The subprime meltdown has put a spotlight on predatory lending practices. Government agencies and commissions across the nation are investigating an increasing number of mortgage fraud complaints.

One of the most interesting stories came from a hearing held on February 13 by the New York State Commission of Investigation. Testimony was given by Suzette Francis who claims she was a victim of mortgage fraud.

In 2006, Francis was living in a homeless shelter in Queens, New York after losing her job. She found a new job as a security guard and approached the principal of her child's school to ask about getting an apartment.

The principal--who was also in the real estate biz--told her that she did not know of any available apartments but that she did know of a house for sale. She then helped Francis, who was earning a modest $10 an hour at the time, get approved for a $470,000 adjustable rate mortgage through a 'special Fannie Mae program' in October of 2007.

The woman who set everything up fudged the mortgage application by inventing false income and claiming that Francis worked for the school. The fraud was necessary because Francis could not reasonably make the monthly mortgage payment of $4,517 on what she actually earned.

Since living in the house, she has not made any mortgage payments. The home is now in foreclosure and Francis has learned that she also owns a second home that was also purchased with fraudulent documents. Francis admits that she does remember being asked to sign additional paperwork at one point but that she was told it was for the first house.

No charges have been filed yet against the woman who supposedly initiated the fraud and Francis is still living in the foreclosed home. The New York State Commission of Investigation, which is a bipartisan independent body, is investigating this case and others in a series of hearings. The investigations are a direct result of increased complaints, according to commission chairman Alfred Lerner.

Foreclosures a Result of Fraud, Not ARM Resets

Fraud is increasingly being linked to foreclosures. A number of reports have come out recently stating that the cause of the current foreclosure crisis is origination fraud, not subprime loans or ARM resets.

The latest of such reports was issued February 8 by an 11-state Foreclosure Prevention Working Group. The group found that the majority of the foreclosures occurring in the fourth quarter of last year were the result of 'weak or non-existent underwriting coupled with high levels of origination fraud.'

The report, which analyzed the performance of entities that service subprime mortgages, claims a large percentage of subprime adjustable rate loans became delinquent prior to any rate increase, indicating the loans 'were simply unaffordable from the outset.'

Other interesting findings:

• Seven out of 10 delinquent borrowers are doing nothing to prevent foreclosure.
• Loan delinquencies are outpacing attempts to mitigate losses through refinances or loan modifications.
• The refinancing option has nearly evaporated due to falling home prices and changes in loan availability.