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Mortgage fraud seen as undercurrent of subprime woes

KANSAS CITY, Missouri (Reuters) - On the surface, Brent Barber’s Kansas City real estate investment company appeared to be serving a greater good -- refurbishing low-income housing across the city’s blighted urban core.

But in reality Barber and a crew of eight others aimed to bilk eager lenders out of more than $11 million in 300 fraudulent mortgage loans, according to the FBI.

Now Barber is in prison and the houses sit abandoned, stark examples of a wave of mortgage fraud that law enforcement and banking experts say is an undercurrent washing through America’s subprime lending woes. Lax lending practices, which led to a record level of U.S. home loans defaulting and sliding into foreclosure, also invited outright fraud similar to the one that Barber was involved in, experts say.

“These subprime lenders were just sort of out of control. They were going so fast no one was really questioning the loan files,” said Bruce Morgan, a Kansas City-area banker and former member of the Federal Reserve Board’s Consumer Advisory Council. “Now within the subset of the subprime market is all this mortgage fraud.”

Federal investigators and prosecutors say mortgage fraud is growing so pervasive that cracking down on it is a top priority.

Many of the schemes being uncovered are linked to the subprime lending industry, which has grown rapidly in recent years as home prices soared and better quality credit risks became harder to find. Many lenders turned to so-called “subprime” loans, sometimes covering 100 percent of a home’s purchase price or offering other risky incentives to draw borrowers who otherwise could not find financing.

But it has become evident that their eagerness to open the vaults also opened the door to teams of swindlers operating around the nation.

There has been a significant uptick in mortgage fraud cases over the last several years,” said FBI spokesman Richard Kolko. “It is one of our priorities. One of our top 10.”

The FBI said while California was high in suspicious activity, the Midwest was ground zero for mortgage fraud cases in 2006, accounting for more than 33 percent.

The Midwest, particularly Michigan, Illinois and Ohio are among the U.S. states highest in subprime loan delinquencies and foreclosures, according to U.S. housing data.

Don Ledford, spokesman for the U.S. Attorney’s Office in Kansas City, said the type of mortgage fraud now high on the radar are schemes involving teams of conspirators.

“You have one person who is the deal maker, but they also have to have an appraiser who will artificially inflate the price of a home and you’ve also got to have someone at the title company,” Ledford said. “We have had several appraisers convicted because of this.”

In the Barber case and many others, the swindlers employ “straw buyers,” using their identities on loan applications for home purchases. Falsified financial reports help convince lenders to make the loans. Inflated appraisals are used to borrow several thousands or hundreds of thousands of dollars more than the properties are worth.

The loan proceeds are then used to pay a home seller their asking price, with the overage divvied up between the scams’ perpetrators. The properties are then usually abandoned, left for foreclosure by the hapless lenders.

One ongoing case in Kansas City has seen the indictments of a candidate for mayor and her lawyer husband, along with an area accountant, a real estate agent, a local loan officer and six others alleged to have conspired to commit mortgage fraud. The accused have pled not guilty and the case goes to trial in June.

In the Barber case, authorities say the businessman led a group in a conspiracy that involved 300 fraudulent mortgage loans worth more than $19.6 million. He pled guilty last year and was sentenced to 12 years in prison.

Phillip Thomas, a Kansas City appraiser linked to Barber who did work for large subprime lenders Countrywide Home Loans, part of Countrywide Financial, and Ameriquest Mortgage Co. and others, was sentenced in December to two years in prison for fraud. Investigators could not give specifics on which loan companies were involved in the Barber case, or whether the loans were initially rated as subprime.

Industry experts say a combination of factors seem to have fueled frauds. Accountability for bad loans has lessened amid an industry trend in which most mortgage loans are sold off as quickly as they are originated, packaged and marketed to investment groups. The rise of specialized mortgage brokers, which aren’t regulated like banks, is also a factor.

But the bottom line is greed.

“There is a lowering of standards,” said Kevin Glendening, deputy Kansas banking commissioner overseeing consumer and mortgage lending. “You have people getting in there that are looking at a get-rich-quick scheme. It is definitely on the rise.”