Mortgage Fraud

In recent months federal and state law enforcement and regulatory agencies have been inundated with reports of mortgage loan fraud from California to Florida. Officials noted mortgage industry sources have reported more than 12,000 cases of suspicious activity in the past nine months, three times the number reported in all of 2001.

The United States has experienced substantial growth in mortgage lending markets and of unusual loan products that have fraudulently expanded consumer access to home finance. 97% of those who currently own homes in California and New York do not qualify to buy their own homes. The booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.

Equity skimming, Property flipping, Straw buyers, and Inflated appraisals are some of the fraud schemes criminals are using to take advantage of a $2.37 trillion mortgage market in the United States. According to an FBI report on financial crimes, "Mortgage fraud is pervasive and growing”.

In September of 2002, the FBI had 436 mortgage fraud investigations. Currently, they have more than 1,036. That's an increase of 237 percent in less than five years. And of the 1,036 current cases, more than half have expected losses of more than $1 million. Of the victims, about 57 percent are federally insured financial institutions; 8 percent are government entities like the Department of Housing and Urban Development; and 35 percent are investors.

While the FBI described mortgage-related fraud as a nationwide problem, it said the levels of illegal activity are worse in some locations than in others. States identified as the top 10 "hot spots" for mortgage fraud are Georgia, South Carolina, Florida, Michigan, Illinois, Missouri, California, Nevada, Utah and Colorado.

Mortgage loan fraud can be divided into two broad categories: fraud for property and fraud for profit. Fraud for property generally involves material misrepresentation or omission of information with the intent to deceive or mislead a lender into extending credit that would likely not be offered if the true facts were known. This type of fraud accounts for about 20 percent of mortgage fraud cases. The fraudulent activities describing fraud for property include: asset fraud; occupancy fraud; employment and income fraud; debt elimination fraud; identity theft; and straw buyers.

Fraud for property is generally committed by home buyers attempting to purchase homes for their personal use. When the intent is to "flip" the property is clear, it becomes fraud for profit as typically lenders will not loan you money for 60 to 90 days to make a quick profit from the sale of property.

They are quite stingy when it comes to making profits for themselves and sharing it with others other than their own stockholders. That is why many lenders build in pre-payment penalties of between 1 to 3% of the loan amount if the loan is paid off early. Some penalties go even higher.

In contrast, the motivation behind fraud for profit is money. Fraud for profit is often committed with the complicity of industry insiders such as mortgage brokers, real estate agents, property appraisers, and settlement agents (escrow officers, attorneys and title examiners). Typical fraudulent activities associated with this category: appraisal fraud; fraudulent flipping; straw buyers; and identity theft.

· Property flipping: the property is bought, falsely appraised at a higher value and quickly sold, sometimes several times in rapid succession. Eventually, the mortgage goes into default. The profits, of course, disappear with the criminal.

· Nominee loans/Straw buyers: the identity of the borrower is concealed by using the name and credit history of a willing accomplice.

· Fake/Stolen identity: stolen identities—along with credit histories—are used on a loan application.

· Inflated appraisals: an appraiser agrees to inflate the property of the house.

· Equity skimming: One of the more complicated schemes, an investor uses a straw buyer to get a mortgage. Prior to closing, the straw buyer signs the property over to the investor, who in turn rents the property out without making any mortgage payments.

The FBI has dispatched undercover teams across the country in an urgent investigation into dealings by suspect mortgage brokers, appraisers, short-term investors, and loan officers.In one operation, six individuals were arrested in Charlotte, charged with bank fraud for their roles in a multimillion-dollar mortgage fraud, officials said. The two-year investigation found fraudulent loans that exposed financial institutions and mortgage companies to $130 million in potential losses.

Federal agents in Jacksonville arrested two people and executed seven search warrants in connection with an alleged scheme designed to defraud banks of $22 million.

In one check-kiting scheme in Binghamton, New York, the operator of a recycling business wrote in excess of $1 billion in worthless checks over a 14-month period, officials said. Not all of the checks were cashed.

