapsed and some local markets have been devastated by scandals that resulted in mass foreclosures when market prices went flat, exposing loan portfolios that were much weaker than the ultimate lenders, or their stockholders, thought they were.
A case in point: Columbus, where at one point a third of the city's home sales were through foreclosure.
Or Spokane, where Century Mortgage Inc.'s scheme to inflate values on the city's worst housing inflicted losses estimated at $1 million on dozens of home buyers and resulted in industry bans, license revocations and jail for its top officers, along with a local real estate agent and an appraiser.
”The more of this that goes on, the closer you stand to economic collapse in your local market,” Hagar told his audience. ”You want to screw up your community? Go ahead.”
In Central Oregon, the most publicized recent case of mortgage lending problems involved All Seasons Mortgage Services owner Garrett John Sytsma.
He was barred from acting as a loan originator in 2004 by the Oregon Department of Consumer and Business Services after he used a false Social Security number and name to obtain a mortgage for himself after he declared bankruptcy, according to documents posted on the state's Web site.
Peter Hatton, an agent with Bend Real Estate Inc., said Hagar's four-hour seminar was good, although he doesn't believe the practices he highlighted are widespread here.
Mazur, who has practiced in Bend since 1993, agreed.
”We don't see it,” she said. ”Good, bad or indifferent, if you're doing something out of stroke - we meet like this, and we tell each other. And we police ourselves.”