Tuesday, October 20, 2009

Windsor Village and Mortgage Fraud: A Study in Why Indiana Needs a Comprehensive Approach to Real Estate Regulation

Today's Indianapolis Star contains a nice article on Windsor Village an eastside neighborhood that was devastated by a mortgage fraud scheme masterminded by Robert Penn. It is an interesting story. Anyone who thinks that white collar crime like mortgage fraud does not have victims should read this and other stories about the mortgage scheme that inflicted such damage.

What is only apparent from reading between the lines is that Mr. Penn was brought to justice not by state real estate regulators or the Marion County Prosecutor, but by the U.S. Attorney applying federal laws. The U.S. Attorney's Office generally won't get involved unless a fraudulent scheme is extensive and involves millions of dollars. Penn's scheme though fit the bill. Other mortgage fraud schemes slip under the radar because the feds simply are too busy to target anything but the most serious fraudulent schemes.

When it comes to the players involved in a real estate transaction, Indiana offers a patchwork of regulation. The Secretary of State regulates mortgage brokers, the Department of Financial Institutions regulates lenders, the Attorney General's Office regulates appraisers and real estate agents, the Department of Insurance's Title Insurance Division, which I used to head, regulates title insurance agents. Any mortgage fraud scheme invariably involve multiple players and the multiple agencies who regulate them. Often the agencies are not on the same page regarding enforcement actions and communication between them is poor. Indiana desperately needs a unified regulatory effort for real estate.

TheMarion County Prosecutor's Office also failed with respect to the Penn matter. Despite having information that should have led to prosecution of Penn, Brizzi's office failed to take action. While the Marion County Prosecutor should be criticized, the fact is other county prosecutors rarely prosecute mortgage fraud either. There is a fundamental reason why. A mortgage fraud scheme is highly complicated. It often takes a deep understanding of the complexities of real estate transaction to know what is going on. Very few deputy prosecutors have the kind of knowledge and experience that is necessary to prosecute mortgage fraud.

Ideally a unified real estate regulatory body could offer prosecutorial assistance to those county prosecutors wanting to tackle mortgage fraud in their communities. With the assistance of an experienced real estate regulator, county prosecutors could more easily take on those whose criminal deeds are buried within complex mortgage fraud schemes that are simply over the head of a typical county prosecutor or his staff.

In the meantime, the Attorney General is in a position to offer assistance to these county prosecutors. Unfortunately during the term of Steve Carter, the Attorney General's Office was the weak link in the state regulator change. Greg Zoeller, elected Attorney General in 2008, is showing signs that his office is going to be more active when it comes to real estate regulation. That is a welcome sign. Indiana desperately needs better real estate regulation and if the Zoeller leads the charge I will be his biggest fan.


Citizen Kane said...

What about the REALTORS® - I recognized that there was fraud going on in Windsor Village, when I saw 600-square foot shacks on Arlington Avenue listed for $100,000 on Realtor.com. So, if I could tell that there was something fishy going on, I don't understand how the people in the industry with their supposedly high ethical standards can not police their own industry.

Paul K. Ogden said...

Real estate agents are policed by the Attorney General's Office. Realtors are an extremely powerful political group. The minute you try to crack down on them, the Realtor's Assn begins making calls to elected and appointed officials complaining.

Ultimately only the feds would enforce the law against real estate agents and HUD was simply too busy. At the DOI, we tried to get the AG to enforce RESPA and Indiana law and they wouldn't do it. In fact, one high-level AG official said it was unclear whether the AG could enforce RESPA. It says right in the RESPA law that the AG can enforce it!

Claudia Beck Treacy said...

Several years ago an employee of my own business embezzled a good deal of money using, what was then, hi-tech computer methods. The "state" failed to prosecute, because "it was too complicated for an assistant prosecutor to understand and explain to a jury."

So now, as I understand the situation with mortgage fraud, the prosecutor's office still has failed to hire competent attorneys with sufficient mental abilities to understand "crimes" more complex than a DUI/OUI. Beyond that, I guess I may be safe in saying that a "SMART crook" should look to Indianapolis a safe haven to commit complex and intelligent crimes.

Brian Kertin said...

Mortgage fraud cases cover a wide spectrum in regard to the complexity of the schemes, and the amounts of money taken and shared by the fraud participants. For the most part, regulatory and enforcement actions come after the money has been taken and cannot be recovered. Notable enforcement actions, like the one discussed, unfortunately do not serve as a deterrent to the bad actors. I am in favor of cracking down on mortgage fraud participants, but the carrot of tens of thousands of dollars per fraudulent transaction is too appealing the the bad guys, and the stick of enforcement does not deter them.