While it's unknown how many fraudulent transactions take place in the $3 trillion mortgage market, the institute found that 26 states had serious mortgage fraud problems. Fraud is costing the industry at least tens of millions of dollars a year.

• The co-founders of a company called the Dorean Group ran a nationwide Internet scam that defrauded banks, lenders and homeowners, according to a 46-count indictment announced by the U.S. Attorney's office in San Francisco and the FBI.

According to court papers, the men — Dale Heineman and Kurt F. Johnson advertised on websites for homeowners in deep debt. They filed quitclaim deeds in county recorder offices that signed over to them the titles on hundreds of homeowners' properties, the filings allege. Then the men told homeowners to refinance their properties, and the new loan proceeds would be split among the defendants and homeowners, according to court papers.

The charges in the indictment concern 17 properties valued at $5 million in nine states. The FBI is continuing to investigate more than 480 properties in 35 states, with a potential value of $88 million in loans, that may have been affected by the alleged scheme. Heineman and Johnson were previously arrested on related charges by Utah state prosecutors and are being held in the Salt Lake County Metro Jail.

• In Kansas City, Mo., 17 people — posing as mortgage brokers, home buyers and sellers, appraisers and title-company employees — ran "a massive scheme of fraudulent real estate transactions," according to a lawsuit filed by ABN Amro Mortgage Group in federal court.

In a suspected "flipping" scam involving hundreds of houses, the defendants bought foreclosed homes at cheap prices, artificially inflated their values through false appraisals, then quickly resold them, the lawsuit says. They illegally profited from commissions and fees, the lawsuit says. ABN Amro, which underwrote and bought nearly 1,000 loans from the defendants, alleges that it was defrauded of millions of dollars.

• In August, 37-year-old attorney Chalana McFarland of Atlanta was sentenced to 30 years in federal prison after a jury convicted her of heading a vast mortgage fraud ring that skimmed $20 million from inflated mortgages on 100 Atlanta homes, according to a Justice Department press release.

McFarland worked with 20 co-conspirators employed as real estate agents, mortgage brokers and loan processors. The ring used fake identities, fraudulent documents, shell companies and "straw" borrowers to buy suburban houses, then quickly resold the homes at artificially inflated prices, according to the Justice Department. The co-conspirators have pleaded guilty to fraud charges or have been sentenced to prison for several months to five years.

Mortgage fraud is hard to detect because 80% of the cases involve industry insiders, the FBI report says. The scams are tough to spot in hot markets such as California, where huge increases in home prices can hide illegal profits.

By the time the properties go into default and the lender forecloses on it the properties have appreciated so quickly that lenders don't lose money.

To fight this growing scourge, FBI announced a partnership on March 8, 2007 with the Mortgage Bankers Association, which represents an industry hit by fraud costs last year of between $946 million and $4.2 billion. FBI is working with the Mortgage Bankers Association by providing their members with an advisory for their customers outlining federal mortgage fraud laws—and penalties. It comes with an assurance that we will aggressively investigate fraud claims.

As per the chief of the Financial Crimes Section of the FBI's Criminal Investigative Division. this is clearly a crime problem in need of a real answer, and that answer is team work. The newly developed Mortgage Fraud Warning enhances our joint effort to combat this financial crime problem by putting would-be wrong-doers on notice, and potentially stopping the crime before it is committed.

Mortgage fraud is rampant in the United States and not only are the illegal activities an immediate threat to home owners and local communities, the scourge could ultimately cause the kind of economic conditions associated with so-called "housing bubbles." (Data from FBI Website)

(President NAPMW San Antonio Association - National Association Professional Mortgage Women (www.NAPMWSA.org), a member of the SA-TAMB Mortgage Brokers, SA Mortgage Bankers, SABOR Education & Equal Opportunity Housing Committee and SABOR Speakers Bureau, Women Council Realtors SA and Hill Country chapters.)

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Mortgage Fraud on the Rise by Vini Shah