MORTGAGE FRAUD

What is Mortgage Fraud? A material misstatement, misrepresentation, or omission made in connection with the purchase, financing, or insuring of real estate.

Just the facts… Estimated annual loss resulting from mortgage fraud: $4 to $6 Billion 66% of pending FBI mortgage fraud investigations involve losses > $1 million 1,571 mortgage fraud cases opened in fiscal year 2009 (compared to 136 in 2004) 3,000+ pending FBI mortgage fraud investigations (through 6/17/10)

Recent National Mortgage Fraud Initiatives

Operation Malicious Mortgage (March – June 2008) Primary types of fraud investigated Lending fraud Foreclosure rescue scams Mortgage-related bankruptcy scams Results 144 criminal cases 406 defendants >$1 billion in losses

Operation Stolen Dreams (March – June 2010) Broader range of fraudulent schemes investigated Expanded use of civil enforcement tools Results 673 criminal cases 1,215 criminal defendants $2.3 billion in losses 191 civil enforcement actions Approximately 400 civil defendants

Who are the targets? Everyone Buyers Sellers Real Estate Agents Mortgage Brokers Closing Agents Attorneys Appraisers Title Companies Bank employees Etc…

Common Mortgage Fraud Schemes Flipping Silent Second Mortgages Foreclosure Rescue Scams Chunking Asset Rental Origination Fraud Asset Rental Double Selling Double Financing Short Sale Fraud Reverse Mortgage Short Sale Fraud Builder Bailouts

Flipping Property is purchased then resold (often quickly) at inflated price. Common characteristics Fraudulent appraisals False loan documentation Straw buyers Kickbacks

House used in flipping scheme May 2007

Foreclosure Rescue Scams Victims: homeowners who can no longer afford mortgage payments. Some have equity, some dont. Perpetrators convince homeowners they can save their homes Homeowners transfer deed to perpetrator Homeowners pay upfront fees to perpetrator Perpetrator takes out mortgage loan Homeowners may make monthly payment to perpetrator

Foreclosure Rescue Scams (continued) Scheme typically results in foreclosure Perpetrator may take equity and disappear Perpetrator may collect monthly payments for a while but not forward them to new lender Perpetrator may flip property to straw buyers to extend duration of scheme

Silent Second Mortgages Down payment money comes via second mortgage Existence of second mortgage is concealed from primary lender Often involves two closings in rapid succession Closing agent almost always involved Recurring question: why did real estate agent, attorney, mortgage broker, etc. let this happen?

Common Mortgage Fraud Schemes (continued) Asset Rental Money is temporarily put into borrowers account to give appearance of creditworthiness Money later given back Origination Fraud False statements regarding income, assets False statements regarding intention to use house as primary residence

Common Mortgage Fraud Schemes (continued) Double Selling Mortgage loan originator accepts legitimate application and documentation from buyer but sends loan package to multiple warehouse lenders to each fund the loan. Double Financing Buyer takes out two mortgages from two lenders on same date Or, buyer refinances at new bank but fails to use proceeds to pay off prior mortgage

Chunking

Chunking Perpetrator convinces uninformed victim to invest in real estate. Victim applies for one loan Perpetrator takes out additional loans for other properties in victims name without victims knowledge Perpetrator keeps some or all loan proceeds; victim is stuck with loan obligations

Short Sale Fraud Borrower purposely withholds mortgage payments, forcing loan into default Accomplice submits straw short-sale offer at a purchase price less than the borrowers loan balance. Fraudster may approach distressed homeowner with this scheme. Fraudster may obtain kickback or become outright owner of home.

Builder Bailout Schemes Builders with excess inventories make too good to be true offers to buyers No money down False promises to subsidize monthly payments or make subsequent improvements to property at no cost Builders may set up shell corporations to purchase the properties Sales price often exceeds market value Corporation may later disappear or go bankrupt

Kickback Schemes Often involve two purchase agreements – one real agreement and one for the bank. The agreement for the bank contains inflated price. Seller kicks back funds to borrower. Real estate agents often involved.

Red Flags Insistence on use of particular appraiser, closing agent, etc. Unusual bonuses/fees Transaction is inconsistent with market Kickbacks False statements/omissions on bank documents Buyer may be assured these are harmless Requests to sign blank documents Parties appear to be affiliated

Red Flags (continued)

Best Practices Full disclosure throughout the transaction Purchase Agreement, loan documents, HUD-1 Look for discrepancies Ask questions/verify

Mortgage Fraud and Federal Law Wire Fraud Mail Fraud Bank Fraud Bank Bribery False Statement to Bank Penalties Up to 30 years imprisonment per count of conviction Up to $1 million fine per count of conviction

Money Laundering Process used by criminals to conceal or disguise the proceeds of their crimes or convert those proceeds into goods or services. Makes dirty money look clean.

Three Stages of Money Laundering Placement Initial introduction of criminal proceeds into the stream of commerce Most vulnerable stage of process Layering Distancing the money from its criminal source Movements of $ into different accounts/countries Increasingly difficult to detect Integration Laundered proceeds are distributed back to the criminal Creates appearance of legitimate wealth May happen years after original crime

Money Laundering & Real Estate

Examples of Money Laundering via Real Estate Transactions Purchase of real estate with proceeds from illegal activity (drugs, theft, fraud, etc.) Use of real-estate related business to launder proceeds e.g., kickbacks flowing through legitimate business Purchasing personal real estate in name of third-party individual or company

Money Laundering Red Flags

Money Laundering Red Flags (continued) Desire to keep individual transactions below $10,000 Use of third-party to make payment Refusal/inability to explain source of proceeds Transactions not in conformity with standard practice e.g., seller willing to accept surprisingly low price for property

Resources U.S. Department of Justice Federal Bureau of Investigation Internal Revenue Service U.S. Department of Housing & Urban Development Federal Deposit Insurance Corporation Federal Financial Institutions Examination Council