Fraud compounds woes of housing crisis

By Nick Carey

CHICAGO (Reuters) - As the U.S. housing meltdown forces hundreds of thousands of Americans from their homes, the extent to which fraud was a factor in the crisis is just coming to light.

Products such as stated-income loans -- known as "liar loans" because no proof of income was needed -- led to widespread misrepresentation by borrowers about their earnings.

But far more sinister forms of fraud, including identity theft and "straw buyers" -- those created using fake documents -- are also coming into the open.

Mike Reardon of nonprofit lender Neighborhood Housing Services of Chicago (NHS) points out two such properties, both boarded up, on South Rockwell Avenue in Chicago's blue-collar South Side.

The owner of one of the homes was traced to Texas, he said.

"Turns out it was a case of identity theft," Reardon said, shaking his head. "He had no idea he owned a home in Chicago."

Across the street, he points to another boarded, slowly rotting home, which had last been sold to a woman named Susan Haas.

"I may be wrong, but I've been looking for months and months and I can't find any proof Susan Haas exists," he said.

Many fraud schemes kept running as long as cash kept flowing from Wall Street. Once the credit crunch turned off the supply of easy money, the perpetrators simply walked away.

Estimates vary as to how prevalent fraud was during the boom.

Arthur Prieston, chairman of the Prieston Group, which provides mortgage-fraud insurance and training to lenders, said that "at least 30 percent of the loans out there contain some form of misrepresentation."

"But because lenders often have to sell off properties quickly to cut their losses, we will never know exactly how much mortgage fraud has been committed," he added.

Prieston estimates that mortgage-fraud losses were around $4.2 billion for 2006, adding that figures for 2007 "will be much higher."

In a recent case in Chicago, he said the authorities prepared to file charges against a woman who had fraudulently bought five properties.

"When we turned up to serve papers on her, we found she was 9 years old," he said. "Her uncle had stolen her identity."